##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended September 30, 2004



OR



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



Commission File Number: 001-14162



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GLENBOROUGH REALTY TRUST INCORPORATED

(Exact name of registrant as specified in its charter)



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|                                        |  |                    
|--------------------------------------- |  | -------------------
|Maryland                                |  | 94-3211970         
|(State or other jurisdiction of         |  | (I.R.S. Employer   
|incorporation or organization)          |  | Identification No.)
|                                        | 
|400 South El Camino Real,               |  |                    
|Suite 1100, San Mateo, California       |  |                    
|(650) 343-9300                          |  | 94402-1708         
|(Address of principal executive offices |  | (Zip Code)         
|and telephone number)                   |  |                    



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Securities registered under Section 12(b) of the Act:



|                                                            |  |                                      
|----------------------------------------------------------- |  | -------------------------------------
|Title of each class:                                        |  | Name of Exchange on which registered:
|Common Stock, $.001 par value                               |  | New York Stock Exchange              
|7.75% Series A Convertible Preferred Stock, $.001 par value |  | New York Stock Exchange              



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



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



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



As of November 8, 2004, 31,940,790 shares of Common Stock ($.001 par value) and 6,850,325
shares of 7.75% Series A Convertible Preferred Stock ($.001 par value, $25.00 per share liquidation preference) were outstanding.



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##### Table of Contents

INDEX

GLENBOROUGH REALTY TRUST INCORPORATED



|              |  |                                                                                              |  |        
|------------- |  | -------------------------------------------------------------------------------------------- |  | -------
|              |  |                                                                                              |  | PageNo.
|PART I        |  | FINANCIAL INFORMATION                                                                        |  |        
|              |  |                                                                                             
|Item 1.       |  | Consolidated Financial Statements of Glenborough Realty Trust Incorporated (Unaudited):      |  |        
|              |  |                                                                                             
|              |  | Consolidated Balance Sheets at September 30, 2004 and December 31, 2003                      |  | 3      
|              |  |                                                                                             
|              |  | Consolidated Statements of Operations for the three months ended September 30, 2004 and 2003 |  | 4      
|              |  |                                                                                             
|              |  | Consolidated Statements of Operations for the nine months ended September 30, 2004 and 2003  |  | 5      
|              |  |                                                                                             
|              |  | Consolidated Statement of Stockholders Equity for the nine months ended September 30, 2004  |  | 6      
|              |  |                                                                                             
|              |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003  |  | 7-8    
|              |  |                                                                                             
|              |  | Notes to Consolidated Financial Statements                                                   |  | 9-30   
|              |  |                                                                                             
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations        |  | 31-47  
|              |  |                                                                                             
|Item 3.       |  | Quantitative and Qualitative Disclosures About Market Risk                                   |  | 47     
|              |  |                                                                                             
|Item 4.       |  | Controls and Procedures                                                                      |  | 48     
|              |  |                                                                                             
|PART II       |  | OTHER INFORMATION                                                                            |  |        
|              |  |                                                                                             
|Item 1.       |  | Legal Proceedings                                                                            |  | 49     
|              |  |                                                                                             
|Item 2.       |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities             |  | 49     
|              |  |                                                                                             
|Item 4.       |  | Submission of Matters to a Vote of Security Holders                                          |  | 49     
|              |  |                                                                                             
|Item 6.       |  | Exhibits and Reports on Form 8-K                                                             |  | 49     
|              | 
|SIGNATURES    |  | 50                                                                                          
|              | 
|EXHIBIT INDEX |  | 51                                                                                          



2



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##### Table of Contents

Part I. FINANCIAL INFORMATION



Item 1.
Financial Statements



GLENBOROUGH REALTY TRUST INCORPORATED

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

(unaudited)



|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                                                |  | September 30,2004 |           |   | December 31,2003 |  
|ASSETS                                                                                                                                                                                                          |  |                   |           |   |                  |   |           |  
|Rental properties, gross                                                                                                                                                                                        |  | $                 | 1,419,878 |   |                  | $ | 1,394,486 |  
|Accumulated depreciation and amortization                                                                                                                                                                       |  |                   | (217,076  | ) |                  |   | (187,297  | )
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Rental properties, net                                                                                                                                                                                          |  |                   | 1,202,802 |   |                  |   | 1,207,189 |  
|                                                                                                                                                                                                                |  |                  
|Property held for sale (net of accumulated depreciation and amortization of $1,589 and $1,424 as of September 30, 2004 and December 31, 2003,
respectively)                                                     |  |                   | 6,239     |   |                  |   | 6,314     |  
|Investments in land and development                                                                                                                                                                             |  |                   | 148,240   |   |                  |   | 67,493    |  
|Investments in unconsolidated operating joint ventures                                                                                                                                                          |  |                   | 12,031    |   |                  |   | 12,211    |  
|Mortgage loans receivable                                                                                                                                                                                       |  |                   | 13,262    |   |                  |   | 40,323    |  
|Leasing and financing costs (net of accumulated amortization of $17,822 and $14,858 as of September 30, 2004 and December 31, 2003,
respectively)                                                               |  |                   | 25,045    |   |                  |   | 26,603    |  
|Cash and cash equivalents                                                                                                                                                                                       |  |                   | 6,183     |   |                  |   | 18,992    |  
|Other assets                                                                                                                                                                                                    |  |                   | 27,843    |   |                  |   | 26,114    |  
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|TOTAL ASSETS                                                                                                                                                                                                    |  | $                 | 1,441,645 |   |                  | $ | 1,405,239 |  
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                            |  |                   |           |   |                  |   |           |  
|Liabilities:                                                                                                                                                                                                    |  |                   |           |   |                  |   |           |  
|Mortgage loans                                                                                                                                                                                                  |  | $                 | 699,896   |   |                  | $ | 649,325   |  
|Unsecured bank line of credit                                                                                                                                                                                   |  |                   | 95,090    |   |                  |   | 89,941    |  
|Obligations associated with property held for sale                                                                                                                                                              |  |                   | 271       |   |                  |   | 258       |  
|Other liabilities                                                                                                                                                                                               |  |                   | 33,165    |   |                  |   | 36,901    |  
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                                                               |  |                   | 828,422   |   |                  |   | 776,425   |  
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Minority Interest                                                                                                                                                                                               |  |                   | 37,764    |   |                  |   | 36,969    |  
|                                                                                                                                                                                                                |  |                  
|Stockholders Equity:                                                                                                                                                                                           |  |                   |           |   |                  |   |           |  
|Common stock, $0.001 par value, 188,000,000 shares authorized, 31,940,790 and 27,847,477 shares issued and outstanding at September 30, 2004
and December 31, 2003, respectively                                |  |                   | 32        |   |                  |   | 28        |  
|Preferred stock, $0.001 par value, 12,000,000 shares authorized, $25.00 liquidation preference, 6,850,325 and 9,956,300 shares issued and
outstanding at September 30, 2004 and December 31, 2003, respectively |  |                   | 7         |   |                  |   | 10        |  
|Additional paid-in capital                                                                                                                                                                                      |  |                   | 790,089   |   |                  |   | 779,627   |  
|Deferred compensation                                                                                                                                                                                           |  |                   | (4,734    | ) |                  |   | (2,977    | )
|Distributions in excess of accumulated earnings                                                                                                                                                                 |  |                   | (209,935  | ) |                  |   | (184,843  | )
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|Total stockholders equity                                                                                                                                                                                      |  |                   | 575,459   |   |                  |   | 591,845   |  
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                      |  | $                 | 1,441,645 |   |                  | $ | 1,405,239 |  
|                                                                                                                                                                                                                |  |                   |           |   |                  |   |           |  



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



3



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

For the three months ended September 30, 2004 and 2003

(in thousands, except share and per share amounts)

(unaudited)



|                                                                                                                 |  |      |            |   |      |   |            |  
|---------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                 |  | 2004 |            |   | 2003 |  
|OPERATING REVENUE                                                                                                |  |      |            |   |      |   |            |  
|Rental revenue                                                                                                   |  | $    | 48,205     |   |      | $ | 43,792     |  
|Fees and reimbursements, including from related parties                                                          |  |      | 757        |   |      |   | 791        |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|Total operating revenue                                                                                          |  |      | 48,962     |   |      |   | 44,583     |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|OPERATING EXPENSES                                                                                               |  |      |            |   |      |   |            |  
|Property operating expenses                                                                                      |  |      | 16,559     |   |      |   | 14,950     |  
|General and administrative                                                                                       |  |      | 3,026      |   |      |   | 2,064      |  
|Depreciation and amortization                                                                                    |  |      | 15,933     |   |      |   | 13,038     |  
|Provision for impairment of real estate assets                                                                   |  |      |           |   |      |   | 580        |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|Total operating expenses                                                                                         |  |      | 35,518     |   |      |   | 30,632     |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|Interest and other income                                                                                        |  |      | 567        |   |      |   | 835        |  
|Equity in earnings of unconsolidated operating joint ventures                                                    |  |      | 158        |   |      |   | 174        |  
|Interest expense                                                                                                 |  |      | (9,395     | ) |      |   | (8,559     | )
|Loss on early extinguishment of debt                                                                             |  |      | (1,950     | ) |      |   |           |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|Income before minority interest and discontinued operations                                                      |  |      | 2,824      |   |      |   | 6,401      |  
|Minority interest                                                                                                |  |      | (29        | ) |      |   | 147        |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|Income before discontinued operations                                                                            |  |      | 2,795      |   |      |   | 6,548      |  
|Discontinued operations (including net gain (loss) on sales of $743 and ($3,449) in 2004 and 2003, respectively) |  |      | 924        |   |      |   | (3,015     | )
|                                                                                                                 |  |      |            |   |      |   |            |  
|Net income                                                                                                       |  |      | 3,719      |   |      |   | 3,533      |  
|Preferred dividends                                                                                              |  |      | (3,318     | ) |      |   | (4,889     | )
|Discount on preferred stock redemption and repurchases                                                           |  |      | 9          |   |      |   | 237        |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|Net income (loss) available to Common Stockholders                                                               |  | $    | 410        |   |      | $ | (1,119     | )
|                                                                                                                 |  |      |            |   |      |   |            |  
|Basic Per Share Data:                                                                                            |  |      |            |   |      |   |            |  
|Continuing operations                                                                                            |  | $    | (0.01      | ) |      | $ | 0.06       |  
|Discontinued operations                                                                                          |  |      | 0.02       |   |      |   | (0.10      | )
|                                                                                                                 |  |      |            |   |      |   |            |  
|Net income (loss) available to Common Stockholders                                                               |  | $    | 0.01       |   |      | $ | (0.04      | )
|                                                                                                                 |  |      |            |   |      |   |            |  
|Basic weighted average shares outstanding                                                                        |  |      | 31,682,728 |   |      |   | 27,605,193 |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|Diluted Per Share Data:                                                                                          |  |      |            |   |      |   |            |  
|Continuing operations                                                                                            |  | $    | (0.01      | ) |      | $ | 0.06       |  
|Discontinued operations                                                                                          |  |      | 0.02       |   |      |   | (0.10      | )
|                                                                                                                 |  |      |            |   |      |   |            |  
|Net income (loss) available to Common Stockholders                                                               |  | $    | 0.01       |   |      | $ | (0.04      | )
|                                                                                                                 |  |      |            |   |      |   |            |  
|Diluted weighted average shares outstanding                                                                      |  |      | 31,682,728 |   |      |   | 30,901,644 |  
|                                                                                                                 |  |      |            |   |      |   |            |  



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



4



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

For the nine months ended September 30, 2004 and 2003

(in thousands, except share and per share amounts)

(unaudited)



|                                                                                                                 |  |      |            |   |      |   |            |  
|---------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                 |  | 2004 |            |   | 2003 |  
|OPERATING REVENUE                                                                                                |  |      |            |   |      |   |            |  
|Rental revenue                                                                                                   |  | $    | 142,949    |   |      | $ | 126,792    |  
|Fees and reimbursements, including from related parties                                                          |  |      | 2,618      |   |      |   | 2,559      |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|Total operating revenue                                                                                          |  |      | 145,567    |   |      |   | 129,351    |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|OPERATING EXPENSES                                                                                               |  |      |            |   |      |   |            |  
|Property operating expenses                                                                                      |  |      | 49,505     |   |      |   | 42,503     |  
|General and administrative                                                                                       |  |      | 9,207      |   |      |   | 9,605      |  
|Depreciation and amortization                                                                                    |  |      | 45,988     |   |      |   | 37,195     |  
|Provision for impairment of real estate assets                                                                   |  |      |           |   |      |   | 2,852      |  
|Provision for impairment of non-real estate assets                                                               |  |      |           |   |      |   | 3,905      |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|Total operating expenses                                                                                         |  |      | 104,700    |   |      |   | 96,060     |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|Interest and other income                                                                                        |  |      | 2,037      |   |      |   | 2,758      |  
|Equity in earnings of unconsolidated operating joint ventures                                                    |  |      | 594        |   |      |   | 478        |  
|Interest expense                                                                                                 |  |      | (27,310    | ) |      |   | (23,844    | )
|Loss on early extinguishment of debt                                                                             |  |      | (2,035     | ) |      |   |           |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|Income before minority interest, discontinued operations and cumulative effect of change in accounting principle |  |      | 14,153     |   |      |   | 12,683     |  
|Minority interest                                                                                                |  |      | (684       | ) |      |   | (1,054     | )
|                                                                                                                 |  |      |            |   |      |   |            |  
|Income before discontinued operations and cumulative effect of change in accounting principle                    |  |      | 13,469     |   |      |   | 11,629     |  
|Discontinued operations (including net gain on sales of $13,271 and $12,155 in 2004 and 2003, respectively)      |  |      | 13,868     |   |      |   | 12,763     |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|Income before cumulative effect of change in accounting principle                                                |  |      | 27,337     |   |      |   | 24,392     |  
|Cumulative effect of change in accounting principle (Note 17)                                                    |  |      | (912       | ) |      |   |           |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|Net income                                                                                                       |  |      | 26,425     |   |      |   | 24,392     |  
|Preferred dividends                                                                                              |  |      | (11,459    | ) |      |   | (14,669    | )
|Dividends paid on redeemed preferred stock                                                                       |  |      | (2,073     | ) |      |   |           |  
|(Premium)/discount and writeoff of original issuance costs on preferred stock redemption and repurchases         |  |      | (5,900     | ) |      |   | 254        |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|Net income available to Common Stockholders                                                                      |  | $    | 6,993      |   |      | $ | 9,977      |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|Basic Per Share Data:                                                                                            |  |      |            |   |      |   |            |  
|Continuing operations                                                                                            |  | $    | (0.15      | ) |      | $ | (0.06      | )
|Discontinued operations                                                                                          |  |      | 0.40       |   |      |   | 0.42       |  
|Cumulative effect of change in accounting principle                                                              |  |      | (0.03      | ) |      |   |           |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|Net income available to Common Stockholders                                                                      |  | $    | 0.22       |   |      | $ | 0.36       |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|Basic weighted average shares outstanding                                                                        |  |      | 31,084,557 |   |      |   | 27,612,311 |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|Diluted Per Share Data:                                                                                          |  |      |            |   |      |   |            |  
|Continuing operations                                                                                            |  | $    | (0.15      | ) |      | $ | (0.06      | )
|Discontinued operations                                                                                          |  |      | 0.40       |   |      |   | 0.42       |  
|Cumulative effect of change in accounting principle                                                              |  |      | (0.03      | ) |      |   |           |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|Net income available to Common Stockholders                                                                      |  | $    | 0.22       |   |      | $ | 0.36       |  
|                                                                                                                 |  |      |            |   |      |   |            |  
|Diluted weighted average shares outstanding                                                                      |  |      | 31,084,557 |   |      |   | 27,612,311 |  
|                                                                                                                 |  |      |            |   |      |   |            |  



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



5



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

For the nine months ended September 30, 2004

(in thousands)

(unaudited)



|                                                                              |  |              |  |                 |    |        |        |   |          |   |    |                          |  |   |                       |   |  |                                              |        |   |       |   |          |   |  |   |         |  
|----------------------------------------------------------------------------- |  | ------------ |  | --------------- | -- | ------ | ------ | - | -------- | - | -- | ------------------------ |  | - | --------------------- | - |  | -------------------------------------------- | ------ | - | ----- | - | -------- | - |  | - | ------- | -
|                                                                              |  | Common Stock |  | Preferred Stock |    |        |        |   |          |   |    |                          |  |   |                       |   | 
|                                                                              |  | Shares       |  | ParValue        |    | Shares |        |   | ParValue |   |    | AdditionalPaid-inCapital |  |   | DeferredCompen-sation |   |  | Distributionsin excess ofaccumulatedearnings |        |   | Total |  
|Balance at December 31, 2003                                                  |  | 27,847       |  | $               | 28 |        | 9,956  |   |          | $ | 10 |                          |  | $ | 779,627               |   |  | $                                            | (2,977 | ) |       | $ | (184,843 | ) |  | $ | 591,845 |  
|                                                                              |  |              |  |                 |    |        |        |  
|Exercise of stock options                                                     |  | 78           |  |                 |   |        |       |   |          |   |   |                          |  |   | 1,431                 |   |  |                                              |       |   |       |   |         |   |  |   | 1,431   |  
|                                                                              |  |              |  |                 |    |        |        |  
|Issuance of common stock, net of offering costs of $1,507                     |  | 3,910        |  |                 | 4  |        |       |   |          |   |   |                          |  |   | 81,378                |   |  |                                              |       |   |       |   |         |   |  |   | 81,382  |  
|                                                                              |  |              |  |                 |    |        |        |  
|Issuance of restricted common stock to officer                                |  | 100          |  |                 |   |        |       |   |          |   |   |                          |  |   | 2,548                 |   |  |                                              | (2,548 | ) |       |   |         |   |  |   |        |  
|                                                                              |  |              |  |                 |    |        |        |  
|Conversion of preferred stock to common stock                                 |  | 6            |  |                 |   |        | (8     | ) |          |   |   |                          |  |   |                      |   |  |                                              |       |   |       |   |         |   |  |   |        |  
|                                                                              |  |              |  |                 |    |        |        |  
|Preferred stock redemption                                                    |  |             |  |                 |   |        | (3,098 | ) |          |   | (3 | )                        |  |   | (77,456               | ) |  |                                              |       |   |       |   |         |   |  |   | (77,459 | )
|                                                                              |  |              |  |                 |    |        |        |  
|Premium and writeoff of original issuance costs on preferred stock redemption |  |             |  |                 |   |        |       |   |          |   |   |                          |  |   | 3,439                 |   |  |                                              |       |   |       |   | (5,900   | ) |  |   | (2,461  | )
|                                                                              |  |              |  |                 |    |        |        |  
|Amortization of deferred compensation                                         |  |             |  |                 |   |        |       |   |          |   |   |                          |  |   |                      |   |  |                                              | 791    |   |       |   |         |   |  |   | 791     |  
|                                                                              |  |              |  |                 |    |        |        |  
|Reallocation of limited partners interests in Operating Partnership          |  |             |  |                 |   |        |       |   |          |   |   |                          |  |   | (878                  | ) |  |                                              |       |   |       |   |         |   |  |   | (878    | )
|                                                                              |  |              |  |                 |    |        |        |  
|Dividends paid to common and preferred stockholders                           |  |             |  |                 |   |        |       |   |          |   |   |                          |  |   |                      |   |  |                                              |       |   |       |   | (43,544  | ) |  |   | (43,544 | )
|                                                                              |  |              |  |                 |    |        |        |  
|Dividends paid on redeemed preferred stock                                    |  |             |  |                 |   |        |       |   |          |   |   |                          |  |   |                      |   |  |                                              |       |   |       |   | (2,073   | ) |  |   | (2,073  | )
|                                                                              |  |              |  |                 |    |        |        |  
|Net income                                                                    |  |             |  |                 |   |        |       |   |          |   |   |                          |  |   |                      |   |  |                                              |       |   |       |   | 26,425   |   |  |   | 26,425  |  
|                                                                              |  |              |  |                 |    |        |        |   |          |   |    |                          |  |   |                       |   |  |                                              |        |   |       |   |          |   |  |   |         |  
|Balance at September 30, 2004                                                 |  | 31,941       |  | $               | 32 |        | 6,850  |   |          | $ | 7  |                          |  | $ | 790,089               |   |  | $                                            | (4,734 | ) |       | $ | (209,935 | ) |  | $ | 575,459 |  
|                                                                              |  |              |  |                 |    |        |        |   |          |   |    |                          |  |   |                       |   |  |                                              |        |   |       |   |          |   |  |   |         |  



