##### Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

|[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|--- | ------------------------------------------------------------------

EXCHANGE ACT OF 1934

For the quarterly period ended September 30,
2006

OR



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

ACT OF 1934

Commission
file number 1-14162

GLENBOROUGH REALTY TRUST INCORPORATED

(Exact name of Registrant as specified in its charter)



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

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

(Address of principal executive offices)

(650) 343-9300

Registrants telephone number, including area code

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



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

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

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

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

Large Accelerated Filer þ  Accelerated Filer ̈Non-accelerated filer ̈

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

As of November 3, 2006, 32,327,957 shares of Common Stock ($.001 par value) and 3,740,807 shares of 7.75% Series A
Convertible Preferred Stock ($.001 par value, $25.00 per share liquidation preference) were outstanding.



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##### Table of Contents

INDEX

GLENBOROUGH REALTY TRUST INCORPORATED



|              |  |                                                                                              |  |         
|------------- |  | -------------------------------------------------------------------------------------------- |  | --------
|              |  |                                                                                              |  | Page No.
|PART I        |  | FINANCIAL INFORMATION                                                                        |  |         
|              |  |                                                                                             
|Item 1.       |  | Consolidated Financial Statements of Glenborough Realty Trust Incorporated (Unaudited):      |  |         
|              |  |                                                                                             
|              |  | Consolidated Balance Sheets at September 30, 2006 and December 31, 2005                      |  | 3       
|              |  |                                                                                             
|              |  | Consolidated Statements of Operations for the three months ended September 30, 2006 and 2005 |  | 4       
|              |  |                                                                                             
|              |  | Consolidated Statements of Operations for the nine months ended September 30, 2006 and 2005  |  | 5       
|              |  |                                                                                             
|              |  | Consolidated Statement of Stockholders Equity for the nine months ended September 30, 2006  |  | 6       
|              |  |                                                                                             
|              |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005  |  | 7-8     
|              |  |                                                                                             
|              |  | Notes to Consolidated Financial Statements                                                   |  | 9-34    
|              |  |                                                                                             
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations        |  | 35-53   
|              |  |                                                                                             
|Item 3.       |  | Quantitative and Qualitative Disclosures About Market Risk                                   |  | 53      
|              |  |                                                                                             
|Item 4.       |  | Controls and Procedures                                                                      |  | 54      
|              |  |                                                                                             
|PART II       |  | OTHER INFORMATION                                                                            |  |         
|              |  |                                                                                             
|Item 1.       |  | Legal Proceedings                                                                            |  | 54      
|              |  |                                                                                             
|Item 1A.      |  | Risk Factors                                                                                 |  | 54      
|              |  |                                                                                             
|Item 2.       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                  |  | 57      
|              |  |                                                                                             
|Item 3.       |  | Defaults Upon Senior Securities                                                              |  | 57      
|              |  |                                                                                             
|Item 4.       |  | Submission of Matters to a Vote of Security Holders                                          |  | 57      
|              |  |                                                                                             
|Item 5.       |  | Other Information                                                                            |  | 57      
|              |  |                                                                                             
|Item 6.       |  | Exhibits                                                                                     |  | 58      
|              | 
|SIGNATURES    |  | 59                                                                                          
|              | 
|EXHIBIT INDEX |  | 60                                                                                          