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



6



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended September 30, 2004 and 2003

(in thousands)

(unaudited)



|                                                                                            |  |      |          |   |      |   |          |  
|------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                                            |  | 2004 |          |   | 2003 |  
|Cash flows from operating activities:                                                       |  |      |          |   |      |   |          |  
|Net income                                                                                  |  | $    | 26,425   |   |      | $ | 24,392   |  
|Adjustments to reconcile net income to net cash provided by operating activities:           |  |      |          |   |      |   |          |  
|Depreciation and amortization (including discontinued operations)                           |  |      | 46,830   |   |      |   | 42,408   |  
|Amortization of loan fees, included in interest expense (including discontinued operations) |  |      | 2,371    |   |      |   | 2,343    |  
|Accrued interest on mortgage loans receivable                                               |  |      | (1,443   | ) |      |   | (2,174   | )
|Minority interest in income from operations                                                 |  |      | 684      |   |      |   | 1,054    |  
|Equity in earnings of unconsolidated operating joint ventures                               |  |      | (594     | ) |      |   | (478     | )
|Net gain on sales of real estate assets                                                     |  |      | (13,271  | ) |      |   | (12,155  | )
|Loss on early extinguishment of debt (including discontinued operations)                    |  |      | 2,075    |   |      |   | 5,588    |  
|Provision for impairment of real estate assets                                              |  |      |         |   |      |   | 2,852    |  
|Provision for impairment of non-real estate assets                                          |  |      |         |   |      |   | 3,905    |  
|Cumulative effect of change in accounting principle                                         |  |      | 912      |   |      |   |         |  
|Amortization of deferred compensation                                                       |  |      | 791      |   |      |   | 726      |  
|Accelerated vesting of stock options                                                        |  |      |         |   |      |   | 122      |  
|(Increase)/decrease in other assets                                                         |  |      | (7,710   | ) |      |   | (14,259  | )
|Increase/(decrease) in other liabilities                                                    |  |      | (5,593   | ) |      |   | (56      | )
|                                                                                            |  |      |          |   |      |   |          |  
|Net cash provided by operating activities                                                   |  |      | 51,477   |   |      |   | 54,268   |  
|                                                                                            |  |      |          |   |      |   |          |  
|Cash flows from investing activities:                                                       |  |      |          |   |      |   |          |  
|Net proceeds from sales of rental properties                                                |  |      | 26,602   |   |      |   | 172,190  |  
|Acquisitions of rental properties                                                           |  |      | (24,381  | ) |      |   | (134,502 | )
|Payments for capital and tenant improvements                                                |  |      | (19,172  | ) |      |   | (31,501  | )
|Investments in land and development                                                         |  |      | (36,787  | ) |      |   | (8,131   | )
|Investments in unconsolidated operating joint ventures                                      |  |      |         |   |      |   | (75      | )
|Distributions from unconsolidated operating joint ventures                                  |  |      | 775      |   |      |   | 449      |  
|Buyout of minority interest in consolidated subsidiary                                      |  |      |         |   |      |   | (175     | )
|Principal payments from mortgage loans receivable                                           |  |      | 28,504   |   |      |   | 4,581    |  
|                                                                                            |  |      |          |   |      |   |          |  
|Net cash (used for) provided by investing activities                                        |  |      | (24,459  | ) |      |   | 2,836    |  
|                                                                                            |  |      |          |   |      |   |          |  
|Cash flows from financing activities:                                                       |  |      |          |   |      |   |          |  
|Proceeds from borrowings                                                                    |  |      | 286,981  |   |      |   | 192,070  |  
|Repayment of borrowings                                                                     |  |      | (280,135 | ) |      |   | (177,131 | )
|Payment of deferred financing costs                                                         |  |      | (1,989   | ) |      |   | (1,103   | )
|Prepayment penalties on loan payoffs                                                        |  |      |         |   |      |   | (5,411   | )
|Contributions from minority interest holders                                                |  |      | 157      |   |      |   |         |  
|Distributions to minority interest holders                                                  |  |      | (3,152   | ) |      |   | (3,886   | )
|Dividends paid to common and preferred stockholders                                         |  |      | (43,544  | ) |      |   | (50,582  | )
|Proceeds from issuance of common stock, net of offering costs                               |  |      | 81,382   |   |      |   |         |  
|Preferred stock redemption                                                                  |  |      | (77,459  | ) |      |   |         |  
|Dividends paid on redeemed preferred stock                                                  |  |      | (2,073   | ) |      |   |         |  
|Premium on preferred stock redemption                                                       |  |      | (2,461   | ) |      |   |         |  
|Exercise of stock options                                                                   |  |      | 1,431    |   |      |   | 527      |  
|Repurchases of common stock                                                                 |  |      |         |   |      |   | (3,419   | )
|Repurchases of preferred stock                                                              |  |      |         |   |      |   | (3,538   | )
|                                                                                            |  |      |          |   |      |   |          |  
|Net cash used for financing activities                                                      |  |      | (40,862  | ) |      |   | (52,473  | )
|                                                                                            |  |      |          |   |      |   |          |  



continued



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



7



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS - continued

For the nine months ended
September 30, 2004 and 2003

(in thousands)

(unaudited)



|                                                                                                         |  |      |         |   |      |   |       
|-------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------
|                                                                                                         |  | 2004 |         |   | 2003
|Net (decrease) increase in cash and cash equivalents                                                     |  | $    | (13,844 | ) |      | $ | 4,631 
|                                                                                                         |  |     
|Cash and cash equivalents at Marina Shores on January 1, 2004 (see Note 17)                              |  |      | 1,035   |   |      |   |      
|                                                                                                         |  |     
|Cash and cash equivalents at beginning of period                                                         |  |      | 18,992  |   |      |   | 5,273 
|                                                                                                         |  |      |         |   |      |   |       
|Cash and cash equivalents at end of period                                                               |  | $    | 6,183   |   |      | $ | 9,904 
|                                                                                                         |  |      |         |   |      |   |       
|Supplemental disclosure of cash flow information:                                                        |  |      |         |   |      |   |       
|                                                                                                         |  |     
|Cash paid for interest (net of capitalized interest of $2,507 and $2,479 in 2004 and 2003, respectively) |  | $    | 25,835  |   |      | $ | 26,841
|                                                                                                         |  |      |         |   |      |   |       
|Supplemental disclosure of non-cash investing and financing activities:                                  |  |      |         |   |      |   |       
|                                                                                                         |  |     
|Non-cash components of consolidation of Marina Shores:                                                   |  |      |         |   |      |   |       
|Investments in land and development                                                                      |  | $    | 46,322  |   |      | $ |      
|Cash and cash equivalents                                                                                |  |      | 1,035   |   |      |   |      
|Mortgage loans payable                                                                                   |  |      | (45,000 | ) |      |   |      
|Minority interest                                                                                        |  |      | (2,228  | ) |      |   |      
|Other assets and liabilities, net                                                                        |  |      | (129    | ) |      |   |      
|                                                                                                         |  |      |         |   |      |   |       
|                                                                                                         |  | $    |        |   |      | $ |      
|                                                                                                         |  |      |         |   |      |   |       
|Reclassification of real estate assets from investments in land and development to rental properties     |  | $    | 1,450   |   |      | $ | 18,084
|                                                                                                         |  |      |         |   |      |   |       
|Acquisition of investment in operating joint venture:                                                    |  |      |         |   |      |   |       
|Exchange of related note receivable                                                                      |  | $    |        |   |      | $ | 3,775 
|Issuance of note payable, net of discount                                                                |  |      |        |   |      |   | 2,518 
|                                                                                                         |  |      |         |   |      |   |       
|Total                                                                                                    |  | $    |        |   |      | $ | 6,293 
|                                                                                                         |  |      |         |   |      |   |       
|Assumption of mortgage loan in acquisition of real estate                                                |  | $    | 21,049  |   |      | $ |      
|                                                                                                         |  |      |         |   |      |   |       
|Disposition of real estate involving buyers assumption of mortgage loans                                |  | $    | 17,175  |   |      | $ | 61,218
|                                                                                                         |  |      |         |   |      |   |       
|Writeoff of original issuance costs on preferred stock redemption                                        |  | $    | 3,439   |   |      | $ |      
|                                                                                                         |  |      |         |   |      |   |       
|Reallocation of limited partners interests in Operating Partnership                                     |  | $    | 878     |   |      | $ | 198   
|                                                                                                         |  |      |         |   |      |   |       
|Conversion of Operating Partnership units into common stock, at market value on date of issuance         |  | $    |        |   |      | $ | 113   
|                                                                                                         |  |      |         |   |      |   |       
|Issuance of restricted stock:                                                                            |  |      |         |   |      |   |       
|Additional paid-in capital                                                                               |  | $    | (2,548  | ) |      | $ |      
|Deferred compensation                                                                                    |  |      | 2,548   |   |      |   |      
|                                                                                                         |  |      |         |   |      |   |       
|Total                                                                                                    |  | $    |        |   |      | $ |      
|                                                                                                         |  |      |         |   |      |   |       



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



8



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(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 September 30, 2004, 31,940,790 shares of Common Stock and 6,850,325 shares of Preferred Stock were issued and outstanding. Common and
preferred shares authorized are 188,000,000 and 12,000,000, respectively. Assuming the issuance of 3,001,957 shares of Common Stock issuable upon redemption of 3,001,957 partnership units in the Operating Partnership (as defined below), there would
be 34,942,747 shares of Common Stock outstanding as of September 30, 2004. In 1999 and 2000, the Companys Board of Directors authorized the repurchase of up to 8,210,700 shares of Common Stock and 3,450,000 shares of Preferred Stock. As of
September 30, 2004, 6,394,816 shares of Common Stock and 1,543,700 shares of Preferred Stock (excluding the redemption discussed below) have been repurchased at a total cost of approximately $131 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), subject to adjustment in certain circumstances. 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.



On April 30, 2004 (the Redemption Date), the Company redeemed, on a pro rata
basis, as to record holders, approximately 3.1 million shares of Preferred Stock, representing approximately 31.2% of the total number of outstanding shares. The redemption price was $25.775 per share of Preferred Stock plus $0.183 per share in
accrued and unpaid dividends for the period from March 26, 2004 through and including the Redemption Date, without interest. This redemption was funded with proceeds from the Companys March 2004 common stock offering (as discussed in Note 19).



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 90.4% limited partner interest at September 30, 2004, 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 September 30, 2004, the Operating Partnership, directly and through the
subsidiaries in which it and the Company own 100% of the ownership interests, controls a portfolio of 63 real estate projects.



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(unaudited)



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 September 30,
2004 and December 31, 2003, the consolidated results of operations of the Company and its subsidiaries for the three and nine months ended September 30, 2004 and 2003, and cash flows of the Company for the nine months ended September 30, 2004 and
2003. 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 September 30, 2004 and December 31, 2003, the results of operations of the Company for the three and nine months ended September 30, 2004 and 2003, and cash flows of the Company for the nine months ended
September 30, 2004 and 2003.



Use of Estimates



The preparation of financial statements in conformity with accounting principles generally
accepted in the United States 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) resulting in multiple effective dates based on the nature as well as the creation date of the
VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on FIN 46 or FIN 46 Revised. However, FIN 46 Revised must be applied no later than the first quarter of fiscal 2004. VIEs created after January
1, 2004 must be accounted for under FIN 46 Revised. Special Purpose Entities (SPEs) created prior to February 1, 2003 may be accounted for under FIN 46 or FIN 46 Reviseds provisions no later than the fourth quarter of fiscal 2003.
Non-SPEs created prior to February 1, 2003, should be accounted for under FIN 46 Reviseds provisions no later than the first quarter of fiscal 2004. The Company has not entered into any arrangements which are considered SPEs. FIN 46 Revised
may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the
first year restated. The disclosure requirements of FIN 46 Revised are effective for all financial statements initially issued after December 31, 2003. 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. In accordance with FIN 46 Revised, the Company began consolidating the entity known as Marina Shores, effective January 1, 2004, as the Company is
deemed to be the primary beneficiary as defined by FIN 46 Revised (see Note 17). There are other alliances which are VIEs, but of which the Company is not the primary beneficiary.



Stock Based Compensation



The Company has an employee stock incentive plan and it accounts for stock options and bonus grants (restricted shares of common stock) in the plan under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. For incentive stock options, no stock-based employee compensation cost is reflected in net income as all options
granted under the plan have an exercise price equal to the market value of the underlying common stock on the date of grant. The options vest over periods between 1 and 6 years, and have a maximum term of 10 years.



As of September 30, 2004, 366,241 shares of bonus grants were outstanding under the Plan. The
intrinsic value of the shares granted has been recorded as deferred compensation, with an offsetting entry to additional paid-in-capital, in the accompanying financial statements. The vesting of 316,241 of these shares is time-based and the deferred
compensation related to these shares is being amortized to general and administrative expense ratably over the respective vesting periods that range from 5 to 10 years. As a result, additional compensation expense of $222,252 and $194,502 was
recognized during the three months



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(unaudited)



ended September 30, 2004 and 2003, respectively, and $639,006 and $847,801 was recognized during the nine months
ended September 30, 2004 and 2003, respectively, in the accompanying consolidated statements of operations. 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. The Company accounts for these shares under the recognition and measurement principles of FASB Interpretation No. 28. As a result, additional compensation expense of $84,904 and $152,087 was recognized during the three and nine months ended
September 30, 2004, respectively, in the accompanying consolidated statement of operations.



As permitted by Statement of Financial Accounting Standards No. 123 Accounting for Stock-based Compensation (SFAS 123), the Company has not changed its method of accounting for stock options 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, the Companys net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except for per share amounts).



|                                                   |  |                   |  |                    |      |   |                   |   |        |              |  |   |               |   |  |   |       |  
|-------------------------------------------------- |  | ----------------- |  | ------------------ | ---- | - | ----------------- | - | ------ | ------------ |  | - | ------------- | - |  | - | ----- | -
|                                                   |  |                   |  | Three months ended |      |   | Nine months ended |  
|                                                   |  |                   |  | Sept 30, 2004      |      |   | Sept 30, 2003     |   |        | Sept 30,2004 |  |   | Sept 30, 2003 |  
|Net income (loss) available to Common Stockholders |  | As reported       |  | $                  | 410  |   |                   | $ | (1,119 | )            |  | $ | 6,993         |   |  | $ | 9,977 |  
|                                                   |  | SFAS No. 123 Adj. |  |                    | (8   | ) |                   |   | (201   | )            |  |   | (91           | ) |  |   | (492  | )
|                                                   |  |                   |  |                    |      |   |                   |   |        |              |  |   |               |   |  |   |       |  
|                                                   |  | Pro forma         |  | $                  | 402  |   |                   | $ | (1,320 | )            |  | $ | 6,902         |   |  | $ | 9,485 |  
|                                                   |  |                   |  |                    |      |   |                   |   |        |              |  |   |               |   |  |   |       |  
|Basic earnings (loss) per share                    |  | As reported       |  | $                  | 0.01 |   |                   | $ | (0.04  | )            |  | $ | 0.22          |   |  | $ | 0.36  |  
|                                                   |  | SFAS No. 123 Adj. |  |                    |     |   |                   |   | (0.01  | )            |  |   |              |   |  |   | (0.02 | )
|                                                   |  |                   |  |                    |      |   |                   |   |        |              |  |   |               |   |  |   |       |  
|                                                   |  | Pro forma         |  | $                  | 0.01 |   |                   | $ | (0.05  | )            |  | $ | 0.22          |   |  | $ | 0.34  |  
|                                                   |  |                   |  |                    |      |   |                   |   |        |              |  |   |               |   |  |   |       |  
|Diluted earnings (loss) per share                  |  | As reported       |  | $                  | 0.01 |   |                   | $ | (0.04  | )            |  | $ | 0.22          |   |  | $ | 0.36  |  
|                                                   |  | SFAS No. 123 Adj. |  |                    |     |   |                   |   | (0.01  | )            |  |   |              |   |  |   | (0.02 | )
|                                                   |  |                   |  |                    |      |   |                   |   |        |              |  |   |               |   |  |   |       |  
|                                                   |  | Pro forma         |  | $                  | 0.01 |   |                   | $ | (0.05  | )            |  | $ | 0.22          |   |  | $ | 0.34  |  
|                                                   |  |                   |  |                    |      |   |                   |   |        |              |  |   |               |   |  |   |       |  



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, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other
value of at-market in-place leases and 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



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(unaudited)



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        |  | Term of the related lease          
|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.



Investments in Unconsolidated Operating Joint Ventures



The Companys investments in operating joint ventures are accounted for using the
equity method. The Company does not hold a controlling interest in any operating joint venture. 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 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



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(unaudited)



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.



Fair Value of Financial Instruments



For certain financial instruments, including cash and cash equivalents, accounts receivable (included in other assets), 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 September 30, 2004 and December 31, 2003, would be approximately $707,941 and $666,033 (in thousands), respectively.



Derivative Financial Instruments



The Company may use derivative financial instruments in the event that it believes such instruments will be an effective hedge against fluctuations in interest rates on a
specific borrowing. Derivative financial instruments such as forward rate agreements or interest rate swaps may be used in this capacity. To the extent such instruments do not qualify as hedges, they will be accounted for on a mark-to-market basis
and recorded in earnings each period as appropriate.



At September 30, 2004,
the Company was not a party to any open interest rate protection agreements.



Leasing and Financing Costs



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



Minority Interest



Minority interest represents the 8.60% and 9.73% limited partner interests in the Operating Partnership not held by the Company at September 30, 2004 and December 31, 2003, 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.



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 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 the Company has previously recognized as revenue, or if other tenants pay rent whom the Company previously
estimated would not. 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.



The Companys portfolio of leases turns over continuously, with the number and value of
expiring leases varying from year to year. The Companys ability to re-lease the space to existing or new tenants at rates equal to or greater than those realized historically is impacted by, among other things, the economic conditions of the
market in which a property is located, the availability of competing space, and the level of improvements which may be required at the property. No assurance can be given that the rental rates that the Company will obtain in the future will be equal
to or greater than those obtained under existing contractual commitments.



13



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(unaudited)



Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as revenue
in the period the applicable expenses are incurred. Differences between estimated and actual amounts are recognized in the subsequent year.



For the nine months ended September 30, 2004 and 2003, no 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.



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.



Reference
to 2003 Audited Financial Statements



These unaudited financial statements
should be read in conjunction with the Notes to Consolidated Financial Statements included in the 2003 audited consolidated financial statements.



14



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(unaudited)



NOTE 3. RENTAL PROPERTIES



The cost and accumulated depreciation of rental properties, by market, as of September 30, 2004 and December 31, 2003, are as follows (in
thousands):



|                       |  |                          |         |   |                           |   |           |            |  |   |                         |   |  |                  |          |   |  |   |           |  
|---------------------- |  | ------------------------ | ------- | - | ------------------------- | - | --------- | ---------- |  | - | ----------------------- | - |  | ---------------- | -------- | - |  | - | --------- | -
|                       |  | As of September 30, 2004 |        
|                       |  | Land                     |         |   | Buildings & Improve-ments |   |           | Total Cost |  |   | AccumulatedDepreciation |   |  | NetRecordedValue |         
|Washington D.C.        |  | $                        | 40,876  |   |                           | $ | 223,897   |            |  | $ | 264,773                 |   |  | $                | (23,551  | ) |  | $ | 241,222   | *
|Southern California    |  |                          | 39,780  |   |                           |   | 190,018   |            |  |   | 229,798                 |   |  |                  | (24,757  | ) |  |   | 205,041   | *
|Boston                 |  |                          | 22,033  |   |                           |   | 160,207   |            |  |   | 182,240                 |   |  |                  | (27,582  | ) |  |   | 154,658   | *
|Northern New Jersey    |  |                          | 26,137  |   |                           |   | 145,570   |            |  |   | 171,707                 |   |  |                  | (31,953  | ) |  |   | 139,754   |  
|San Francisco          |  |                          | 36,051  |   |                           |   | 84,349    |            |  |   | 120,400                 |   |  |                  | (13,479  | ) |  |   | 106,921   |  
|Chicago                |  |                          | 2,745   |   |                           |   | 103,638   |            |  |   | 106,383                 |   |  |                  | (26,966  | ) |  |   | 79,417    |  
|Tampa/Orlando          |  |                          | 8,286   |   |                           |   | 41,325    |            |  |   | 49,611                  |   |  |                  | (10,654  | ) |  |   | 38,957    |  
|St. Louis              |  |                          | 7,192   |   |                           |   | 28,648    |            |  |   | 35,840                  |   |  |                  | (6,670   | ) |  |   | 29,170    |  
|Denver                 |  |                          | 6,222   |   |                           |   | 45,458    |            |  |   | 51,680                  |   |  |                  | (5,681   | ) |  |   | 45,999    | *
|Minneapolis            |  |                          | 6,129   |   |                           |   | 31,116    |            |  |   | 37,245                  |   |  |                  | (7,800   | ) |  |   | 29,445    |  
|Las Vegas              |  |                          | 7,746   |   |                           |   | 33,687    |            |  |   | 41,433                  |   |  |                  | (8,035   | ) |  |   | 33,398    |  
|Omaha                  |  |                          | 1,534   |   |                           |   | 36,296    |            |  |   | 37,830                  |   |  |                  | (8,462   | ) |  |   | 29,368    |  
|Indianapolis           |  |                          | 691     |   |                           |   | 4,759     |            |  |   | 5,450                   |   |  |                  | (1,013   | ) |  |   | 4,437     |  
|All others             |  |                          | 13,614  |   |                           |   | 79,568    |            |  |   | 93,182                  |   |  |                  | (22,062  | ) |  |   | 71,120    |  
|Property held for sale |  |                          | (796    | ) |                           |   | (6,898    | )          |  |   | (7,694                  | ) |  |                  | 1,589    |   |  |   | (6,105    | )
|                       |  |                          |         |   |                           |   |           |            |  |   |                         |   |  |                  |          |   |  |   |           |  
|Total                  |  | $                        | 218,240 |   |                           | $ | 1,201,638 |            |  | $ | 1,419,878               |   |  | $                | (217,076 | ) |  | $ | 1,202,802 |  
|                       |  |                          |         |   |                           |   |           |            |  |   |                         |   |  |                  |          |   |  |   |           |  

---

|* | Includes acquisition costs allocated to at-market and above-market rate in-place leases, net of accumulated amortization, of $8,065 in Washington D.C., $6,449 in Southern
California, $5,764 in Boston, and $1,296 in Denver.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                       |  |                         |         |   |                           |   |           |            |  |   |                         |   |  |                  |          |   |  |   |           |  
|---------------------- |  | ----------------------- | ------- | - | ------------------------- | - | --------- | ---------- |  | - | ----------------------- | - |  | ---------------- | -------- | - |  | - | --------- | -
|                       |  | As of December 31, 2003 |        
|                       |  | Land                    |         |   | Buildings & Improve-ments |   |           | Total Cost |  |   | AccumulatedDepreciation |   |  | NetRecordedValue |         
|Washington D.C.        |  | $                       | 33,663  |   |                           | $ | 219,608   |            |  | $ | 253,271                 |   |  | $                | (21,327  | ) |  | $ | 231,944   | *
|Southern California    |  |                         | 39,780  |   |                           |   | 189,081   |            |  |   | 228,861                 |   |  |                  | (17,617  | ) |  |   | 211,244   | *
|Boston                 |  |                         | 22,751  |   |                           |   | 161,038   |            |  |   | 183,789                 |   |  |                  | (23,804  | ) |  |   | 159,985   | *
|Northern New Jersey    |  |                         | 26,137  |   |                           |   | 144,666   |            |  |   | 170,803                 |   |  |                  | (27,995  | ) |  |   | 142,808   |  
|San Francisco          |  |                         | 36,051  |   |                           |   | 83,195    |            |  |   | 119,246                 |   |  |                  | (11,056  | ) |  |   | 108,190   |  
|Chicago                |  |                         | 2,746   |   |                           |   | 102,814   |            |  |   | 105,560                 |   |  |                  | (24,152  | ) |  |   | 81,408    |  
|Tampa/Orlando          |  |                         | 8,286   |   |                           |   | 41,016    |            |  |   | 49,302                  |   |  |                  | (9,272   | ) |  |   | 40,030    |  
|St. Louis              |  |                         | 7,192   |   |                           |   | 27,746    |            |  |   | 34,938                  |   |  |                  | (5,870   | ) |  |   | 29,068    |  
|Denver                 |  |                         | 4,654   |   |                           |   | 37,919    |            |  |   | 42,573                  |   |  |                  | (4,651   | ) |  |   | 37,922    |  
|Minneapolis            |  |                         | 6,129   |   |                           |   | 30,629    |            |  |   | 36,758                  |   |  |                  | (6,821   | ) |  |   | 29,937    |  
|Las Vegas              |  |                         | 7,746   |   |                           |   | 33,269    |            |  |   | 41,015                  |   |  |                  | (7,070   | ) |  |   | 33,945    |  
|Omaha                  |  |                         | 1,534   |   |                           |   | 34,601    |            |  |   | 36,135                  |   |  |                  | (7,304   | ) |  |   | 28,831    |  
|Indianapolis           |  |                         | 691     |   |                           |   | 6,440     |            |  |   | 7,131                   |   |  |                  | (2,274   | ) |  |   | 4,857     |  
|All others             |  |                         | 13,612  |   |                           |   | 79,189    |            |  |   | 92,801                  |   |  |                  | (19,508  | ) |  |   | 73,293    |  
|Property held for sale |  |                         | (796    | ) |                           |   | (6,901    | )          |  |   | (7,697                  | ) |  |                  | 1,424    |   |  |   | (6,273    | )
|                       |  |                         |         |   |                           |   |           |            |  |   |                         |   |  |                  |          |   |  |   |           |  
|Total                  |  | $                       | 210,176 |   |                           | $ | 1,184,310 |            |  | $ | 1,394,486               |   |  | $                | (187,297 | ) |  | $ | 1,207,189 |  
|                       |  |                         |         |   |                           |   |           |            |  |   |                         |   |  |                  |          |   |  |   |           |  

---

|* | Includes acquisition costs allocated to at-market and above-market rate in-place leases, net of accumulated amortization, of $7,074 in Washington D.C., $9,083 in Southern
California, and $6,949 in Boston.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(unaudited)



NOTE 4. ACQUISITIONS OF RENTAL PROPERTIES



In August 2004, the Company acquired Three Gateway Center, an 80,000 square foot, 4-story office building located at Gateway Business Park
in Denver, Colorado. The total acquisition cost of approximately $8.5 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
$1.3 million. Liabilities related to below-market rate in-place leases amounted to approximately $96,000.



In April 2004, the Company acquired 1100 17thStreet, a 142,000 square foot,
12-story multi-tenant office building located in Washington, D.C. The total acquisition cost of approximately $38.2 million was funded using 1031 tax-deferred exchange proceeds from the sale of an office building, along with the assumption of a $21
million loan from a life insurance company. The assumed loan bears a floating interest rate of 30-day LIBOR plus 1.75%, with a floor of 3.5%, and matures on July 1, 2007. 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 $3.2 million. Liabilities related to below-market rate in-place leases amounted to approximately $1.6 million.



NOTE 5. DISPOSITIONS OF RENTAL PROPERTIES



During the nine months ended September 30, 2004, the Company sold four properties. These
assets were sold for an aggregate sales price of approximately $44.5 million and generated a gain on sale of approximately $13.3 million. The four properties sold were:



|                  |  |                |  |              |  |                     |  |                     |       
|----------------- |  | -------------- |  | ------------ |  | ------------------- |  | ------------------- | ------
|Property          |  | Location       |  | Date of Sale |  | Total SquareFootage |  | Sales Price($000s)
|Valley Forge VI   |  | Norristown, PA |  | 1/13/04      |  | 30,000              |  | $                   | 1,100 
|Cameron Run       |  | Alexandria, VA |  | 6/16/04      |  | 143,707             |  | $                   | 29,925
|90 Libbey Parkway |  | Weymouth, MA   |  | 7/29/04      |  | 79,825              |  | $                   | 3,900 
|Germantown        |  | Germantown, MD |  | 8/12/04      |  | 79,480              |  | $                   | 9,600 



In accordance with SFAS 144
Accounting for the Impairment or Disposal of Long Lived Assets, the gain or loss on sale and the related operating results from these sold properties are classified as discontinued operations in the accompanying consolidated statements
of operations for all periods presented. 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. At September 30, 2004, there was one property classified as held for sale.



The major classes of assets and liabilities of properties classified as held for sale at September 30, 2004, and December 31, 2003, are as follows (dollars in thousands):



|                                                    |  |                   |        |   |                  |   |        |  
|--------------------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                                    |  | September 30,2004 |        |   | December 31,2003 |  
|ASSETS                                              |  |                   |        |   |                  |   |        |  
|Rental properties, gross                            |  | $                 | 7,694  |   |                  | $ | 7,697  |  
|Accumulated depreciation                            |  |                   | (1,589 | ) |                  |   | (1,424 | )
|                                                    |  |                   |        |   |                  |   |        |  
|Rental properties, net                              |  |                   | 6,105  |   |                  |   | 6,273  |  
|                                                    |  |                  
|Leasing and financing costs, net                    |  |                   | 4      |   |                  |   |       |  
|Other assets                                        |  |                   | 130    |   |                  |   | 41     |  
|                                                    |  |                   |        |   |                  |   |        |  
|Properties held for sale                            |  | $                 | 6,239  |   |                  | $ | 6,314  |  
|                                                    |  |                   |        |   |                  |   |        |  
|LIABILITIES                                         |  |                   |        |   |                  |   |        |  
|Other liabilities                                   |  | $                 | 271    |   |                  | $ | 258    |  
|                                                    |  |                   |        |   |                  |   |        |  
|Obligation associated with properties held for sale |  | $                 | 271    |   |                  | $ | 258    |  
|                                                    |  |                   |        |   |                  |   |        |  



16



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(unaudited)



Below is a summary of the results of operations of sold properties through their respective disposition dates
(dollars in thousands):



|                                                  |  |                                 |     |      |                                |        |      |  |      |        |  |   |       
|------------------------------------------------- |  | ------------------------------- | --- | ---- | ------------------------------ | ------ | ---- |  | ---- | ------ |  | - | ------
|                                                  |  | Three months endedSeptember 30, |     |      | Nine months endedSeptember 30,
|                                                  |  | 2004                            |     | 2003 |                                |        | 2004 |  | 2003
|Total rental revenue                              |  | $                               | 433 |      | $                              | 4,164  |      |  | $    | 3,169  |  | $ | 23,922
|                                                  |  |                                 |     |      |                                |        |      |  |      |        |  |   |       
|Property operating expenses                       |  |                                 | 125 |      |                                | 1,558  |      |  |      | 1,034  |  |   | 7,324 
|Depreciation and amortization                     |  |                                 | 42  |      |                                | 990    |      |  |      | 842    |  |   | 5,212 
|Interest expense                                  |  |                                 | 45  |      |                                | 1,005  |      |  |      | 656    |  |   | 5,190 
|Loss on early extinguishment of debt              |  |                                 | 40  |      |                                | 177    |      |  |      | 40     |  |   | 5,588 
|                                                  |  |                                 |     |      |                                |        |      |  |      |        |  |   |       
|Total expenses                                    |  |                                 | 252 |      |                                | 3,730  |      |  |      | 2,572  |  |   | 23,314
|                                                  |  |                                 |     |      |                                |        |      |  |      |        |  |   |       
|Income before gain (loss) on sales of real estate |  |                                 | 181 |      |                                | 434    |      |  |      | 597    |  |   | 608   
|Gain (loss) on sales of real estate, net          |  |                                 | 743 |      |                                | (3,449 | )    |  |      | 13,271 |  |   | 12,155
|                                                  |  |                                 |     |      |                                |        |      |  |      |        |  |   |       
|Discontinued operations                           |  | $                               | 924 |      | $                              | (3,015 | )    |  | $    | 13,868 |  | $ | 12,763
|                                                  |  |                                 |     |      |                                |        |      |  |      |        |  |   |       



NOTE 6. INVESTMENTS IN LAND AND
DEVELOPMENT



The Companys investments in land and development
increased from $67,493,000 at December 31, 2003, to $148,240,000 at September 30, 2004. This increase is primarily due to the consolidation of the entity known as Marina Shores, effective January 1, 2004, in accordance with FIN 46 Revised. See Note
17 for further discussion. In addition, during the nine months ended September 30, 2004, the Company acquired an undivided 50% tenancy in common interest in approximately 295 acres of the land at Gateway Business Park for a total purchase price of
$30.7 million. See Note 8 for further discussion.



In March 2004, the Company
gained approval for Marina Shores Village with a 6-1 vote of the Redwood City Planning Commission. The proposed mixed use, waterfront community includes approvals for the construction of 1,930 residential units, 150,000 square feet of office space
and 25,000 square feet of retail space. In June 2004, the City Council unanimously approved the project with a 7-0 vote. In August 2004, a local group opposing the development qualified a referendum for the November ballot. On November 2, 2004, the
referendum to ratify the city council action was defeated by 1,800 votes (54% to 46%). The Company is currently working with the city to determine the highest and best use for the land.



17



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(unaudited)



As of September 30, 2004, the Company had investments in the following properties under development and land held for
development:



Properties Under Development



|       |  |                     |  |                                                                      |  |        |  |               |  |                  |      |  |                           |    
|------ |  | ------------------- |  | -------------------------------------------------------------------- |  | ------ |  | ------------- |  | ---------------- | ---- |  | ------------------------- | ---
|Market |  | Properties          |  | Description                                                          |  | City   |  | SquareFootage |  | EconomicInterest |      |  | InvestmentBalance($000s)
|Denver |  | Gateway Office Five |  | Fifth office building constructed at Gateway Business Park (1-story) |  | Denver |  | 62,972        |  | 50               | %(1) |  | $                         | 824
|       |  |                     |  |                                                                      |  |        |  |               |  |                  |      |  |                           |    
|TOTAL  |  |                     |  |                                                                      |  |        |  | 62,972        |  |                  |      |  | $                         | 824
|       |  |                     |  |                                                                      |  |        |  |               |  |                  |      |  |                           |    



Land Held for
Development



|                                                                        |  |                             |  |                                                                                                                |  |                          |   |                     |  |                  |      |  |                           |         |    
|----------------------------------------------------------------------- |  | --------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | ------------------------ | - | ------------------- |  | ---------------- | ---- |  | ------------------------- | ------- | ---
|Market                                                                  |  | Properties                  |  | Description                                                                                                    |  | City                     |   | ProposedSq. Footage |  | EconomicInterest |      |  | InvestmentBalance($000s) |        
|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              | %    |  | $                         | 5,150   |    
|                                                                        |  |                             |  |                                                                                                                |  |                          |   |                     |  |                  |      |  |                           |         |    
|                                                                        |  | Subtotal - Boston           |  |                                                                                                                |  |                          |   | 235,000             |  |                  |      |  |                           | 5,150   |    
|                                                                        |  |                             |  |                                                                                                                |  |                         
|Denver                                                                  |  | Gateway Business Park       |  | 1,200 acre mixed-use park near Denver International Airport; approximately 442 acres undeveloped               |  | Denver                   |   | 5,000,000           |  | 50               | %(2) |  |                           | 47,132  | (2)
|                                                                        |  |                             |  |                                                                                                                |  |                         
|                                                                        |  | Lima Street                 |  | 19.5 acres of undeveloped land in Englewood, Colorado, zoned for office use                                    |  | Denver                   |   | 120,000             |  | 100              | %    |  |                           | 4,750   |    
|                                                                        |  |                             |  |                                                                                                                |  |                          |   |                     |  |                  |      |  |                           |         |    
|                                                                        |  | Subtotal - Denver           |  |                                                                                                                |  |                          |   | 5,120,000           |  |                  |      |  |                           | 51,882  |    
|                                                                        |  |                             |  |                                                                                                                |  |                         
|San Francisco                                                           |  | Marina Shores               |  | Mixed-use waterfront community, which could include office, retail and multifamily                             |  | Redwood City             |   |                     |  | 50               | %(3) |  |                           | 81,242  |    
|                                                                        |  |                             |  |                                                                                                                |  |                         
|                                                                        |  | Eden Shores                 |  | 27 acres zoned for the construction of a 600,000 square foot office campus                                     |  | Hayward                  |   | 600,000             |  | 100              | %    |  |                           | 16,497  |    
|                                                                        |  |                             |  |                                                                                                                |  |                          |   |                     |  |                  |      |  |                           |         |    
|                                                                        |  | Subtotal - San Francisco    |  |                                                                                                                |  |                          |   | 600,000             |  |                  |      |  |                           | 97,739  |    
|                                                                        |  |                             |  |                                                                                                                |  |                         
|                                                                        |  |                             |  | Other land not currently under development                                                                     |  | New Jersey/San Francisco |   |                     |  |                  |      |  |                           | 5,907   |    
|                                                                        |  |                             |  |                                                                                                                |  |                          |   |                     |  |                  |      |  |                           |         |    
|TOTAL                                                                   |  |                             |  |                                                                                                                |  |                          |   | 5,955,000           |  |                  |      |  | $                         | 160,678 |    
|                                                                        |  |                             |  |                                                                                                                |  |                          |   |                     |  |                  |      |  |                           |         |    
|TOTAL INVESTMENTS IN LAND AND DEVELOPMENT AND MORTGAGE LOANS RECEIVABLE |  | 6,017,972                   |  |                                                                                                                |  |                          | $ | 161,502             | 
|                                                                        |  |                             |  |                                                                                                                |  |                          |   |                     |  |                  |      |  |                           |         |    

---

|(1) | Interest in the form of mezzanine loans.
|--- | ----------------------------------------

|(2) | Interest in the form of a mortgage loan receivable, mezzanine loans and equity. The investment balance includes $13,262 representing the balance of the mortgage loan receivable at
September 30, 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Interest in the form of equity and mezzanine loans. The Company consolidated this entity on January 1, 2004, pursuant to FIN 46 Revised. See Note 17 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 its development alliances, the Company has provided an aggregate of
approximately $4.4 million in debt guarantees; however, some of the loans



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(unaudited)



were not fully drawn as of September 30, 2004. 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.



Certain of the alliances with which the Company conducts business have been deemed to be VIEs as defined by FIN 46 Revised, however, other
than Marina Shores as discussed above, 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
$87.8 million and $49.5 million, respectively, at September 30, 2004. 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 OPERATING JOINT VENTURES



The Companys investments in unconsolidated operating 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 (losses). Distributions are recorded as a reduction of the Companys investment.