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 30,2006 |   |  |  |  |  |  |   | December 31,2005 |   |  | 
|                                                                                                                                                                                                |  |  |  |  
|ASSETS                                                                                                                                                                                          |  |  |  |   |                   |   |  |  |  |  |  |   |                  |   |  | 
|Rental properties, gross                                                                                                                                                                        |  |  |  | $ | 1,304,602         |   |  |  |  |  |  | $ | 1,296,057        |   |  | 
|Accumulated depreciation and amortization                                                                                                                                                       |  |  |  |   | (205,495          | ) |  |  |  |  |  |   | (186,449         | ) |  | 
|                                                                                                                                                                                                |  |  |  |  
|Rental properties, net                                                                                                                                                                          |  |  |  |   | 1,099,107         |   |  |  |  |  |  |   | 1,109,608        |   |  | 
|                                                                                                                                                                                                |  |  |  |   |                   |  
|Properties held for sale                                                                                                                                                                        |  |  |  |   |                  |   |  |  |  |  |  |   | 103,548          |   |  | 
|Investments in land and development                                                                                                                                                             |  |  |  |   | 59,831            |   |  |  |  |  |  |   | 51,750           |   |  | 
|Investments in unconsolidated joint ventures                                                                                                                                                    |  |  |  |   | 12,027            |   |  |  |  |  |  |   | 12,040           |   |  | 
|Mortgage loans receivable                                                                                                                                                                       |  |  |  |   | 11,055            |   |  |  |  |  |  |   | 11,231           |   |  | 
|Leasing and financing costs (net of accumulated amortization of $11,980 and $17,664 as of September 30, 2006 and
December 31, 2005, respectively)                                               |  |  |  |   | 21,749            |   |  |  |  |  |  |   | 21,465           |   |  | 
|Straight-line rent receivable                                                                                                                                                                   |  |  |  |   | 20,100            |   |  |  |  |  |  |   | 16,874           |   |  | 
|Cash and cash equivalents                                                                                                                                                                       |  |  |  |   | 4,718             |   |  |  |  |  |  |   | 3,661            |   |  | 
|Restricted cash                                                                                                                                                                                 |  |  |  |   | 5,677             |   |  |  |  |  |  |   | 5,720            |   |  | 
|Accounts receivable, net                                                                                                                                                                        |  |  |  |   | 2,504             |   |  |  |  |  |  |   | 2,292            |   |  | 
|Other assets, net                                                                                                                                                                               |  |  |  |   | 8,047             |   |  |  |  |  |  |   | 7,941            |   |  | 
|                                                                                                                                                                                                |  |  |  |  
|                                                                                                                                                                                                |  |  |  |   |                   |  
|TOTAL ASSETS                                                                                                                                                                                    |  |  |  | $ | 1,244,815         |   |  |  |  |  |  | $ | 1,346,130        |   |  | 
|                                                                                                                                                                                                |  |  |  |  
|                                                                                                                                                                                                |  |  |  |   |                   |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                            |  |  |  |   |                   |   |  |  |  |  |  |   |                  |   |  | 
|Liabilities:                                                                                                                                                                                    |  |  |  |   |                   |   |  |  |  |  |  |   |                  |   |  | 
|Mortgage loans                                                                                                                                                                                  |  |  |  | $ | 629,116           |   |  |  |  |  |  | $ | 659,870          |   |  | 
|Unsecured bank line of credit                                                                                                                                                                   |  |  |  |   | 99,466            |   |  |  |  |  |  |   | 106,669          |   |  | 
|Accrued common and preferred stock dividends                                                                                                                                                    |  |  |  |   | 10,687            |   |  |  |  |  |  |   | 13,610           |   |  | 
|Obligations associated with properties held for sale                                                                                                                                            |  |  |  |   |                  |   |  |  |  |  |  |   | 45,855           |   |  | 
|Other liabilities                                                                                                                                                                               |  |  |  |   | 38,108            |   |  |  |  |  |  |   | 41,276           |   |  | 
|                                                                                                                                                                                                |  |  |  |  
|Total liabilities                                                                                                                                                                               |  |  |  |   | 777,377           |   |  |  |  |  |  |   | 867,280          |   |  | 
|                                                                                                                                                                                                |  |  |  |  
|                                                                                                                                                                                                |  |  |  |   |                   |  
|Commitments and contingencies (Note 19)                                                                                                                                                         |  |  |  |   |                   |   |  |  |  |  |  |   |                  |   |  | 
|                                                                                                                                                                                                |  |  |  |   |                   |  
|Minority interest                                                                                                                                                                               |  |  |  |   | 31,771            |   |  |  |  |  |  |   | 31,206           |   |  | 
|                                                                                                                                                                                                |  |  |  |   |                   |  
|Stockholders Equity:                                                                                                                                                                           |  |  |  |   |                   |   |  |  |  |  |  |   |                  |   |  | 
|                                                                                                                                                                                                |  |  |  |   |                   |  
|Common stock, $0.001 par value, 188,000,000 shares authorized, 32,273,566 and 33,710,400 shares issued and outstanding at
September 30, 2006 and December 31, 2005, respectively                |  |  |  |   | 32                |   |  |  |  |  |  |   | 34               |   |  | 
|Convertible preferred stock, $0.001 par value, 12,000,000 shares authorized, $25.00 liquidation preference, 3,740,277 shares
issued and outstanding at September 30, 2006 and December 31, 2005 |  |  |  |   | 4                 |   |  |  |  |  |  |   | 4                |   |  | 
|Additional paid-in capital                                                                                                                                                                      |  |  |  |   | 721,968           |   |  |  |  |  |  |   | 751,183          |   |  | 
|Distributions in excess of accumulated earnings                                                                                                                                                 |  |  |  |   | (286,337          | ) |  |  |  |  |  |   | (303,577         | ) |  | 
|                                                                                                                                                                                                |  |  |  |  
|Total stockholders equity                                                                                                                                                                      |  |  |  |   | 435,667           |   |  |  |  |  |  |   | 447,644          |   |  | 
|                                                                                                                                                                                                |  |  |  |  
|                                                                                                                                                                                                |  |  |  |   |                   |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                      |  |  |  | $ | 1,244,815         |   |  |  |  |  |  | $ | 1,346,130        |   |  | 
|                                                                                                                                                                                                |  |  |  |  