The Companys investments in unconsolidated operating joint ventures consist of the
following as of September 30, 2004 and December 31, 2003 (dollars in thousands):



|                     |  |                   |   |  |                   |  |                      |       |  |               |  |                    |        |               |   |       
|-------------------- |  | ----------------- | - |  | ----------------- |  | -------------------- | ----- |  | ------------- |  | ------------------ | ------ | ------------- | - | ------
|                     |  |                   |   |  |                   |  |                      |       |  |               |  | Investment Balance
|Joint Venture        |  | OwnershipInterest |   |  | Property Location |  | Square Footage/Units |       |  | Property Type |  | Sep. 30,2004       |        | Dec. 31, 2003
|Rincon Center I & II |  | 10                | % |  | San Francisco, CA |  | 741,103              | sf    |  | Mixed-Use     |  | $                  | 4,033  |               | $ | 4,119 
|2000 Corporate Ridge |  | 10                | % |  | McLean, VA        |  | 255,980              | sf    |  | Office        |  |                    | 2,970  |               |   | 2,895 
|Gateway Retail I     |  | 50                | % |  | Denver, CO        |  | 12,000               | sf    |  | Retail        |  |                    | 400    |               |   | 424   
|Lakecrest Apartments |  | 27                | % |  | Aurora, CO        |  | 440                  | units |  | Residential   |  |                    | 4,628  |               |   | 4,773 
|                     |  |                   |   |  |                   |  |                      |       |  |               |  |                    |        |               |   |       
|                     |  |                   |   |  |                   |  |                      |       |  |               |  | $                  | 12,031 |               | $ | 12,211
|                     |  |                   |   |  |                   |  |                      |       |  |               |  |                    |        |               |   |       



NOTE 8. MORTGAGE LOANS RECEIVABLE



The Company holds a first mortgage of approximately $13.3 million,
including accrued interest, at September 30, 2004, secured by a 50% interest in 147 acres of land at Gateway Business Park in Aurora, Colorado. The loan was originally funded in June 1998, had a fixed interest rate of 6.5% and a maturity date of
July 2007. In July 2004, the loan agreement was amended to increase the interest rate to 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.



In August 2004, the Company acquired an undivided 50% tenancy in common interest in approximately 135 acres of land at Gateway Business Park for a total purchase price of $13.9 million. This land had been part of the
security for the mortgage loan receivable. In connection with this acquisition, the 135 acres were released as security and the Company received an $11.8 million payment on the mortgage loan receivable which was applied first to accrued interest and
then to principal.



In February 2004, the Company acquired an undivided 50%
tenancy in common interest in approximately 160 acres of the land at Gateway Business Park for a total purchase price of $16.8 million. This land had been part of the security for the mortgage loan receivable. In connection with this acquisition,
the 160 acres were released as security and the Company received a $14.3 million payment on the mortgage loan receivable which was applied first to accrued interest and then to principal.



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(unaudited)



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 September 30, 2004 and December 31, 2003, other assets on the consolidated balance sheets consist of the following (in thousands):



|                                   |  |      |        |      |   |       
|---------------------------------- |  | ---- | ------ | ---- | - | ------
|                                   |  | 2004 |        | 2003
|Accounts receivable, net           |  | $    | 3,027  |      | $ | 3,055 
|Straight-line rent receivable, net |  |      | 15,580 |      |   | 11,092
|Prepaid expenses                   |  |      | 1,702  |      |   | 1,305 
|Impound accounts                   |  |      | 1,775  |      |   | 4,627 
|Notes receivable                   |  |      | 3,634  |      |   | 3,724 
|Investment in management contracts |  |      | 1,301  |      |   | 1,749 
|Corporate office fixed assets, net |  |      | 240    |      |   | 454   
|Other                              |  |      | 584    |      |   | 108   
|                                   |  |      |        |      |   |       
|Total other assets                 |  | $    | 27,843 |      | $ | 26,114
|                                   |  |      |        |      |   |       



NOTE 10. SECURED AND UNSECURED
LOANS



The Company had the following mortgage loans and unsecured bank
line of credit outstanding as of September 30, 2004 and December 31, 2003 (dollars in thousands):



|                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |      |         |      |   |        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | 2004 |         | 2003
|Secured loans with various lenders, bearing interest at fixed rates between 3.82% and 8.13% at September 30, 2004 and December 31, 2003, with monthly principal and interest payments ranging
between $52 and $292 and maturing at various dates through December 1, 2013. These loans are secured by properties with an aggregate net carrying value of $421,011 and $406,206 at September 30, 2004 and December 31, 2003, respectively. |  | $    | 346,794 |      | $ | 297,327
|                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |     
|Secured loans with various lenders, bearing interest at variable rates ranging between 3.59% and 5.09% at September 30, 2004, and 3.12% and 3.47% at December 31, 2003, and maturing at various
dates through November 10, 2008. These loans are secured by properties with an aggregate net carrying value of $162,283 and $186,826 at September 30, 2004 and December 31, 2003, respectively.                                           |  |      | 117,195 |      |   | 129,641



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(unaudited)



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |      |         |      |   |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | 2004 |         | 2003
|Secured loan with an insurance company, net of unamortized discount of $496 and $1,492 at September 30, 2004 and December 31, 2003, respectively. The loan has two fixed rate components. The
fixed rate component of $43,979 bears interest at 6.13%, matures on February 11, 2009, and requires monthly principal and interest payments of $296. The fixed rate component of $141,042 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 and are secured by properties with an aggregate net carrying value of $239,540 and $193,578 at September 30, 2004 and December 31, 2003,
respectively. |  | $    | 185,021 |      | $ | 135,813
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |     
|Secured loan with an insurance company, net of unamortized discount of $573 and $679 at September 30, 2004 and December 31, 2003, respectively. The loan bears a fixed interest rate of 6.13%,
matures on November 10, 2008, and requires monthly principal and interest payments of $343. This loan is secured by a cross-collateralized pool of properties with an aggregate net carrying value of $108,705 and $140,137 at September 30, 2004 and
December 31, 2003, respectively. A second component of this loan consisting of a $35,101 variable rate loan was paid off in April 2004. See below for further discussion.                                                                                  |  |      | 50,886  |      |   | 86,544 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |      |         |      |   |        
|Total mortgage loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |      | 699,896 |      |   | 649,325
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |     
|Unsecured $180,000 line of credit with a group of commercial banks, with a variable interest rate of 30-day LIBOR plus 1.525% at September 2004 and December 31, 2003 (3.37% and 2.65%,
respectively), monthly interest only payments and a maturity date of March 26, 2007, with one one-year extension option. In March 2004, the maturity date was extended and certain terms were modified. See below for further discussion.                                                                                                                                                                                                                                                                               |  |      | 95,090  |      |   | 89,941 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |      |         |      |   |        
|Total secured and unsecured loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | $    | 794,986 |      | $ | 739,266
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |      |         |      |   |        



At September 30, 2004, the
Companys indebtedness included fixed-rate debt of $582,701,000 and floating-rate debt of $212,285,000, and the Companys ratio of total debt to gross book assets was approximately 48%.



During the nine months ended September 30, 2004, mortgage loans payable increased from
$649,325,000 to $699,896,000. This increase resulted from the consolidation of Marina Shores debt in the amount of $45,000,000 in accordance with FIN 46 Revised, $127,931,000 in new mortgage loans and $1,814,000 of draws on a construction
loan, offset by $49,270,000 of paydowns on two floating-rate loans, $4,025,000 of scheduled principal amortization, $17,175,000 paid off in connection with a property sale, and $53,704,000 of other loan payoffs.



In accordance with FIN 46 Revised, the Company began consolidating the entity known as Marina
Shores, effective January 1, 2004, as the Company is deemed to be the primary beneficiary as defined by FIN 46 Revised. Marina Shores has total debt of $45 million consisting of two loans, with a $30 million loan bearing interest at the fixed rate
of 4.82%, and a $15 million loan bearing interest at the fixed rate of 6.82%. Both loans require monthly interest-only payments and mature on November 15, 2004. The Company is currently negotiating extensions for these loans with the lender.



In September 2004, the Company paid off a fixed rate mortgage of $2.3 million
which was due to mature in October 2004. As a result of the loan payoff, a 52,721 square foot office building in Lexington, Massachusetts, is now unencumbered.



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(unaudited)



In September 2004, the Company completed a modification of a fixed rate loan with an insurance company. The Company
released two properties from the collateral pool and added one property, received additional loan proceeds and extended the maturity date from November 2008 to February 2009. The interest rate remains fixed at 5.905%. The two properties released
from the collateral pool were a 171,359 square foot property in Eden Prairie, Minnesota, and a 79,000 square foot property in Germantown, Maryland. The Germantown, Maryland property was sold upon its release from the loan (as discussed in Note 5)
and the proceeds from this sale along with the additional loan proceeds were used to payoff a $51.4 million variable rate loan secured by a 305,110 square foot office building in Arlington, Virginia. That building was then added to the collateral
pool. Excess loan proceeds were used to paydown the Companys unsecured bank line of credit. In connection with the loan modification and payoff of the variable rate loan, the Company recognized a loss on early extinguishment of debt of
approximately $1.9 million which consisted primarily of the writeoff of unamortized original financing costs.



In July 2004, in connection with the disposition of 90 Libbey Parkway (as discussed in Note 5), the Company made a paydown of approximately $4.9 million on a floating-rate loan which was secured by a
cross-collateralized pool of six properties. This loan bears interest at the floating rate of 30-day LIBOR plus 2.00%, requires monthly interest-only payments, and has a maturity date of December 5, 2005. The interest rate on this loan at September
30, 2004, was 3.84% and it is now secured by a cross-collateralized pool of five properties. In connection with this paydown, the Company recognized a loss on early extinguishment of debt of approximately $40,000 which consisted of the writeoff of
unamortized original financing costs.



In June 2004, the Company modified a
mortgage loan secured by 610 West Ash, a 174,247 square foot, 19-story, Class A office building located in San Diego, California, which was acquired in the fourth quarter of 2003. The Company received $5 million of additional proceeds with all other
loan terms remaining unchanged. The additional proceeds from this loan were used to paydown the Companys unsecured bank line of credit.



In April 2004, the Company closed a new $35 million loan which is secured by three office properties located in Illinois and Iowa. The loan has a maturity date of April
1, 2005, with two one-year extension options, requires monthly interest-only payments and bears interest at the floating rate of 30-day LIBOR plus 2.00%. The interest rate on this loan at September 30, 2004, was 3.84%. The proceeds from this loan
were used to payoff a $35.1 million floating rate loan which was secured by a cross-collateralized pool of seven properties, had a maturity date of December 2004, and had a floating interest rate of LIBOR plus 3.25% with a floor of 5%.



In April 2004, in connection with the acquisition of 1100 17thStreet (as discussed in Note 4), the Company assumed a mortgage loan with an outstanding balance of approximately $21 million.
The loan has a maturity date of July 1, 2007, and bears interest at a floating rate of 30-day LIBOR plus 1.75%, with a floor of 3.5%. The interest rate on this loan at September 30, 2004, was 3.59%.



In April 2004, the Company closed a $17 million loan which is secured by a
cross-collateralized pool of seven properties. The loan matures in November 2008, requires monthly interest-only payments and bears interest at a floating rate of 30-day LIBOR plus 3.25%. The interest rate on this loan at September 30, 2004, was
5.09%. The proceeds from this loan were used to paydown the Companys unsecured bank line of credit.



In February 2004, the Company made a paydown of approximately $9.3 million on a floating-rate loan which was secured by a cross-collateralized pool of seven properties. This loan bears interest at the floating rate of
30-day LIBOR plus 2.00%, requires monthly interest-only payments, and has a maturity date of December 5, 2005. The interest rate on this loan at September 30, 2004, was 3.84%. As a result of the paydown, one of the properties securing the loan, a
56,348 square foot office property located in Alexandria, Virginia, was released from the collateral pool. All other terms of the loan remain the same. In connection with this paydown, the Company recognized a loss on early extinguishment of debt of
approximately $85,000 which consisted of the writeoff of unamortized original financing costs.



Outstanding borrowings under the Companys unsecured bank line of credit increased from $89,941,000 at December 31, 2003, to $95,090,000 at September 30, 2004. The increase was due to draws totaling $178,284,000
for the Preferred Stock redemption (see Note 19), acquisition of properties, acquisition of land at Gateway Business Park (see Note 8), mortgage loan payoffs, disposition of the corporate aircraft and development advances, offset by pay downs
totaling $173,135,000 generated from the proceeds of a common stock offering (see Note 19), paydowns received on the mortgage loan receivable (see Note 8), proceeds from property sales and new financings, and cash flow from operations. In March
2004, the unsecured bank line of credit was modified to extend the maturity date from September 2005 to March 2007, with one one-year extension option. The



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(unaudited)



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 2004 and remains in compliance at September 30, 2004.



In connection with a 2001 secured financing, the Company entered into an interest rate cap agreement (caplets) to hedge increases in 30-day LIBOR rates above a specified
level. The agreement expired over a term concurrent with the secured financing, was indexed to a 30-day LIBOR rate, was for a notional amount equal to the maximum amount available on the secured financing, and capped 30-day LIBOR to a maximum of 6%.
The Company paid a $594,000 fee at the inception of this cap agreement of which $357,000 had been charged to earnings as of March 31, 2004. The remaining $237,000 was charged to earnings in the second quarter of 2004 when the related secured
financing was paid off. At September 30, 2004, 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 September 30, 2004, are as follows (in thousands). Included in the year ending December 31, 2007, is the unsecured bank line of credit balance of $95,090 which has an initial maturity
of March 26, 2007.



|                         |  |   |        
|------------------------ |  | - | -------
|Year Ending December 31, |  |  
|2004                     |  | $ | 68,628 
|2005                     |  |   | 88,009 
|2006                     |  |   | 86,187 
|2007                     |  |   | 123,009
|2008                     |  |   | 212,732
|Thereafter               |  |   | 216,421
|                         |  |   |        
|Total                    |  | $ | 794,986
|                         |  |   |        



NOTE 11. OTHER LIABILITIES



As of September 30, 2004 and December 31, 2003, other liabilities on the
consolidated balance sheets consist of the following (in thousands):



|                                                                       |  |      |        |      |   |       
|---------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                                                       |  | 2004 |        | 2003
|Accounts payable and accrued liabilities                               |  | $    | 4,678  |      | $ | 4,559 
|Aircraft lease buyout                                                  |  |      |       |      |   | 5,747 
|SFAS No. 141 below market rate leases, net of accumulated amortization |  |      | 5,452  |      |   | 5,402 
|Unsecured note payable                                                 |  |      | 2,676  |      |   | 2,575 
|Accrued retirement benefits                                            |  |      | 5,234  |      |   | 5,081 
|Interest payable                                                       |  |      | 1,416  |      |   | 1,545 
|Security deposits                                                      |  |      | 7,224  |      |   | 6,135 
|Property taxes payable                                                 |  |      | 2,833  |      |   | 1,084 
|Prepaid rents                                                          |  |      | 3,408  |      |   | 4,528 
|Deferred income                                                        |  |      | 244    |      |   | 245   
|                                                                       |  |      |        |      |   |       
|Total other liabilities                                                |  | $    | 33,165 |      | $ | 36,901
|                                                                       |  |      |        |      |   |       



NOTE 12. LOSSES ON EARLY
EXTINGUISHMENT OF DEBT



In connection with various loan transactions (see
Note 10), including those related to properties classified as discontinued operations, the Company recorded losses on early extinguishment of debt of approximately $2.1 million during the nine months ended September 30, 2004, which consisted
primarily of the writeoff of unamortized original financing costs.



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(unaudited)



NOTE 13. RELATED PARTY TRANSACTIONS



Fee and reimbursement income earned by the Company from related parties totaled $757,000 and $791,000 for the three months ended September
30, 2004 and 2003, respectively, and $2,618,000 and $2,559,000 for the nine months ended September 30, 2004 and 2003, respectively, and consisted of property management, asset management and other fee income.



NOTE 14. EARNINGS PER SHARE



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



|                                                            |  |                                  |            |      |                                 |            |      |  |      |            |  |   |           
|----------------------------------------------------------- |  | -------------------------------- | ---------- | ---- | ------------------------------- | ---------- | ---- |  | ---- | ---------- |  | - | ----------
|                                                            |  | Three months ended September 30, |            |      | Nine months ended September 30,
|                                                            |  | 2004                             |            | 2003 |                                 |            | 2004 |  | 2003
|Net income (loss) available to CommonStockholders  Basic   |  | $                                | 410        |      | $                               | (1,119     | )    |  | $    | 6,993      |  | $ | 9,977     
|Minority interest                                           |  |                                  |           |      |                                 | (147       | )    |  |      |           |  |   |          
|                                                            |  |                                  |            |      |                                 |            |      |  |      |            |  |   |           
|Net income (loss) available to CommonStockholders  Diluted |  | $                                | 410        |      | $                               | (1,266     | )    |  | $    | 6,993      |  | $ | 9,977     
|                                                            |  |                                  |            |      |                                 |            |      |  |      |            |  |   |           
|Weighted average shares:                                    |  |                                  |            |      |                                 |            |      |  |      |            |  |   |           
|Basic                                                       |  |                                  | 31,682,728 |      |                                 | 27,605,193 |      |  |      | 31,084,557 |  |   | 27,612,311
|Stock options and restricted stock                          |  |                                  |           |      |                                 | 288,679    |      |  |      |           |  |   |          
|Convertible Operating Partnership Units                     |  |                                  |           |      |                                 | 3,007,772  |      |  |      |           |  |   |          
|                                                            |  |                                  |            |      |                                 |            |      |  |      |            |  |   |           
|Diluted                                                     |  |                                  | 31,682,728 |      |                                 | 30,901,644 |      |  |      | 31,084,557 |  |   | 27,612,311
|                                                            |  |                                  |            |      |                                 |            |      |  |      |            |  |   |           
|Basic earnings (loss) per share                             |  | $                                | 0.01       |      | $                               | (0.04      | )    |  | $    | 0.22       |  | $ | 0.36      
|Diluted earnings (loss) per share                           |  | $                                | 0.01       |      | $                               | (0.04      | )    |  | $    | 0.22       |  | $ | 0.36      



For the three months ended September
30, 2004, options to purchase shares of the Companys common stock of 2,843,367 and convertible operating partnership units of 3,001,957 have been excluded from the computation of diluted earnings per share as they are anti-dilutive. For the
three months ended September 30, 2003, options to purchase shares of the Companys common stock of 2,839,495 were not included in the computation of diluted earnings per share as their exercise prices were greater than the average market price
of the Companys common stock of $19.24. For the nine months ended September 30, 2004 and 2003, options to purchase shares of the Companys common stock of 2,843,367 and 3,118,075, respectively, and convertible operating partnership units
of 3,001,957 and 3,006,389, respectively, have been excluded from the computation of diluted earnings per share as they are anti-dilutive. The preferred stock has been excluded from the computation of diluted earnings per share as it is
anti-dilutive in all periods presented.



NOTE 15. SEGMENT INFORMATION



The Company owns and operates office and industrial properties throughout
the United States and manages its business by geographic markets. Office properties now represent approximately 96% of the Companys portfolio by net operating income and consist primarily of multi-tenant office buildings. The remaining
industrial properties are 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 September 30, 2004, the Companys largest markets are Washington D.C., Southern California, Boston, Northern New Jersey and San Francisco.



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(unaudited)



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 nine months ended September 30, 2004 and 2003 is as follows (in thousands):



|                            |  |                                     |         |                                      |   |        
|--------------------------- |  | ----------------------------------- | ------- | ------------------------------------ | - | -------
|                            |  | Nine Months EndedSeptember 30, 2004 |         | Nine Months Ended September 30, 2003
|Washington D.C.             |  |                                     |         |                                      |   |        
|Rental revenue              |  | $                                   | 27,731  |                                      | $ | 24,997 
|Property operating expenses |  |                                     | 7,474   |                                      |   | 6,832  
|                            |  |                                     |         |                                      |   |        
|Net operating income        |  | $                                   | 20,257  |                                      | $ | 18,165 
|                            |  |                                     |         |                                      |   |        
|Rental properties, net      |  | $                                   | 241,222 |                                      | $ | 196,386
|                            |  |                                     |         |                                      |   |        
|Southern California         |  |                                     |         |                                      |   |        
|Rental revenue              |  | $                                   | 25,115  |                                      | $ | 23,769 
|Property operating expenses |  |                                     | 7,974   |                                      |   | 7,404  
|                            |  |                                     |         |                                      |   |        
|Net operating income        |  | $                                   | 17,141  |                                      | $ | 16,365 
|                            |  |                                     |         |                                      |   |        
|Rental properties, net      |  | $                                   | 205,041 |                                      | $ | 181,460
|                            |  |                                     |         |                                      |   |        
|Boston                      |  |                                     |         |                                      |   |        
|Rental revenue              |  | $                                   | 23,061  |                                      | $ | 18,349 
|Property operating expenses |  |                                     | 8,567   |                                      |   | 6,381  
|                            |  |                                     |         |                                      |   |        
|Net operating income        |  | $                                   | 14,494  |                                      | $ | 11,968 
|                            |  |                                     |         |                                      |   |        
|Rental properties, net      |  | $                                   | 154,658 |                                      | $ | 153,858
|                            |  |                                     |         |                                      |   |        
|Northern New Jersey         |  |                                     |         |                                      |   |        
|Rental revenue              |  | $                                   | 18,824  |                                      | $ | 17,984 
|Property operating expenses |  |                                     | 6,454   |                                      |   | 5,530  
|                            |  |                                     |         |                                      |   |        
|Net operating income        |  | $                                   | 12,370  |                                      | $ | 12,454 
|                            |  |                                     |         |                                      |   |        
|Rental properties, net      |  | $                                   | 139,754 |                                      | $ | 153,071
|                            |  |                                     |         |                                      |   |        
|San Francisco               |  |                                     |         |                                      |   |        
|Rental revenue              |  | $                                   | 7,718   |                                      | $ | 8,180  
|Property operating expenses |  |                                     | 2,305   |                                      |   | 2,157  
|                            |  |                                     |         |                                      |   |        
|Net operating income        |  | $                                   | 5,413   |                                      | $ | 6,023  
|                            |  |                                     |         |                                      |   |        
|Rental properties, net      |  | $                                   | 106,921 |                                      | $ | 108,518
|                            |  |                                     |         |                                      |   |        
|Chicago                     |  |                                     |         |                                      |   |        
|Rental revenue              |  | $                                   | 9,470   |                                      | $ | 8,934  
|Property operating expenses |  |                                     | 4,285   |                                      |   | 4,392  
|                            |  |                                     |         |                                      |   |        
|Net operating income        |  | $                                   | 5,185   |                                      | $ | 4,542  
|                            |  |                                     |         |                                      |   |        
|Rental properties, net      |  | $                                   | 79,417  |                                      | $ | 82,368 
|                            |  |                                     |         |                                      |   |        
|Tampa/Orlando               |  |                                     |         |                                      |   |        
|Rental revenue              |  | $                                   | 5,637   |                                      | $ | 6,635  
|Property operating expenses |  |                                     | 1,935   |                                      |   | 1,828  
|                            |  |                                     |         |                                      |   |        
|Net operating income        |  | $                                   | 3,702   |                                      | $ | 4,807  
|                            |  |                                     |         |                                      |   |        
|Rental properties, net      |  | $                                   | 38,957  |                                      | $ | 40,256 
|                            |  |                                     |         |                                      |   |        



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(unaudited)



|                            |  |                                      |        |                                     |   |       
|--------------------------- |  | ------------------------------------ | ------ | ----------------------------------- | - | ------
|                            |  | Nine Months Ended September 30, 2004 |        | Nine Months EndedSeptember 30, 2003
|St. Louis                   |  |                                      |        |                                     |   |       
|Rental revenue              |  | $                                    | 6,135  |                                     | $ | 5,889 
|Property operating expenses |  |                                      | 2,324  |                                     |   | 2,317 
|                            |  |                                      |        |                                     |   |       
|Net operating income        |  | $                                    | 3,811  |                                     | $ | 3,572 
|                            |  |                                      |        |                                     |   |       
|Rental properties, net      |  | $                                    | 29,170 |                                     | $ | 28,990
|                            |  |                                      |        |                                     |   |       
|Denver                      |  |                                      |        |                                     |   |       
|Rental revenue              |  | $                                    | 3,865  |                                     | $ | 7,627 
|Property operating expenses |  |                                      | 1,489  |                                     |   | 2,719 
|                            |  |                                      |        |                                     |   |       
|Net operating income        |  | $                                    | 2,376  |                                     | $ | 4,908 
|                            |  |                                      |        |                                     |   |       
|Rental properties, net      |  | $                                    | 45,999 |                                     | $ | 38,242
|                            |  |                                      |        |                                     |   |       
|Minneapolis                 |  |                                      |        |                                     |   |       
|Rental revenue              |  | $                                    | 4,261  |                                     | $ | 4,567 
|Property operating expenses |  |                                      | 1,932  |                                     |   | 1,947 
|                            |  |                                      |        |                                     |   |       
|Net operating income        |  | $                                    | 2,329  |                                     | $ | 2,620 
|                            |  |                                      |        |                                     |   |       
|Rental properties, net      |  | $                                    | 29,445 |                                     | $ | 29,787
|                            |  |                                      |        |                                     |   |       
|Las Vegas                   |  |                                      |        |                                     |   |       
|Rental revenue              |  | $                                    | 3,784  |                                     | $ | 4,157 
|Property operating expenses |  |                                      | 809    |                                     |   | 1,067 
|                            |  |                                      |        |                                     |   |       
|Net operating income        |  | $                                    | 2,975  |                                     | $ | 3,090 
|                            |  |                                      |        |                                     |   |       
|Rental properties, net      |  | $                                    | 33,398 |                                     | $ | 34,277
|                            |  |                                      |        |                                     |   |       
|Omaha                       |  |                                      |        |                                     |   |       
|Rental revenue              |  | $                                    | 4,584  |                                     | $ | 4,361 
|Property operating expenses |  |                                      | 1,727  |                                     |   | 1,675 
|                            |  |                                      |        |                                     |   |       
|Net operating income        |  | $                                    | 2,857  |                                     | $ | 2,686 
|                            |  |                                      |        |                                     |   |       
|Rental properties, net      |  | $                                    | 29,368 |                                     | $ | 28,839
|                            |  |                                      |        |                                     |   |       
|Indianapolis                |  |                                      |        |                                     |   |       
|Rental revenue              |  | $                                    | 696    |                                     | $ | 3,292 
|Property operating expenses |  |                                      | 117    |                                     |   | 128   
|                            |  |                                      |        |                                     |   |       
|Net operating income        |  | $                                    | 579    |                                     | $ | 3,164 
|                            |  |                                      |        |                                     |   |       
|Rental properties, net      |  | $                                    | 4,437  |                                     | $ | 4,617 
|                            |  |                                      |        |                                     |   |       
|All Others                  |  |                                      |        |                                     |   |       
|Rental revenue              |  | $                                    | 5,237  |                                     | $ | 11,973
|Property operating expenses |  |                                      | 3,147  |                                     |   | 5,450 
|                            |  |                                      |        |                                     |   |       
|Net operating income        |  | $                                    | 2,090  |                                     | $ | 6,523 
|                            |  |                                      |        |                                     |   |       
|Rental properties, net      |  | $                                    | 71,120 |                                     | $ | 79,910
|                            |  |                                      |        |                                     |   |       



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(unaudited)



|                            |  |                                      |           |   |                                     |   |           |  
|--------------------------- |  | ------------------------------------ | --------- | - | ----------------------------------- | - | --------- | -
|                            |  | Nine Months Ended September 30, 2004 |           |   | Nine Months EndedSeptember 30, 2003 |  
|Discontinued Operations     |  |                                      |           |   |                                     |   |           |  
|Rental revenue              |  | $                                    | (3,169    | ) |                                     | $ | (23,922   | )
|Property operating expenses |  |                                      | (1,034    | ) |                                     |   | (7,324    | )
|                            |  |                                      |           |   |                                     |   |           |  
|Net operating income        |  | $                                    | (2,135    | ) |                                     | $ | (16,598   | )
|                            |  |                                      |           |   |                                     |   |           |  
|Rental properties, net      |  | $                                    | (6,105    | ) |                                     | $ | (6,334    | )
|                            |  |                                      |           |   |                                     |   |           |  
|Total                       |  |                                      |           |   |                                     |   |           |  
|Rental revenue              |  | $                                    | 142,949   |   |                                     | $ | 126,792   |  
|Property operating expenses |  |                                      | 49,505    |   |                                     |   | 42,503    |  
|                            |  |                                      |           |   |                                     |   |           |  
|Net operating income        |  | $                                    | 93,444    |   |                                     | $ | 84,289    |  
|                            |  |                                      |           |   |                                     |   |           |  
|Rental properties, net      |  | $                                    | 1,202,802 |   |                                     | $ | 1,154,245 |  
|                            |  |                                      |           |   |                                     |   |           |  



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



|                                                                                                                 |  |                                      |         |   |                                     |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------- | - | ----------------------------------- | - | ------- | -
|                                                                                                                 |  | Nine Months Ended September 30, 2004 |         |   | Nine Months EndedSeptember 30, 2003 |  
|Revenues                                                                                                         |  |                                      |         |   |                                     |   |         |  
|Total revenue for reportable segments                                                                            |  | $                                    | 142,949 |   |                                     | $ | 126,792 |  
|Fees and reimbursements, including from related parties                                                          |  |                                      | 2,618   |   |                                     |   | 2,559   |  
|                                                                                                                 |  |                                      |         |   |                                     |   |         |  
|Total operating revenue                                                                                          |  | $                                    | 145,567 |   |                                     | $ | 129,351 |  
|                                                                                                                 |  |                                      |         |   |                                     |   |         |  
|Net Operating Income                                                                                             |  |                                      |         |   |                                     |   |         |  
|Net operating income for reportable segments                                                                     |  | $                                    | 93,444  |   |                                     | $ | 84,289  |  
|Unallocated amounts:                                                                                             |  |                                      |         |   |                                     |   |         |  
|Fees and reimbursements, including from related parties                                                          |  |                                      | 2,618   |   |                                     |   | 2,559   |  
|Interest and other income                                                                                        |  |                                      | 2,037   |   |                                     |   | 2,758   |  
|Equity in earnings of unconsolidated operating joint ventures                                                    |  |                                      | 594     |   |                                     |   | 478     |  
|General and administrative                                                                                       |  |                                      | (9,207  | ) |                                     |   | (9,605  | )
|Depreciation and amortization                                                                                    |  |                                      | (45,988 | ) |                                     |   | (37,195 | )
|Interest expense                                                                                                 |  |                                      | (27,310 | ) |                                     |   | (23,844 | )
|Loss on early extinguishment of debt                                                                             |  |                                      | (2,035  | ) |                                     |   |        |  
|Provision for impairment of real estate assets                                                                   |  |                                      |        |   |                                     |   | (2,852  | )
|Provision for impairment of non-real estate assets                                                               |  |                                      |        |   |                                     |   | (3,905  | )
|                                                                                                                 |  |                                      |         |   |                                     |   |         |  
|Income before minority interest, discontinued operations and cumulative effect of change in accounting principle |  | $                                    | 14,153  |   |                                     | $ | 12,683  |  
|                                                                                                                 |  |                                      |         |   |                                     |   |         |  



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(unaudited)



The following is a reconciliation of segment assets to total assets for the periods presented above (in thousands):



|                                                       |  |                         |           |                        |   |          
|------------------------------------------------------ |  | ----------------------- | --------- | ---------------------- | - | ---------
|                                                       |  | As of September 30,2004 |           | As ofSeptember 30,2003
|Rental Properties, net, for reportable segments        |  | $                       | 1,202,802 |                        | $ | 1,154,245
|Unallocated amounts:                                   |  |                         |           |                        |   |          
|Property held for sale                                 |  |                         | 6,239     |                        |   | 6,334    
|Investments in land and development                    |  |                         | 148,240   |                        |   | 65,611   
|Investments in unconsolidated operating joint ventures |  |                         | 12,031    |                        |   | 14,332   
|Mortgage loans receivable                              |  |                         | 13,262    |                        |   | 39,406   
|Leasing and financing costs, net                       |  |                         | 25,045    |                        |   | 24,691   
|Cash and cash equivalents                              |  |                         | 6,183     |                        |   | 9,904    
|Other assets                                           |  |                         | 27,843    |                        |   | 48,627   
|                                                       |  |                         |           |                        |   |          
|Total Assets                                           |  | $                       | 1,441,645 |                        | $ | 1,363,150
|                                                       |  |                         |           |                        |   |          



NOTE 16. PROVISION FOR IMPAIRMENT
OF ASSETS



Provision for Impairment of Real Estate Assets



In the first quarter of 2003, the Company recorded a provision for
impairment of approximately $2.3 million to provide for a decrease in the carrying value of a 10% owned development joint venture which owns an office property located in San Mateo, California, to its estimated fair value of zero due to decreased
leasing activity and lower than anticipated market rents. In addition, in the third quarter of 2003, the Company recorded a provision for impairment of $580,000 to reduce the carrying value of a 50% owned development joint venture, which is
developing a residential project in Aurora, Colorado, from approximately $1,125,000 to its estimated fair value of $545,000, due to lower than anticipated values.



Provision for Impairment of Non-Real Estate Assets



In the second quarter of 2003, the Company recorded an impairment charge of approximately $3.9 million relating to anticipated losses on the
disposition of the Companys leased aircraft which was disposed of in January 2004.



NOTE 17. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE



In accordance with FIN 46 Revised, the Company began consolidating the entity known as Marina Shores, effective January 1, 2004, as the Company is deemed to be the primary beneficiary as defined by FIN 46 Revised. The
implementation of this change has been accounted for as a change in accounting principle and applied cumulatively as of January 1, 2004. The effect of this change on the Companys consolidated balance sheet as of September 30, 2004, and the
Companys consolidated statements of operations for the three and nine months ended September 30, 2004, is detailed in the table below. All intercompany transactions, receivables and payables have been eliminated in consolidation.



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(unaudited)



|                                           |  |                                     |        |  
|------------------------------------------ |  | ----------------------------------- | ------ | -
|                                           |  | As of September 30, 2004 (in 000s) |       
|Balance Sheet                              |  |                                     |        |  
|Investments in land and development        |  | $                                   | 45,763 |  
|Cash and cash equivalents                  |  |                                     | 831    |  
|Other assets                               |  |                                     | 109    |  
|                                           |  |                                     |        |  
|Total assets                               |  | $                                   | 46,703 |  
|                                           |  |                                     |        |  
|Mortgage loans(1)                          |  | $                                   | 45,000 |  
|Other liabilities                          |  |                                     | 178    |  
|                                           |  |                                     |        |  
|Total liabilities                          |  |                                     | 45,178 |  
|                                           | 
|Minority interest                          |  |                                     | 2,386  |  
|Stockholders equity                       |  |                                     | (861   | )
|                                           |  |                                     |        |  
|Total liabilities and stockholders equity |  | $                                   | 46,703 |  
|                                           |  |                                     |        |  



|                                                        |  |                                       |     |   |                                     |   |      |  
|------------------------------------------------------- |  | ------------------------------------- | --- | - | ----------------------------------- | - | ---- | -
|                                                        |  |                                      
|                                                        |  | Three Months Ended September 30, 2004 |     |   | Nine Months EndedSeptember 30, 2004 |  
|Statement of Operations                                 |  |                                       |     |   |                                     |   |      |  
|Fees and reimbursements, including from related parties |  | $                                     | (20 | ) |                                     | $ | (60  | )
|                                                        |  |                                       |     |   |                                     |   |      |  
|Interest expense                                        |  |                                       | (38 | ) |                                     |   | (111 | )
|Cumulative effect of change in accounting principle     |  |                                       |    |   |                                     |   | 912  |  
|                                                        |  |                                       |     |   |                                     |   |      |  
|Total expenses                                          |  |                                       | (38 | ) |                                     |   | 801  |  
|                                                        |  |                                       |     |   |                                     |   |      |  
|Net income (loss)                                       |  | $                                     | 18  |   |                                     | $ | (861 | )
|                                                        |  |                                       |     |   |                                     |   |      |  

---

|(1) | Contains a recourse provision to the Company in the amount of $30 million.
|--- | --------------------------------------------------------------------------



The cumulative effect of the change in accounting principle resulted in a one-time non-cash reduction to the Companys net income of
$912,000, or approximately $0.03 per share, which represents the elimination of intercompany fee income recognized, slightly offset by additions to capitalized interest on this development project as if Marina Shores had been consolidated at the
inception of the Companys investment.



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



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

(unaudited)



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 tax indemnifications granted to the contributors will not affect the way the Company conducts
their business, including when and under what circumstances the Company may sell such restricted properties or interests in them during the restriction period. 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



Common Stock Offering



On March 19, 2004, the Company completed the sale of 3,910,000 shares of common stock (including the exercise of the over allotment of
510,000 shares) in an offering underwritten by Goldman, Sachs & Co. The 3,910,000 shares were sold at a per share price of $21.20, resulting in proceeds, net of offering costs, of approximately $81.4 million. The Company used the net proceeds to
redeem a portion of the outstanding shares of its Preferred Stock in April 2004 (as discussed below). In the interim, prior to the redemption, the proceeds were used to repay a portion of the amounts outstanding under the Companys unsecured
bank line of credit.



Preferred Stock Redemption



On April 30, 2004 (the Redemption Date), the Company redeemed approximately 3.1
million shares of Preferred Stock, representing approximately 31.2% of the total number of outstanding shares. The redemption price was $25.775 per share of Preferred Stock plus $0.183 per share in accrued and unpaid dividends for the period from
March 26, 2004 through and including the Redemption Date, without interest. This redemption was funded with proceeds from the Companys March 2004 common stock offering which had temporarily been used to pay down the Companys unsecured
bank line of credit (as discussed above).



30



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##### 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 and self-managed real estate investment trust, or REIT, with a nationwide portfolio of 63 primarily office properties, including 4 operating joint ventures,
as of September 30, 2004. 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 11
million square feet with the largest concentrations in the following markets: Washington D.C., Southern California, Boston, Northern New Jersey 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 Composition and Occupancy



During 2003, we substantially completed our conversion to a focused office REIT. Total portfolio occupancy increased from 88% at September 30, 2003 to 89% at September
30, 2004. Net operating income (adjusted for discontinued operations) increased 1.6% from $31,448,000 for the three months ended September 30, 2003, to $31,954,000 for the three months ended September 30, 2004.



Lease Maturities



Based upon the strength of the national leasing market, lease rollover will affect our rental revenues with changes in portfolio occupancy
and changes in rental rates upon lease renewal. In the third quarter of 2004, we had approximately 160,000 square feet of new office leasing production at an average rent of $20.43 per square foot. We also renewed approximately 166,000 square feet
of office leases at an average rent per square foot of $22.05. This represented an increase in effective rents from renewals (annualized rents net of concessions) of 5.7% during the third quarter of 2004.



Comparison of the three months ended September 30, 2004 to the three months ended
September 30, 2003.



In accordance with SFAS 144 Accounting for
the Impairment or Disposal of Long Lived Assets, effective for financial statements issued for fiscal years beginning after December 15, 2001, net income and gains and losses on sales of real estate for properties sold or classified as held
for sale subsequent to December 31, 2001 are reflected in the consolidated statements of operations as Discontinued Operations for all periods presented. As we generally reinvest the proceeds from property dispositions into the
acquisition of new properties, we feel that it is necessary to discuss our results of operations after discontinued operations have been added back to the respective revenue and expense line items to provide a representation of the balances that
management uses to evaluate the results of operations for the periods presented.



Following is a table which reconciles our results of operations reported in accordance with GAAP to our results of operations with discontinued operations added back to each respective revenue and expense line item. The comparative
discussion of the two periods results which follows is based on the Adjusted column amounts.