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, 2006 and 2005

(in thousands, except share and per share amounts)

(unaudited)



|                                                                                                                                                                                                                   |  |  |  |   |            |   |  |  |  |  |  |   |            |   |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  | - | ---------- | - |  |  |  |  |  | - | ---------- | - |  | 
|                                                                                                                                                                                                                   |  |  |  |   | 2006       |   |  |  |  |  |  |   | 2005       |   |  | 
|                                                                                                                                                                                                                   |  |  |  |  
|OPERATING REVENUE                                                                                                                                                                                                  |  |  |  |   |            |   |  |  |  |  |  |   |            |   |  | 
|Rental revenue                                                                                                                                                                                                     |  |  |  | $ | 38,831     |   |  |  |  |  |  | $ | 35,577     |   |  | 
|Tenant reimbursements                                                                                                                                                                                              |  |  |  |   | 4,545      |   |  |  |  |  |  |   | 3,644      |   |  | 
|Fees and reimbursements, including from related parties                                                                                                                                                            |  |  |  |   | 695        |   |  |  |  |  |  |   | 849        |   |  | 
|                                                                                                                                                                                                                   |  |  |  |  
|Total operating revenue                                                                                                                                                                                            |  |  |  |   | 44,071     |   |  |  |  |  |  |   | 40,070     |   |  | 
|                                                                                                                                                                                                                   |  |  |  |  
|                                                                                                                                                                                                                   |  |  |  |   |            |  
|OPERATING EXPENSES                                                                                                                                                                                                 |  |  |  |   |            |   |  |  |  |  |  |   |            |   |  | 
|Property operating expenses                                                                                                                                                                                        |  |  |  |   | 15,347     |   |  |  |  |  |  |   | 13,562     |   |  | 
|General and administrative                                                                                                                                                                                         |  |  |  |   | 5,882      |   |  |  |  |  |  |   | 3,423      |   |  | 
|Depreciation and amortization                                                                                                                                                                                      |  |  |  |   | 14,175     |   |  |  |  |  |  |   | 13,116     |   |  | 
|Provision for impairment of real estate assets                                                                                                                                                                     |  |  |  |   |           |   |  |  |  |  |  |   | 62         |   |  | 
|                                                                                                                                                                                                                   |  |  |  |  
|Total operating expenses                                                                                                                                                                                           |  |  |  |   | 35,404     |   |  |  |  |  |  |   | 30,163     |   |  | 
|                                                                                                                                                                                                                   |  |  |  |  
|                                                                                                                                                                                                                   |  |  |  |   |            |  
|Interest and other income                                                                                                                                                                                          |  |  |  |   | 467        |   |  |  |  |  |  |   | 455        |   |  | 
|Equity in earnings (loss) of unconsolidated joint ventures                                                                                                                                                         |  |  |  |   | (73        | ) |  |  |  |  |  |   | 6          |   |  | 
|Interest expense                                                                                                                                                                                                   |  |  |  |   | (10,604    | ) |  |  |  |  |  |   | (9,795     | ) |  | 
|Loss on early extinguishment of debt                                                                                                                                                                               |  |  |  |   | (772       | ) |  |  |  |  |  |   | (127       | ) |  | 
|                                                                                                                                                                                                                   |  |  |  |  
|                                                                                                                                                                                                                   |  |  |  |   |            |  
|Income (loss) before minority interest, discontinued operations and gain on sale of real estate assets                                                                                                             |  |  |  |   | (2,315     | ) |  |  |  |  |  |   | 446        |   |  | 
|Minority interest (including share of discontinued operations and gain on sale of real estate assets)                                                                                                              |  |  |  |   | (1,070     | ) |  |  |  |  |  |   | (2,240     | ) |  | 
|                                                                                                                                                                                                                   |  |  |  |  
|Loss before discontinued operations and gain on sale of real estate assets                                                                                                                                         |  |  |  |   | (3,385     | ) |  |  |  |  |  |   | (1,794     | ) |  | 
|Discontinued operations (including net gain on sales of $12,697 and $27,617 in 2006 and 2005, respectively and gain related to