31



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|                                                                                                        |  |                                       |        |   |                                       |   |      |          |  |   |             |   |  |                        |        |   |          |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ------------------------------------- | - | ---- | -------- |  | - | ----------- | - |  | ---------------------- | ------ | - | -------- | - | ------ | - |  | - | ------ | -
|                                                                                                        |  | Three Months Ended September 30, 2004 |        |   | Three Months Ended September 30, 2003 |  
|                                                                                                        |  | As Reported                           |        |   | DiscontinuedOperations                |   |      | Adjusted |  |   | As Reported |   |  | DiscontinuedOperations |        |   | Adjusted |  
|OPERATING REVENUE                                                                                       |  |                                       |        |   |                                       |   |      |          |  |   |             |   |  |                        |        |   |          |   |        |   |  |   |        |  
|Rental revenue                                                                                          |  | $                                     | 48,205 |   |                                       | $ | 433  |          |  | $ | 48,638      |   |  | $                      | 43,792 |   |          | $ | 4,164  |   |  | $ | 47,956 |  
|Fees and reimbursements, including from related parties                                                 |  |                                       | 757    |   |                                       |   |     |          |  |   | 757         |   |  |                        | 791    |   |          |   |       |   |  |   | 791    |  
|                                                                                                        |  |                                       |        |   |                                       |   |      |          |  |   |             |   |  |                        |        |   |          |   |        |   |  |   |        |  
|Total operating revenue                                                                                 |  |                                       | 48,962 |   |                                       |   | 433  |          |  |   | 49,395      |   |  |                        | 44,583 |   |          |   | 4,164  |   |  |   | 48,747 |  
|                                                                                                        |  |                                       |        |   |                                       |   |      |          |  |   |             |   |  |                        |        |   |          |   |        |   |  |   |        |  
|OPERATING EXPENSES                                                                                      |  |                                       |        |   |                                       |   |      |          |  |   |             |   |  |                        |        |   |          |   |        |   |  |   |        |  
|Property operating expenses                                                                             |  |                                       | 16,559 |   |                                       |   | 125  |          |  |   | 16,684      |   |  |                        | 14,950 |   |          |   | 1,558  |   |  |   | 16,508 |  
|General and administrative                                                                              |  |                                       | 3,026  |   |                                       |   |     |          |  |   | 3,026       |   |  |                        | 2,064  |   |          |   |       |   |  |   | 2,064  |  
|Depreciation and amortization                                                                           |  |                                       | 15,933 |   |                                       |   | 42   |          |  |   | 15,975      |   |  |                        | 13,038 |   |          |   | 990    |   |  |   | 14,028 |  
|Provision for impairment of real estate assets                                                          |  |                                       |       |   |                                       |   |     |          |  |   |            |   |  |                        | 580    |   |          |   |       |   |  |   | 580    |  
|                                                                                                        |  |                                       |        |   |                                       |   |      |          |  |   |             |   |  |                        |        |   |          |   |        |   |  |   |        |  
|Total operating expenses                                                                                |  |                                       | 35,518 |   |                                       |   | 167  |          |  |   | 35,685      |   |  |                        | 30,632 |   |          |   | 2,548  |   |  |   | 33,180 |  
|                                                                                                        |  |                                       |        |   |                                       |   |      |          |  |   |             |   |  |                        |        |   |          |   |        |   |  |   |        |  
|Interest and other income                                                                               |  |                                       | 567    |   |                                       |   |     |          |  |   | 567         |   |  |                        | 835    |   |          |   |       |   |  |   | 835    |  
|Equity in earnings of unconsolidated operating JVs                                                     |  |                                       | 158    |   |                                       |   |     |          |  |   | 158         |   |  |                        | 174    |   |          |   |       |   |  |   | 174    |  
|Interest expense                                                                                        |  |                                       | (9,395 | ) |                                       |   | (45  | )        |  |   | (9,440      | ) |  |                        | (8,559 | ) |          |   | (1,005 | ) |  |   | (9,564 | )
|Loss on early extinguishment of debt                                                                    |  |                                       | (1,950 | ) |                                       |   | (40  | )        |  |   | (1,990      | ) |  |                        |       |   |          |   | (177   | ) |  |   | (177   | )
|                                                                                                        |  |                                       |        |   |                                       |   |      |          |  |   |             |   |  |                        |        |   |          |   |        |   |  |   |        |  
|Income before gain (loss) on sales of real estate assets, minority interest and discontinued operations |  |                                       | 2,824  |   |                                       |   | 181  |          |  |   | 3,005       |   |  |                        | 6,401  |   |          |   | 434    |   |  |   | 6,835  |  
|Gain (loss) on sales of real estate assets                                                              |  |                                       |       |   |                                       |   | 743  |          |  |   | 743         |   |  |                        |       |   |          |   | (3,449 | ) |  |   | (3,449 | )
|                                                                                                        |  |                                       |        |   |                                       |   |      |          |  |   |             |   |  |                        |        |   |          |   |        |   |  |   |        |  
|Income before minority interest and discontinued ops                                                    |  |                                       | 2,824  |   |                                       |   | 924  |          |  |   | 3,748       |   |  |                        | 6,401  |   |          |   | (3,015 | ) |  |   | 3,386  |  
|Minority interest(1)                                                                                    |  |                                       | (29    | ) |                                       |   |     |          |  |   | (29         | ) |  |                        | 147    |   |          |   |       |   |  |   | 147    |  
|                                                                                                        |  |                                       |        |   |                                       |   |      |          |  |   |             |   |  |                        |        |   |          |   |        |   |  |   |        |  
|Income before discontinued operations                                                                   |  |                                       | 2,795  |   |                                       |   | 924  |          |  |   | 3,719       |   |  |                        | 6,548  |   |          |   | (3,015 | ) |  |   | 3,533  |  
|Discontinued operations                                                                                 |  |                                       | 924    |   |                                       |   | (924 | )        |  |   |            |   |  |                        | (3,015 | ) |          |   | 3,015  |   |  |   |       |  
|                                                                                                        |  |                                       |        |   |                                       |   |      |          |  |   |             |   |  |                        |        |   |          |   |        |   |  |   |        |  
|Net income                                                                                              |  |                                       | 3,719  |   |                                       |   |     |          |  |   | 3,719       |   |  |                        | 3,533  |   |          |   |       |   |  |   | 3,533  |  
|Preferred dividends                                                                                     |  |                                       | (3,318 | ) |                                       |   |     |          |  |   | (3,318      | ) |  |                        | (4,889 | ) |          |   |       |   |  |   | (4,889 | )
|Discount on preferred stock repurchases                                                                 |  |                                       | 9      |   |                                       |   |     |          |  |   | 9           |   |  |                        | 237    |   |          |   |       |   |  |   | 237    |  
|                                                                                                        |  |                                       |        |   |                                       |   |      |          |  |   |             |   |  |                        |        |   |          |   |        |   |  |   |        |  
|Net income (loss) available to Common Stockholders                                                      |  | $                                     | 410    |   |                                       | $ |     |          |  | $ | 410         |   |  | $                      | (1,119 | ) |          | $ |       |   |  | $ | (1,119 | )
|                                                                                                        |  |                                       |        |   |                                       |   |      |          |  |   |             |   |  |                        |        |   |          |   |        |   |  |   |        |  

---

|(1) | Includes minority interests share of discontinued operations, preferred dividends and premium/discount and writeoff of original issuance costs on preferred
stock redemption.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Net Operating Income. Following is a
table of net operating income by market, for comparative purposes, presenting the results for the three months ended September 30, 2004 and 2003 (in thousands). The data set forth below should be read in conjunction with Note 15. Segment
Information in our consolidated financial statements included in Item 1.



|                           |  |      |        |           |       |   |      |   |           |  |       |  
|-------------------------- |  | ---- | ------ | --------- | ----- | - | ---- | - | --------- |  | ----- | -
|                           |  | 2004 |        | % ofTotal |       |   | 2003 |   | % ofTotal | 
|Washington D.C.            |  | $    | 6,353  |           | 19.88 | % |      | $ | 6,057     |  | 19.26 | %
|Southern California        |  |      | 5,845  |           | 18.29 | % |      |   | 5,265     |  | 16.74 | %
|Boston                     |  |      | 5,146  |           | 16.10 | % |      |   | 4,691     |  | 14.92 | %
|Northern New Jersey        |  |      | 3,855  |           | 12.06 | % |      |   | 4,135     |  | 13.15 | %
|San Francisco              |  |      | 1,910  |           | 5.98  | % |      |   | 1,741     |  | 5.54  | %
|Chicago                    |  |      | 1,758  |           | 5.50  | % |      |   | 1,625     |  | 5.17  | %
|Tampa/Orlando              |  |      | 1,242  |           | 3.89  | % |      |   | 1,843     |  | 5.86  | %
|St. Louis                  |  |      | 1,222  |           | 3.82  | % |      |   | 1,259     |  | 4.00  | %
|Denver                     |  |      | 874    |           | 2.74  | % |      |   | 790       |  | 2.51  | %
|Minneapolis                |  |      | 756    |           | 2.37  | % |      |   | 846       |  | 2.69  | %
|Las Vegas                  |  |      | 1,200  |           | 3.76  | % |      |   | 796       |  | 2.53  | %
|Omaha                      |  |      | 955    |           | 2.99  | % |      |   | 872       |  | 2.77  | %
|Indianapolis               |  |      | 186    |           | 0.58  | % |      |   | 189       |  | 0.60  | %
|All others                 |  |      | 652    |           | 2.04  | % |      |   | 1,339     |  | 4.26  | %
|                           |  |      |        |           |       |   |      |   |           |  |       |  
|Total Net Operating Income |  | $    | 31,954 |           | 100.0 | % |      | $ | 31,448    |  | 100.0 | %
|                           |  |      |        |           |       |   |      |   |           |  |       |  



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Rental Revenue. Rental revenue increased $682,000 to $48,638,000 for the three months ended September 30, 2004,
from $47,956,000 for the three months ended September 30, 2003. This change was primarily a result of property acquisitions and increases in occupancy and rental rates, offset by property dispositions. Following is a table of rental revenue by
market, for comparative purposes, presenting the results for the three months ended September 30, 2004 and 2003 (in thousands):



|                     |  |      |        |      |   |       
|-------------------- |  | ---- | ------ | ---- | - | ------
|                     |  | 2004 |        | 2003
|Washington D.C.      |  | $    | 8,933  |      | $ | 8,468 
|Southern California  |  |      | 8,537  |      |   | 7,818 
|Boston               |  |      | 7,826  |      |   | 7,314 
|Northern New Jersey  |  |      | 5,978  |      |   | 5,908 
|San Francisco        |  |      | 2,619  |      |   | 2,519 
|Chicago              |  |      | 3,185  |      |   | 3,108 
|Tampa/Orlando        |  |      | 1,883  |      |   | 2,400 
|St. Louis            |  |      | 2,020  |      |   | 1,974 
|Denver               |  |      | 1,378  |      |   | 1,302 
|Minneapolis          |  |      | 1,440  |      |   | 1,520 
|Las Vegas            |  |      | 1,492  |      |   | 1,074 
|Omaha                |  |      | 1,523  |      |   | 1,453 
|Indianapolis         |  |      | 220    |      |   | 229   
|All others           |  |      | 1,604  |      |   | 2,869 
|                     |  |      |        |      |   |       
|Total Rental Revenue |  | $    | 48,638 |      | $ | 47,956
|                     |  |      |        |      |   |       



Property Operating Expenses.
Property operating expenses remained relatively flat with an increase of $176,000 to $16,684,000 for the three months ended September 30, 2004, from $16,508,000 for the three months ended September 30, 2003. Following is a table of property
operating expenses by market, for comparative purposes, presenting the results for the three months ended September 30, 2004 and 2003 (in thousands):



|                                  |  |      |        |      |   |       
|--------------------------------- |  | ---- | ------ | ---- | - | ------
|                                  |  | 2004 |        | 2003
|Washington D.C.                   |  | $    | 2,580  |      | $ | 2,411 
|Southern California               |  |      | 2,692  |      |   | 2,553 
|Boston                            |  |      | 2,680  |      |   | 2,623 
|Northern New Jersey               |  |      | 2,123  |      |   | 1,773 
|San Francisco                     |  |      | 709    |      |   | 778   
|Chicago                           |  |      | 1,427  |      |   | 1,483 
|Tampa/Orlando                     |  |      | 641    |      |   | 557   
|St. Louis                         |  |      | 798    |      |   | 715   
|Denver                            |  |      | 504    |      |   | 512   
|Minneapolis                       |  |      | 684    |      |   | 674   
|Las Vegas                         |  |      | 292    |      |   | 278   
|Omaha                             |  |      | 568    |      |   | 581   
|Indianapolis                      |  |      | 34     |      |   | 40    
|All others                        |  |      | 952    |      |   | 1,530 
|                                  |  |      |        |      |   |       
|Total Property Operating Expenses |  | $    | 16,684 |      | $ | 16,508
|                                  |  |      |        |      |   |       



General and Administrative
Expenses. General and administrative expenses increased $962,000 to $3,026,000 for the three months ended September 30, 2004, from $2,064,000 for the three months ended September 30, 2003. This increase is primarily due to increases in incentive
compensation costs, as well as higher professional fees and outside services related to Sarbanes-Oxley 404 compliance.



Depreciation and Amortization. Depreciation and amortization increased $1,947,000 to $15,975,000 for the three months ended September 30, 2004, from $14,028,000
for the three months ended September 30, 2003. This increase is primarily due to property acquisitions, net of dispositions, depreciation of capital improvements, and amortization of at-market in-place leases we recorded in accordance with SFAS No.
141. See complete description of our accounting policy regarding recognition and amortization of at-market in-place leases in Note 2 of our consolidated financial statements.



Provision for impairment of real estate assets.During the three months ended September 30, 2003, we recorded an impairment charge of
$580,000 to reduce the carrying value of our 50% owned development joint venture, which is developing a residential project in Aurora, Colorado, from approximately $1,125,000 to its estimated fair value of $545,000, due to lower than anticipated
values.



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##### Table of Contents

Interest and Other Income. Interest and other income decreased $268,000 to $567,000 for the three months ended
September 30, 2004, from $835,000 for the three months ended September 30, 2003, primarily due to principal payments received on our mortgage loan receivable secured by land at Gateway Business Park in Colorado.



Loss on Early Extinguishment of Debt. During the three months ended September 30,
2004, we recorded losses on early extinguishment of debt of $1,990,000 which consisted primarily of the writeoff of unamortized original financing costs due to loan modifications and payoffs. During the three months ended September 30, 2003, in
connection with various loan payoffs related to property sales, we recorded losses on early extinguishment of debt of $177,000 which consisted of the writeoff of unamortized original financing costs.



Gain (loss) on sales of real estate assets.The gain on sales of real estate assets of
$743,000 during the three months ended September 30, 2004, resulted from the sale of one office property and one industrial property. The loss on sales of real estate assets of $3,449,000 during the three months ended September 30, 2003, resulted
from the sale of three office properties.



Comparison of the nine months
ended September 30, 2004 to the nine months ended September 30, 2003.



In accordance with SFAS 144 Accounting for the Impairment or Disposal of Long Lived Assets, effective for financial statements issued for fiscal years beginning after December 15, 2001, net income and gains and losses on sales
of real estate for properties sold or classified as held for sale subsequent to December 31, 2001 are reflected in the consolidated statements of operations as Discontinued Operations for all periods presented. As we generally reinvest
the proceeds from property dispositions into the acquisition of new properties, we feel that it is necessary to discuss our results of operations after discontinued operations have been added back to the respective revenue and expense line items to
provide a representation of the balances that management uses to evaluate the results of operations for the periods presented.



Following is a table which reconciles our results of operations reported in accordance with GAAP to our results of operations with discontinued operations added back to
each respective revenue and expense line item. The comparative discussion of the two periods results which follows is based on the Adjusted column amounts.



34



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##### Table of Contents

|                                                                                                                                                      |  |                                      |         |   |                                      |   |         |          |  |   |             |   |  |                        |         |   |          |   |         |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------- | - | ------------------------------------ | - | ------- | -------- |  | - | ----------- | - |  | ---------------------- | ------- | - | -------- | - | ------- | - |  | - | ------- | -
|                                                                                                                                                      |  | Nine Months Ended September 30, 2004 |         |   | Nine Months Ended September 30, 2003 |  
|                                                                                                                                                      |  | As Reported                          |         |   | DiscontinuedOperations               |   |         | Adjusted |  |   | As Reported |   |  | DiscontinuedOperations |         |   | Adjusted |  
|OPERATING REVENUE                                                                                                                                     |  |                                      |         |   |                                      |   |         |          |  |   |             |   |  |                        |         |   |          |   |         |   |  |   |         |  
|Rental revenue                                                                                                                                        |  | $                                    | 142,949 |   |                                      | $ | 3,169   |          |  | $ | 146,118     |   |  | $                      | 126,792 |   |          | $ | 23,922  |   |  | $ | 150,714 |  
|Fees and reimbursements, including from related parties                                                                                               |  |                                      | 2,618   |   |                                      |   |        |          |  |   | 2,618       |   |  |                        | 2,559   |   |          |   |        |   |  |   | 2,559   |  
|                                                                                                                                                      |  |                                      |         |   |                                      |   |         |          |  |   |             |   |  |                        |         |   |          |   |         |   |  |   |         |  
|Total operating revenue                                                                                                                               |  |                                      | 145,567 |   |                                      |   | 3,169   |          |  |   | 148,736     |   |  |                        | 129,351 |   |          |   | 23,922  |   |  |   | 153,273 |  
|                                                                                                                                                      |  |                                      |         |   |                                      |   |         |          |  |   |             |   |  |                        |         |   |          |   |         |   |  |   |         |  
|OPERATING EXPENSES                                                                                                                                    |  |                                      |         |   |                                      |   |         |          |  |   |             |   |  |                        |         |   |          |   |         |   |  |   |         |  
|Property operating expenses                                                                                                                           |  |                                      | 49,505  |   |                                      |   | 1,034   |          |  |   | 50,539      |   |  |                        | 42,503  |   |          |   | 7,324   |   |  |   | 49,827  |  
|General and administrative                                                                                                                            |  |                                      | 9,207   |   |                                      |   |        |          |  |   | 9,207       |   |  |                        | 9,605   |   |          |   |        |   |  |   | 9,605   |  
|Depreciation and amortization                                                                                                                         |  |                                      | 45,988  |   |                                      |   | 842     |          |  |   | 46,830      |   |  |                        | 37,195  |   |          |   | 5,212   |   |  |   | 42,407  |  
|Provision for impairment of real estate assets                                                                                                        |  |                                      |        |   |                                      |   |        |          |  |   |            |   |  |                        | 2,852   |   |          |   |        |   |  |   | 2,852   |  
|Provision for impairment on non-real estate assets                                                                                                    |  |                                      |        |   |                                      |   |        |          |  |   |            |   |  |                        | 3,905   |   |          |   |        |   |  |   | 3,905   |  
|                                                                                                                                                      |  |                                      |         |   |                                      |   |         |          |  |   |             |   |  |                        |         |   |          |   |         |   |  |   |         |  
|Total operating expenses                                                                                                                              |  |                                      | 104,700 |   |                                      |   | 1,876   |          |  |   | 106,576     |   |  |                        | 96,060  |   |          |   | 12,536  |   |  |   | 108,596 |  
|                                                                                                                                                      |  |                                      |         |   |                                      |   |         |          |  |   |             |   |  |                        |         |   |          |   |         |   |  |   |         |  
|Interest and other income                                                                                                                             |  |                                      | 2,037   |   |                                      |   |        |          |  |   | 2,037       |   |  |                        | 2,758   |   |          |   |        |   |  |   | 2,758   |  
|Equity in earnings of unconsolidated operating JVs                                                                                                   |  |                                      | 594     |   |                                      |   |        |          |  |   | 594         |   |  |                        | 478     |   |          |   |        |   |  |   | 478     |  
|Interest expense                                                                                                                                      |  |                                      | (27,310 | ) |                                      |   | (656    | )        |  |   | (27,966     | ) |  |                        | (23,844 | ) |          |   | (5,190  | ) |  |   | (29,034 | )
|Loss on early extinguishment of debt                                                                                                                  |  |                                      | (2,035  | ) |                                      |   | (40     | )        |  |   | (2,075      | ) |  |                        |        |   |          |   | (5,588  | ) |  |   | (5,588  | )
|                                                                                                                                                      |  |                                      |         |   |                                      |   |         |          |  |   |             |   |  |                        |         |   |          |   |         |   |  |   |         |  
|Income before gain on sales of real estate assets, minority interest, discontinued operations and cumulative effect of change in accounting
principle |  |                                      | 14,153  |   |                                      |   | 597     |          |  |   | 14,750      |   |  |                        | 12,683  |   |          |   | 608     |   |  |   | 13,291  |  
|Gain on sales of real estate assets                                                                                                                   |  |                                      |        |   |                                      |   | 13,271  |          |  |   | 13,271      |   |  |                        |        |   |          |   | 12,155  |   |  |   | 12,155  |  
|                                                                                                                                                      |  |                                      |         |   |                                      |   |         |          |  |   |             |   |  |                        |         |   |          |   |         |   |  |   |         |  
|Income before minority interest, discontinued operations and cumulative effect of change in accounting principle                                      |  |                                      | 14,153  |   |                                      |   | 13,868  |          |  |   | 28,021      |   |  |                        | 12,683  |   |          |   | 12,763  |   |  |   | 25,446  |  
|Minority interest(1)                                                                                                                                  |  |                                      | (684    | ) |                                      |   |        |          |  |   | (684        | ) |  |                        | (1,054  | ) |          |   |        |   |  |   | (1,054  | )
|                                                                                                                                                      |  |                                      |         |   |                                      |   |         |          |  |   |             |   |  |                        |         |   |          |   |         |   |  |   |         |  
|Income before discontinued operations and cumulative effect of change in accounting principle                                                         |  |                                      | 13,469  |   |                                      |   | 13,868  |          |  |   | 27,337      |   |  |                        | 11,629  |   |          |   | 12,763  |   |  |   | 24,392  |  
|Discontinued operations                                                                                                                               |  |                                      | 13,868  |   |                                      |   | (13,868 | )        |  |   |            |   |  |                        | 12,763  |   |          |   | (12,763 | ) |  |   |        |  
|                                                                                                                                                      |  |                                      |         |   |                                      |   |         |          |  |   |             |   |  |                        |         |   |          |   |         |   |  |   |         |  
|Income before cumulative effect of change in accounting principle                                                                                     |  |                                      | 27,337  |   |                                      |   |        |          |  |   | 27,337      |   |  |                        | 24,392  |   |          |   |        |   |  |   | 24,392  |  
|Cumulative effect of change in accounting principle                                                                                                   |  |                                      | (912    | ) |                                      |   |        |          |  |   | (912        | ) |  |                        |        |   |          |   |        |   |  |   |        |  
|                                                                                                                                                      |  |                                      |         |   |                                      |   |         |          |  |   |             |   |  |                        |         |   |          |   |         |   |  |   |         |  
|Net income                                                                                                                                            |  |                                      | 26,425  |   |                                      |   |        |          |  |   | 26,425      |   |  |                        | 24,392  |   |          |   |        |   |  |   | 24,392  |  
|Preferred dividends                                                                                                                                   |  |                                      | (11,459 | ) |                                      |   |        |          |  |   | (11,459     | ) |  |                        | (14,669 | ) |          |   |        |   |  |   | (14,669 | )
|Dividends paid on redeemed preferred stock                                                                                                            |  |                                      | (2,073  | ) |                                      |   |        |          |  |   | (2,073      | ) |  |                        |        |   |          |   |        |   |  |   |        |  
|(Premium)/discount and writeoff of original issuance costs on preferred stock redemption                                                              |  |                                      | (5,900  | ) |                                      |   |        |          |  |   | (5,900      | ) |  |                        | 254     |   |          |   |        |   |  |   | 254     |  
|                                                                                                                                                      |  |                                      |         |   |                                      |   |         |          |  |   |             |   |  |                        |         |   |          |   |         |   |  |   |         |  
|Net income available to Common Stockholders                                                                                                           |  | $                                    | 6,993   |   |                                      | $ |        |          |  | $ | 6,993       |   |  | $                      | 9,977   |   |          | $ |        |   |  | $ | 9,977   |  
|                                                                                                                                                      |  |                                      |         |   |                                      |   |         |          |  |   |             |   |  |                        |         |   |          |   |         |   |  |   |         |  

---

|(1) | Includes minority interests share of discontinued operations, preferred dividends and premium/discount and writeoff of original issuance costs on preferred
stock redemption.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Net Operating Income, Following is a table of net operating income by market, for comparative purposes, presenting
the results for the nine months ended September 30, 2004 and 2003 (in thousands). The data set forth below should be read in conjunction with Note 15. Segment Information in our consolidated financial statements included in Item 1.



|                           |  |      |        |           |       |   |      |   |           |  |       |  
|-------------------------- |  | ---- | ------ | --------- | ----- | - | ---- | - | --------- |  | ----- | -
|                           |  | 2004 |        | % ofTotal |       |   | 2003 |   | % ofTotal | 
|Washington D.C.            |  | $    | 20,257 |           | 21.20 | % |      | $ | 18,165    |  | 18.01 | %
|Southern California        |  |      | 17,141 |           | 17.93 | % |      |   | 16,365    |  | 16.22 | %
|Boston                     |  |      | 14,494 |           | 15.16 | % |      |   | 11,968    |  | 11.86 | %
|Northern New Jersey        |  |      | 12,370 |           | 12.94 | % |      |   | 12,454    |  | 12.35 | %
|San Francisco              |  |      | 5,413  |           | 5.66  | % |      |   | 6,023     |  | 5.97  | %
|Chicago                    |  |      | 5,185  |           | 5.42  | % |      |   | 4,542     |  | 4.50  | %
|Tampa/Orlando              |  |      | 3,702  |           | 3.87  | % |      |   | 4,807     |  | 4.76  | %
|St. Louis                  |  |      | 3,811  |           | 3.99  | % |      |   | 3,572     |  | 3.54  | %
|Denver                     |  |      | 2,376  |           | 2.49  | % |      |   | 4,908     |  | 4.86  | %
|Minneapolis                |  |      | 2,329  |           | 2.44  | % |      |   | 2,620     |  | 2.60  | %
|Las Vegas                  |  |      | 2,975  |           | 3.11  | % |      |   | 3,090     |  | 3.06  | %
|Omaha                      |  |      | 2,857  |           | 2.99  | % |      |   | 2,686     |  | 2.66  | %
|Indianapolis               |  |      | 579    |           | 0.61  | % |      |   | 3,164     |  | 3.14  | %
|All others                 |  |      | 2,090  |           | 2.19  | % |      |   | 6,523     |  | 6.47  | %
|                           |  |      |        |           |       |   |      |   |           |  |       |  
|Total Net Operating Income |  | $    | 95,579 |           | 100.0 | % |      | $ | 100,887   |  | 100.0 | %
|                           |  |      |        |           |       |   |      |   |           |  |       |  



Rental Revenue. Rental revenue
decreased $4,596,000 to $146,118,000 for the nine months ended September 30, 2004, from $150,714,000 for the nine months ended September 30, 2003. This change was primarily a result of property dispositions, offset by property acquisitions, and
increases in occupancy and rental rates. Following is a table of rental revenue by market, for comparative purposes, presenting the results for the nine months ended September 30, 2004 and 2003 (in thousands):



|                     |  |      |         |      |   |        
|-------------------- |  | ---- | ------- | ---- | - | -------
|                     |  | 2004 |         | 2003
|Washington D.C.      |  | $    | 27,731  |      | $ | 24,997 
|Southern California  |  |      | 25,115  |      |   | 23,769 
|Boston               |  |      | 23,061  |      |   | 18,349 
|Northern New Jersey  |  |      | 18,824  |      |   | 17,984 
|San Francisco        |  |      | 7,718   |      |   | 8,180  
|Chicago              |  |      | 9,470   |      |   | 8,934  
|Tampa/Orlando        |  |      | 5,637   |      |   | 6,635  
|St. Louis            |  |      | 6,135   |      |   | 5,889  
|Denver               |  |      | 3,865   |      |   | 7,627  
|Minneapolis          |  |      | 4,261   |      |   | 4,567  
|Las Vegas            |  |      | 3,784   |      |   | 4,157  
|Omaha                |  |      | 4,584   |      |   | 4,361  
|Indianapolis         |  |      | 696     |      |   | 3,292  
|All others           |  |      | 5,237   |      |   | 11,973 
|                     |  |      |         |      |   |        
|Total Rental Revenue |  | $    | 146,118 |      | $ | 150,714
|                     |  |      |         |      |   |        



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Property Operating Expenses. Property operating expenses remained relatively flat with an increase of $712,000 to
$50,539,000 for the nine months ended September 30, 2004, from $49,827,000 for the nine months ended September 30, 2003. Following is a table of property operating expenses by market, for comparative purposes, presenting the results for the nine
months ended September 30, 2004 and 2003 (in thousands):



|                         |  |      |        |      |   |       
|------------------------ |  | ---- | ------ | ---- | - | ------
|                         |  | 2004 |        | 2003
|Washington D.C.          |  | $    | 7,474  |      | $ | 6,832 
|Southern California      |  |      | 7,974  |      |   | 7,404 
|Boston                   |  |      | 8,567  |      |   | 6,381 
|Northern New Jersey      |  |      | 6,454  |      |   | 5,530 
|San Francisco            |  |      | 2,305  |      |   | 2,157 
|Chicago                  |  |      | 4,285  |      |   | 4,392 
|Tampa/Orlando            |  |      | 1,935  |      |   | 1,828 
|St. Louis                |  |      | 2,324  |      |   | 2,317 
|Denver                   |  |      | 1,489  |      |   | 2,719 
|Minneapolis              |  |      | 1,932  |      |   | 1,947 
|Las Vegas                |  |      | 809    |      |   | 1,067 
|Omaha                    |  |      | 1,727  |      |   | 1,675 
|Indianapolis             |  |      | 117    |      |   | 128   
|All others               |  |      | 3,147  |      |   | 5,450 
|                         |  |      |        |      |   |       
|Total Operating Expenses |  | $    | 50,539 |      | $ | 49,827
|                         |  |      |        |      |   |       



General and Administrative
Expenses. General and administrative expenses decreased $398,000 to $9,207,000 for the nine months ended September 30, 2004, from $9,605,000 for the nine months ended September 30, 2003. This decrease is primarily due to reductions in staffing
levels from 2003 and decreased travel expenses during the nine months ended September 30, 2004, partially offset by higher incentive compensation costs, as well as higher professional fees and outside services related to Sarbanes-Oxley 404
compliance.



Depreciation and Amortization. Depreciation and
amortization increased $4,423,000 to $46,830,000 for the nine months ended September 30, 2004, from $42,407,000 for the nine months ended September 30, 003. This increase is primarily due to property acquisitions, net of dispositions, depreciation
of capital improvements, and amortization of at-market in-place leases we recorded in accordance with SFAS No. 141. See complete description of our accounting policy regarding recognition and amortization of at-market in-place leases in Note 2 of
our consolidated financial statements.



Provision for impairment of real
estate assets.During the nine months ended September 30, 2003, we recorded a provision for impairment of approximately $2,272,000 to provide for a decrease in the carrying value of our 10% owned development joint venture which owns an office
property located in San Mateo, California, to its estimated fair value of zero due to decreased leasing activity and lower than anticipated market rents. In addition, we recorded an impairment charge of $580,000 to reduce the carrying value of our
50% owned development joint venture, which is developing a residential project in Aurora, Colorado, from approximately $1,125,000 to its estimated fair value of $545,000, due to lower than anticipated values.



Provision for impairment of non-real estate assets. In the second quarter of 2003, we
recorded an impairment charge of approximately $3.9 million relating to anticipated losses on the disposition of our leased aircraft which was disposed of in January 2004.



Interest and Other Income. Interest and other income decreased $721,000 to $2,037,000 for the nine months ended September 30, 2004,
from $2,758,000 for the nine months ended September 30, 2003, primarily due to principal payments received on our mortgage loan receivable secured by land at Gateway Business Park in Colorado.



Interest Expense. Interest expense decreased $1,068,000 to $27,966,000 for the the
nine months ended September 30, 2004, from $29,034,000 for the the nine months ended September 30, 2003. This decrease is primarily due to debt paid off in connection with property sales and refinancings, as well as decreases in variable interest
rates, partially offset by new debt.



Loss on Early Extinguishment of
Debt. During the nine months ended September 30, 2004, we recorded losses on early extinguishment of debt of $2,075,000 which consisted primarily of the writeoff of unamortized original financing costs in connection with various loan paydowns
and payoffs and a loan modification. During the nine months ended September 30, 2003, we recorded losses on early extinguishment of debt of $5,588,000 consisting primarily of prepayment penalties, as well as the writeoff of unamortized original
financing costs. The 2003 losses were included in discontinued operations as they were related to loan payoffs in connection with property sales.



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Gain on sales of real estate assets.The gain on sales of real estate assets of $13,271,000 during the nine months
ended September 30, 2004, resulted from the sale of three office properties and one industrial property. The gain on sales of real estate assets of $12,155,000 during the nine months ended September 30, 2003, resulted from the sale of thirteen
properties, including five office, seven industrial and one multifamily.



Cumulative Effect of Change in Accounting Principle.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. The implementation of this change has been accounted for as a change in accounting principle and applied cumulatively as of January 1, 2004. The cumulative effect of the change in accounting principle resulted in a one-time non-cash
reduction to our net income of $912,000, or approximately $0.03 per share, which represents the elimination of intercompany fee income recognized, slightly offset by additions to capitalized interest on this development project as if Marina Shores
had been consolidated at the inception of our investment.



Charges
associated with the redemption of preferred stock. In April 2004, we redeemed approximately 3.1 million shares of our outstanding 73/4% Series A Convertible Preferred Stock. In connection with this redemption, we incurred charges of $2,073,000 for the final dividends paid to the redeemed preferred shareholders, as well as a charge of $5,900,000, which
consisted of $3,439,000 for the non-cash writeoff of original issuance costs of the preferred shares, $2,407,000 for the premium paid to redeem the preferred shares and $54,000 in other miscellaneous costs.



Liquidity and Capital Resources



Cash Flows



For the nine months ended September 30, 2004, cash provided by operating activities was $51,477,000 as compared to $54,268,000 for the same
period in 2003. This decrease is primarily due to property dispositions, offset by property acquisitions. Cash used for investing activities was $24,459,000 for the nine months ended September 30, 2004, as compared to cash provided by investing
activities of $2,836,000 for the same period in 2003. This change is primarily due to higher proceeds from property sales, offset by funds used for acquisition of properties during the nine months ended September 30, 2003, as compared to higher
investments in land and development, offset by principal payments on mortgage loans receivable received during the nine months ended September 30, 2004. Cash used for financing activities was $40,862,000 for the nine months ended September 30, 2004,
as compared to $52,473,000 for the same period in 2003. This change is due to several factors, including a decrease in common and preferred stock dividends paid, a decrease in stock repurchases, as well as proceeds from a common stock offering,
offset by costs of the preferred stock redemption and lower borrowings net of repayments.



We expect to meet our short-term liquidity requirements generally through our working capital, our unsecured bank line of credit (as discussed below) and cash generated by operations. We believe 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. 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 and distribution requirements. 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 an 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, public and private equity and debt issuances, the issuance of partnership units in the Operating Partnership, proceeds from property sales
and cash flow provided by operations.



Investments in Land and
Development



Our investments in land and development
increased from $67,493,000 at December 31, 2003, to $148,240,000 at September 30, 2004. This increase is primarily due to the consolidation of the entity known as Marina Shores, effective January 1, 2004, in accordance with FIN 46 Revised. In
addition, during the nine months ended September 30, 2004, we acquired an undivided 50% tenancy in common interest in approximately 295 acres of the land at Gateway Business Park for a total purchase price of $30.7 million.



In March 2004, we gained approval for Marina Shores Village with a 6-1 vote of the Redwood
City Planning Commission. The proposed mixed use, waterfront community includes approvals for the construction of 1,930 residential units, 150,000 square feet of office space and 25,000 square feet of retail space. In June 2004, the City Council
unanimously approved the project with a 7-0 vote. In August 2004, a local group opposing the development qualified a referendum for the November ballot. On November 2, 2004, the referendum to ratify the city council action was defeated by 1,800
votes (54% to 46%). We are currently working with the city to determine the highest and best use for the land.



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As of September 30, 2004, we had investments in the following properties under development and land held for development:



|                                                                        |  |                             |  |                                                                                                                |  |                          |  |                     |   |                  |      |  |                           |         |    
|----------------------------------------------------------------------- |  | --------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | ------------------------ |  | ------------------- | - | ---------------- | ---- |  | ------------------------- | ------- | ---
|Properties Under Development                                            |  |                             |  |                                                                                                                | 
|Market                                                                  |  | Properties                  |  | Description                                                                                                    |  | City                     |  | SquareFootage       |   | EconomicInterest |      |  | InvestmentBalance($000s) |        
|Denver                                                                  |  | Gateway Office Five         |  | Fifth office building constructed at Gateway Business Park (1-story)                                           |  | Denver                   |  | 62,972              |   | 50               | %(1) |  | $                         | 824     |    
|                                                                        |  |                             |  |                                                                                                                |  |                          |  |                     |   |                  |      |  |                           |         |    
|TOTAL                                                                   |  |                             |  |                                                                                                                |  |                          |  | 62,972              |   |                  |      |  | $                         | 824     |    
|                                                                        |  |                             |  |                                                                                                                |  |                          |  |                     |   |                  |      |  |                           |         |    
|Land Held for Development                                               |  |                             |  |                                                                                                                | 
|Market                                                                  |  | Properties                  |  | Description                                                                                                    |  | City                     |  | ProposedSq. Footage |   | EconomicInterest |      |  | InvestmentBalance($000s) |        
|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              | %    |  | $                         | 5,150   |    
|                                                                        |  |                             |  |                                                                                                                |  |                          |  |                     |   |                  |      |  |                           |         |    
|                                                                        |  | Subtotal - Boston           |  |                                                                                                                |  |                          |  | 235,000             |   |                  |      |  |                           | 5,150   |    
|                                                                        |  |                             |  |                                                                                                                |  |                         
|Denver                                                                  |  | Gateway Business Park       |  | 1,200 acre mixed-use park near Denver International Airport; approximately 442 acres undeveloped               |  | Denver                   |  | 5,000,000           |   | 50               | %(2) |  |                           | 47,132  | (2)
|                                                                        |  |                             |  |                                                                                                                |  |                         
|                                                                        |  | Lima Street                 |  | 19.5 acres of undeveloped land in Englewood, Colorado, zoned for office use                                    |  | Denver                   |  | 120,000             |   | 100              | %    |  |                           | 4,750   |    
|                                                                        |  |                             |  |                                                                                                                |  |                          |  |                     |   |                  |      |  |                           |         |    
|                                                                        |  | Subtotal - Denver           |  |                                                                                                                |  |                          |  | 5,120,000           |   |                  |      |  |                           | 51,882  |    
|                                                                        |  |                             |  |                                                                                                                |  |                         
|San Francisco                                                           |  | Marina Shores               |  | Mixed-use waterfront community, which could include office, retail and multifamily                             |  | Redwood City             |  |                     |   | 50               | %(3) |  |                           | 81,242  |    
|                                                                        |  |                             |  |                                                                                                                |  |                         
|                                                                        |  | Eden Shores                 |  | 27 acres zoned for the construction of a 600,000 square foot office campus                                     |  | Hayward                  |  | 600,000             |   | 100              | %    |  |                           | 16,497  |    
|                                                                        |  |                             |  |                                                                                                                |  |                          |  |                     |   |                  |      |  |                           |         |    
|                                                                        |  | Subtotal - San Francisco    |  |                                                                                                                |  |                          |  | 600,000             |   |                  |      |  |                           | 97,739  |    
|                                                                        |  |                             |  |                                                                                                                |  |                         
|                                                                        |  |                             |  | Other land not currently under development                                                                     |  | New Jersey/San Francisco |  |                     |   |                  |      |  |                           | 5,907   |    
|                                                                        |  |                             |  |                                                                                                                |  |                          |  |                     |   |                  |      |  |                           |         |    
|TOTAL                                                                   |  |                             |  |                                                                                                                |  |                          |  | 5,955,000           |   |                  |      |  | $                         | 160,678 |    
|                                                                        |  |                             |  |                                                                                                                |  |                          |  |                     |   |                  |      |  |                           |         |    
|TOTAL INVESTMENTS IN LAND AND DEVELOPMENT AND MORTGAGE LOANS RECEIVABLE |  |                             |  | 6,017,972                                                                                                      |  |                          |  |                     | $ | 161,502          |     
|                                                                        |  |                             |  |                                                                                                                |  |                          |  |                     |   |                  |      |  |                           |         |    

---

|(1) | Interest in the form of mezzanine loans.
|--- | ----------------------------------------

|(2) | Interest in the form of a mortgage loan receivable, mezzanine loans and equity. The investment balance includes $13,262 representing the balance of the mortgage loan receivable at
September 30, 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Interest in the form of equity and mezzanine loans. We consolidated this entity on January 1, 2004, pursuant to FIN 46 Revised.
|--- | -------------------------------------------------------------------------------------------------------------------------------



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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 our development alliances, we have provided an aggregate of approximately $4.4 million in debt guarantees; however, some of the loans were not
fully drawn as of September 30, 2004. 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 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
VIEs as defined by FIN 46 Revised, however, other than Marina Shores as discussed above, 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 $87.8 million and $49.5 million, respectively, at September 30, 2004. Our maximum exposure to loss is equal to our investments in these arrangements, plus the related debt guarantees, as described
above.