increase in fair value of property of $0 and $1,331 in 2006 and 2005, respectively) |  |  |  |   | 12,988     |   |  |  |  |  |  |   | 30,417     |   |  | 
|Gain on sale of real estate assets                                                                                                                                                                                 |  |  |  |   | 3,677      |   |  |  |  |  |  |   |           |   |  | 
|                                                                                                                                                                                                                   |  |  |  |  
|Net income                                                                                                                                                                                                         |  |  |  |   | 13,280     |   |  |  |  |  |  |   | 28,623     |   |  | 
|Preferred dividends                                                                                                                                                                                                |  |  |  |   | (1,812     | ) |  |  |  |  |  |   | (1,812     | ) |  | 
|                                                                                                                                                                                                                   |  |  |  |  
|Net income available to Common Stockholders                                                                                                                                                                        |  |  |  | $ | 11,468     |   |  |  |  |  |  | $ | 26,811     |   |  | 
|                                                                                                                                                                                                                   |  |  |  |  
|                                                                                                                                                                                                                   |  |  |  |   |            |  
|Basic Income (Loss) Per Share Data:                                                                                                                                                                                |  |  |  |   |            |   |  |  |  |  |  |   |            |   |  | 
|Continuing operations (including gain on sale of real estate assets of $0.10 in 2006)                                                                                                                              |  |  |  | $ | (0.01      | ) |  |  |  |  |  | $ | (0.04      | ) |  | 
|Discontinued operations                                                                                                                                                                                            |  |  |  |   | 0.37       |   |  |  |  |  |  |   | 0.78       |   |  | 
|                                                                                                                                                                                                                   |  |  |  |  
|Net income available to Common Stockholders                                                                                                                                                                        |  |  |  | $ | 0.36       |   |  |  |  |  |  | $ | 0.74       |   |  | 
|                                                                                                                                                                                                                   |  |  |  |  
|Basic weighted average shares outstanding                                                                                                                                                                          |  |  |  |   | 32,084,122 |   |  |  |  |  |  |   | 36,003,636 |   |  | 
|                                                                                                                                                                                                                   |  |  |  |  
|                                                                                                                                                                                                                   |  |  |  |   |            |  
|Diluted Income (Loss) Per Share Data:                                                                                                                                                                              |  |  |  |   |            |   |  |  |  |  |  |   |            |   |  | 
|Continuing operations (including gain on sale of real estate assets of $0.10 in 2006)                                                                                                                              |  |  |  | $ | (0.01      | ) |  |  |  |  |  | $ | (0.04      | ) |  | 
|Discontinued operations                                                                                                                                                                                            |  |  |  |   | 0.37       |   |  |  |  |  |  |   | 0.78       |   |  | 
|                                                                                                                                                                                                                   |  |  |  |  
|Net income available to Common Stockholders                                                                                                                                                                        |  |  |  | $ | 0.36       |   |  |  |  |  |  | $ | 0.74       |   |  | 
|                                                                                                                                                                                                                   |  |  |  |  
|                                                                                                                                                                                                                   |  |  |  |   |            |  
|Diluted weighted average shares outstanding                                                                                                                                                                        |  |  |  |   | 32,084,122 |   |  |  |  |  |  |   | 36,003,636 |   |  | 
|                                                                                                                                                                                                                   |  |  |  |  
|                                                                                                                                                                                                                   |  |  |  |   |            |  
|Dividends declared per common share outstanding                                                                                                                                                                    |  |  |  | $ | 0.275      |   |  |  |  |  |  | $ | 0.35       |   |  | 
|                                                                                                                                                                                                                   |  |  |  |  
|                                                                                                                                                                                                                   |  |  |  |   |            |  
|Dividends declared per preferred share outstanding                                                                                                                                                                 |  |  |  | $ | 0.48       |   |  |  |  |  |  | $ | 0.48       |   |  | 
|                                                                                                                                                                                                                   |  |  |  |  