Investments in Unconsolidated Operating Joint Ventures



Investments in unconsolidated operating joint ventures decreased from
$12,211,000 at December 31, 2003 to $12,031,000 at September 30, 2004. This decrease was primarily due to cash distributions received from the joint ventures, offset by our equity interests in the joint ventures earnings.



Mortgage Loans Receivable



Mortgage loans receivable decreased from $40,323,000 at December 31, 2003, to $13,262,000 at
September 30, 2004. We hold a first mortgage secured by a 50% interest in 147 acres of land at Gateway Business Park in Aurora, Colorado (as noted in above table). Periodic payments of interest and principal are received on the loan from proceeds of
land parcel sales in the project. During the nine months ended September 30, 2004, the decrease in mortgage loans receivable resulted from principal and interest payments totaling approximately $28.5 million, partially offset by monthly interest
accruals.



In August 2004, we acquired an undivided 50% tenancy in common
interest in approximately 135 acres of the land at Gateway Business Park for a total purchase price of $13.9 million. This land had been part of the security for the above noted mortgage loan receivable. In connection with this acquisition, the 135
acres was released as security and we received an $11.8 million payment on our mortgage loan receivable which was applied first to accrued interest and then to principal.



In February 2004, we acquired an undivided 50% tenancy in common interest in approximately 160 acres of the land at Gateway Business Park
for a total purchase price of $16.8 million. This land had been part of the security for the above noted mortgage loan receivable. In connection with this acquisition, the 160 acres was released as security and we received a $14.3 million payment on
our mortgage loan receivable which was applied first to accrued interest and then to principal.



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 September 30, 2004, our total
indebtedness included fixed-rate debt of $582,701,000 and floating-rate debt of $212,285,000, and our ratio of total debt to gross book assets was approximately 48%.



During the nine months ended September 30, 2004, mortgage loans payable increased from $649,325,000 to $699,896,000. This increase resulted
from the consolidation of Marina Shores debt in the amount of $45,000,000 in accordance with FIN 46 Revised, $127,931,000 in new mortgage loans and $1,814,000 of draws on a construction loan, offset by $49,270,000 of paydowns on two
floating-rate loans, $4,025,000 of scheduled principal amortization, $17,175,000 paid off in connection with a property sale, and $53,704,000 of other loan payoffs.



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. Marina Shores has total debt of $45 million consisting of two loans, with a $30 million loan bearing interest at the fixed rate of 4.82%, and a $15 million loan bearing interest at the fixed
rate of 6.82%. Both loans require monthly interest-only payments and mature on November 15, 2004. We are currently negotiating extension for these loan with the lender.



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##### Table of Contents

In September 2004, we paid off a fixed rate mortgage of $2.3 million which was due to mature in October 2004. As a result
of the loan payoff, a 52,721 square foot office building in Lexington, Massachusetts, is now unencumbered.



In September 2004, we completed a modification of a fixed rate loan with an insurance company. We released two properties from the collateral pool and added one property, received additional loan proceeds and extended
the maturity date from November 2008 to February 2009. The interest rate remains fixed at 5.905%. The two properties released from the collateral pool were a 171,359 square foot property in Eden Prairie, Minnesota, and a 79,000 square foot property
in Germantown, Maryland. The Germantown, Maryland property was sold upon its release from the loan and the proceeds from this sale along with the additional loan proceeds were used to payoff a $51.4 million variable rate loan secured by a 305,110
square foot office building in Arlington, Virginia. That building was then added to the collateral pool. Excess loan proceeds were used to paydown our unsecured bank line of credit. In connection with the loan modification and payoff of the variable
rate loan, we recognized a loss on early extinguishment of debt of approximately $1.9 million which consisted primarily of the writeoff of unamortized original financing costs.



In July 2004, in connection with the disposition of 90 Libbey Parkway, we made a paydown of approximately $4.9 million on a floating-rate
loan which was secured by a cross-collateralized pool of six properties. This loan bears interest at the floating rate of 30-day LIBOR plus 2.00%, requires monthly interest-only payments, and has a maturity date of December 5, 2005. The interest
rate on this loan at September 30, 2004, was 3.84% and it is now secured by a cross-collateralized pool of five properties. In connection with this paydown, we recognized a loss on early extinguishment of debt of approximately $40,000 which
consisted of the writeoff of unamortized original financing costs.



In June
2004, we modified a mortgage loan secured by 610 West Ash, a 174,247 square foot, 19-story, Class A office building located in San Diego, California, which was acquired in the fourth quarter of 2003. We received $5 million of additional proceeds
with all other loan terms remaining unchanged. The additional proceeds from this loan were used to paydown our unsecured bank line of credit.



In April 2004, we closed a new $35 million loan which is secured by three office properties located in Illinois and Iowa. The loan has a maturity date of April 1, 2005,
with two one-year extension options, requires monthly interest-only payments and bears interest at the floating rate of 30-day LIBOR plus 2.00%. The interest rate on this loan at September 30, 2004, was 3.84%. The proceeds from this loan were used
to payoff a $35.1 million floating rate loan which was secured by a cross-collateralized pool of seven properties, had a maturity date of December 2004, and had a floating interest rate of LIBOR plus 3.25% with a floor of 5%.



In April 2004, in connection with the acquisition of 1100 17thStreet, we assumed a mortgage loan with an outstanding balance of approximately $21 million. The loan has a maturity date of
July 1, 2007, and bears interest at a floating rate of 30-day LIBOR plus 1.75%, with a floor of 3.5%. The interest rate on this loan at September 30, 2004, was 3.59%.



In April 2004, we closed a $17 million loan which is secured by a cross-collateralized pool of seven properties. The loan matures in
November 2008, requires monthly interest-only payments and bears interest at a floating rate of 30-day LIBOR plus 3.25%. The interest rate on this loan at September 30, 2004, was 5.09%. The proceeds from this loan were used to paydown our unsecured
bank line of credit.



In February 2004, we made a paydown of approximately $9.3
million on a floating-rate loan which was secured by a cross-collateralized pool of seven properties. This loan bears interest at the floating rate of 30-day LIBOR plus 2.00%, requires monthly interest-only payments, and has a maturity date of
December 5, 2005. The interest rate on this loan at September 30, 2004, was 3.84%. As a result of the paydown, one of the properties securing the loan, a 56,348 square foot office property located in Alexandria, Virginia, was released from the
collateral pool. All other terms of the loan remain the same. In connection with this paydown, we recognized a loss on early extinguishment of debt of approximately $85,000 which consisted of the writeoff of unamortized original financing costs.



Outstanding borrowings under our unsecured bank line of credit increased from
$89,941,000 at December 31, 2003, to $95,090,000 at September 30, 2004. The increase was due to draws totaling $178,284,000 for the Preferred Stock redemption, acquisition of properties, acquisition of land at Gateway Business Park, mortgage loan
payoffs, disposition of the corporate aircraft and development advances, offset by pay downs totaling $173,135,000 generated from the proceeds of a common stock offering, paydowns received on the mortgage loan receivable, proceeds from property
sales and new financings, and cash flow from operations. In March 2004, the unsecured bank line of credit was modified to extend the maturity date from September



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2005 to March 2007, with one one-year extension option. 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 2004 and remain in compliance at September 30, 2004.



In connection with a 2001 secured financing, we entered into an interest rate cap agreement (caplets) to hedge increases in 30-day LIBOR
rates above a specified level. The agreement expired over a term concurrent with the secured financing, was indexed to a 30-day LIBOR rate, was for a notional amount equal to the maximum amount available on the secured financing, and capped 30-day
LIBOR to a maximum of 6%. We paid a $594,000 fee at the inception of this cap agreement of which $357,000 had been charged to earnings as of March 31, 2004. The remaining $237,000 was charged to earnings in the second quarter of 2004 when the
related secured financing was paid off. At September 30, 2004, 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 September 30, 2004, are as follows (in thousands). Included in the year ending December 31, 2007, is the unsecured bank line of credit balance of $95,090 which has an initial maturity of March 26, 2007.



|                         |  |   |        
|------------------------ |  | - | -------
|Year Ending December 31, |  |  
|2004                     |  | $ | 68,628 
|2005                     |  |   | 88,009 
|2006                     |  |   | 86,187 
|2007                     |  |   | 123,009
|2008                     |  |   | 212,732
|Thereafter               |  |   | 216,421
|                         |  |   |        
|Total                    |  | $ | 794,986
|                         |  |   |        



Equity and Debt Offerings



In November 1997, we filed a shelf registration statement with the SEC
(the 1997 Registration Statement) which registered the issuance of up to $1.0 billion of our equity securities. The 1997 Registration Statement was declared effective on December 18, 1997. There is currently $718.3 million of capacity in
equity securities remaining on the 1997 Registration Statement. In January 1999, we filed a shelf registration statement with the SEC (the 1999 Registration Statement) which registered the issuance of up to $300 million of debt
securities of Glenborough Properties, L.P, which may be guaranteed by us. The 1999 Registration Statement was declared effective by the SEC on January 25, 1999. There is currently $300 million of capacity of debt securities remaining on the 1999
Registration Statement.



On March 19, 2004, we completed the sale of 3,910,000
shares of common stock (including the exercise of the over allotment of 510,000 shares) in an offering underwritten by Goldman, Sachs & Co. The 3,910,000 shares were sold at a per share price of $21.20, resulting in proceeds, net of offering
costs, of approximately $81.4 million. We used the net proceeds to redeem a portion of the outstanding shares of our Preferred Stock on April 30, 2004 (as discussed below). In the interim, prior to the redemption, the proceeds were used to repay a
portion of the amounts outstanding under our unsecured bank line of credit.



Preferred Stock Redemption



On April 30, 2004 (the
Redemption Date), we redeemed approximately 3.1 million shares of Preferred Stock, representing approximately 31.2% of the total number of outstanding shares. The redemption price was $25.775 per share of Preferred Stock plus $0.183 per
share in accrued and unpaid dividends for the period from March 26, 2004 through and including the Redemption Date, without interest. This redemption was funded with proceeds from our March 2004 common stock offering which had temporarily been used
to pay down our unsecured bank line of credit (as discussed above).



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 September 30, 2004, 6,394,816 common shares have been repurchased at an average price



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per share of $16.60 and a total cost of approximately $106.8 million; this represents approximately 78% of the expanded
repurchase authorization and approximately 20% 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 September 30, 2004, 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. No repurchases of Common Stock or Preferred Stock (excluding the redemption discussed above) were made during the quarter ended September 30, 2004. Future stock repurchases will be made from time to
time in the open market or otherwise and the timing will depend on market conditions and other factors.



Critical Accounting Policies



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, investments in development and other investment assets such as operating joint ventures and mortgage loans receivable are generally carried at the lower of cost or estimated fair value. Certain development and operating 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 property, investments in development and other investments could be significantly higher or lower than their carrying amounts.



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 nine months ended September 30, 2004 and 2003. Accordingly, no provision for income taxes is
included in our consolidated financial statements.



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. All of 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 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.



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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.



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.



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The following table sets forth our reconciliation of net income to funds from operations (FFO) for the three and nine
months ended September 30, 2004 and 2003 (in thousands, except weighted average shares and per share amounts):



|                                                                                         |  |                    |        |   |                   |   |        |              |  |   |              |   |  |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | ------------ |  | - | ------------ | - |  | - | ------- | -
|                                                                                         |  | Three Months Ended |        |   | Nine Months Ended |  
|                                                                                         |  | Sept 30,2004       |        |   | Sept 30,2003      |   |        | Sept 30,2004 |  |   | Sept 30,2003 |  
|Net income                                                                               |  | $                  | 3,719  |   |                   | $ | 3,533  |              |  | $ | 26,425       |   |  | $ | 24,392  |  
|Cumulative effect of change in accounting principle                                      |  |                    |       |   |                   |   |       |              |  |   | 912          |   |  |   |        |  
|Real estate depreciation and amortization, net of minority interest(1)                   |  |                    | 14,254 |   |                   |   | 12,338 |              |  |   | 41,729       |   |  |   | 37,317  |  
|Preferred dividends                                                                      |  |                    | (3,318 | ) |                   |   | (4,889 | )            |  |   | (11,459      | ) |  |   | (14,669 | )
|Dividends paid on redeemed preferred stock                                               |  |                    |       |   |                   |   |       |              |  |   | (2,073       | ) |  |   |        |  
|(Premium)/discount and writeoff of original issuance costs on preferred stock redemption |  |                    | 9      |   |                   |   | 237    |              |  |   | (5,900       | ) |  |   | 254     |  
|(Gain) loss on sale from discontinued operations, net of minority interest               |  |                    | (677   | ) |                   |   | 3,112  |              |  |   | (12,091      | ) |  |   | (10,967 | )
|Adjustment to reflect FFO of unconsolidated operating joint ventures(2)                  |  |                    | 178    |   |                   |   | 101    |              |  |   | 536          |   |  |   | 326     |  
|Adjustment to reflect FFO of minority interest(3)                                        |  |                    | 1,354  |   |                   |   | 1,526  |              |  |   | 3,576        |   |  |   | 3,908   |  
|                                                                                         |  |                    |        |   |                   |   |        |              |  |   |              |   |  |   |         |  
|FFO available to Common Shareholders                                                     |  | $                  | 15,519 |   |                   | $ | 15,958 |              |  | $ | 41,655       |   |  | $ | 40,561  |  
|                                                                                         |  |                    |        |   |                   |   |        |              |  |   |              |   |  |   |         |  

---

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

|(2) | Represents the adjustments to FFO required to reflect the FFO of the unconsolidated operating 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 and gain/loss on sales 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 belief that certain 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 intention to continue our policy of paying quarterly distributions;
|- | -----------------------------------------------------------------------



| | 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 belief 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 statements regarding potential future development and negotiations with city agencies related to highest and best use of development property;
|- | --------------------------------------------------------------------------------------------------------------------------------------------------



| | Our expectation to continue our policy of managing our exposure to fluctuations in market interest rates through the use of fixed rate debt instruments to the extent possible;
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Our expectation 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 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;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| | Our statements that 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 is significant.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



All forward-looking statements
included in this document are based on information available to us on the date hereof. It is important to note that our actual results could differ materially from those stated or implied in such forward-looking statements. The following factors,
among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:



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



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



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



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



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



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



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



| | difficulties in identifying properties to acquire and in effecting acquisitions;
|- | --------------------------------------------------------------------------------



| | our failure to successfully integrate acquired properties and operations;
|- | -------------------------------------------------------------------------



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



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



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



| | continuing threat of terrorist attacks;
|- | ---------------------------------------



| | unanticipated difficulties with joint venture partners; and
|- | -----------------------------------------------------------



| | risks and uncertainties affecting property development and construction (including construction delays, cost overruns, our inability to obtain necessary permits and public
opposition to these activities).
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The forward-looking statements
in this Quarterly Report on Form 10-Q are subject to additional risks and uncertainties further discussed under Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation - Risk Factors of our
Annual Report on Form 10-K for the year ended December 31, 2003. We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.



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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.



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. We do not believe that changes in market interest rates will 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 27% at September 30, 2004, and 35% at December 31, 2003, 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 4.91% at December 31, 2003, to 5.19% at September 30, 2004. 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 is 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 September 30, 2004, 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 |        |   |      |   |        |     
|                      |  | 2004                   |        |   | 2005 |   |        | 2006 |  |   | 2007   |   |  | 2008 |        |   | Thereafter |   |         | Total |  |   | Fair Value
|                      |  | (in thousands)         |        |   |     
|Secured Fixed         |  | $                      | 68,411 |   |      | $ | 7,634  |      |  | $ | 85,318 |   |  | $    | 9,185  |   |            | $ | 195,732 |       |  | $ | 216,421    |   |  | $ | 582,701 |   |  | $ | 590,746
|                      |  |                        |        |   |      |   |        |     
|Average interest rate |  |                        | 4.96   | % |      |   | 5.98   | %    |  |   | 6.71   | % |  |      | 6.12   | % |            |   | 5.52    | %     |  |   | 5.72       | % |  |   | 5.72    | % |  |   |        
|                      |  |                        |        |   |      |   |        |     
|Secured Variable      |  | $                      | 217    |   |      | $ | 80,375 |      |  | $ | 869    |   |  | $    | 18,734 |   |            | $ | 17,000  |       |  | $ |           |   |  | $ | 117,195 |   |  | $ | 117,195
|                      |  |                        |        |   |      |   |        |     
|Average interest rate |  |                        | 3.59   | % |      |   | 3.91   | %    |  |   | 3.59   | % |  |      | 3.59   | % |            |   | 5.09    | %     |  |   |           |   |  |   | 4.03    | % |  |   |        
|                      |  |                        |        |   |      |   |        |     
|Unsecured Variable    |  | $                      |       |   |      | $ |       |      |  | $ |       |   |  | $    | 95,090 |   |            | $ |        |       |  | $ |           |   |  | $ | 95,090  |   |  | $ | 95,090 
|                      |  |                        |        |   |      |   |        |     
|Average interest rate |  |                        |       |   |      |   |       |      |  |   |       |   |  |      | 3.37   | % |            |   |        |       |  |   |           |   |  |   | 3.37    | % |  |   |        



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 $265,000, based upon the balances outstanding on variable rate instruments at September 30, 2004.



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Item 4. Controls and Procedures



As of the end of
the period covered by this report, we evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in alerting them on a timely basis to material information required to be included in this report.
There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.



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##### Table of Contents

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 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities



None.



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



There were no matters submitted to a vote of security holders during the quarter ended September 30, 2004.



Item 6. Exhibits and Reports on Form 8-K



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



The Exhibit Index attached hereto is hereby incorporated by reference to this item.



| | (b) | Reports on Form 8-K:
| | --- | --------------------



On July 27, 2004, we furnished a report on Form 8-K with respect to our press release, announcing results of operations for the quarter ended June 30,
2004 (not incorporated herein by reference).



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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: November 8, 2004 |  |                                       |  | /s/ Andrew Batinovich                 
|                       |  |                                       |  | Andrew Batinovich                     
|                       |  |                                       |  | Director, President and               
|                       |  |                                       |  | Chief Executive Officer               
|                       |  |                                      
|Date: November 8, 2004 |  |                                       |  | /s/ Stephen Saul                      
|                       |  |                                       |  | Stephen Saul                          
|                       |  |                                       |  | Chief Financial Officer               
|                       |  |                                       |  | (Principal Financial Officer)         
|                       |  |                                      
|Date: November 8, 2004 |  |                                       |  | /s/ Brian Peay                        
|                       |  |                                       |  | Brian Peay                            
|                       |  |                                       |  | Senior Vice President,                
|                       |  |                                       |  | Finance and Accounting                
|                       |  |                                       |  | (Principal Accounting Officer)        



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EXHIBIT INDEX



|            |  |                                                                                                                                       
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Title                                                                                                                         
|11.01       |  | Statement re: Computation of Earnings Per Share is shown in Note 14 of the Consolidated Financial Statements of the Company in Item 1.
|            | 
|12.01       |  | Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Dividends.                     
|            | 
|31.01       |  | Section 302 Certification of Andrew Batinovich, Chief Executive Officer.                                                              
|            | 
|31.02       |  | Section 302 Certification of Stephen R. Saul, Chief Financial Officer.                                                                
|            | 
|32.01       |  | Section 906 Certification of Andrew Batinovich, Chief Executive Officer.                                                              
|            | 
|32.02       |  | Section 906 Certification of Stephen R. Saul, Chief Financial Officer.                                                                



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