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



4



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

For the nine months ended September 30, 2006 and 2005

(in thousands, except share and per share amounts)

(unaudited)



|                                                                                                                                                                                                                     |  |  |  |   |            |   |  |  |  |  |  |   |            |   |  | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | - | ---------- | - |  |  |  |  |  | - | ---------- | - |  | 
|                                                                                                                                                                                                                     |  |  |  |   | 2006       |   |  |  |  |  |  |   | 2005       |   |  | 
|                                                                                                                                                                                                                     |  |  |  |  
|OPERATING REVENUE                                                                                                                                                                                                    |  |  |  |   |            |   |  |  |  |  |  |   |            |   |  | 
|Rental revenue                                                                                                                                                                                                       |  |  |  | $ | 115,710    |   |  |  |  |  |  | $ | 102,044    |   |  | 
|Tenant reimbursements                                                                                                                                                                                                |  |  |  |   | 15,306     |   |  |  |  |  |  |   | 10,990     |   |  | 
|Fees and reimbursements, including from related parties                                                                                                                                                              |  |  |  |   | 3,693      |   |  |  |  |  |  |   | 3,302      |   |  | 
|                                                                                                                                                                                                                     |  |  |  |  
|Total operating revenue                                                                                                                                                                                              |  |  |  |   | 134,709    |   |  |  |  |  |  |   | 116,336    |   |  | 
|                                                                                                                                                                                                                     |  |  |  |  
|                                                                                                                                                                                                                     |  |  |  |   |            |  
|OPERATING EXPENSES                                                                                                                                                                                                   |  |  |  |   |            |   |  |  |  |  |  |   |            |   |  | 
|Property operating expenses                                                                                                                                                                                          |  |  |  |   | 46,065     |   |  |  |  |  |  |   | 38,586     |   |  | 
|General and administrative                                                                                                                                                                                           |  |  |  |   | 13,663     |   |  |  |  |  |  |   | 10,633     |   |  | 
|Depreciation and amortization                                                                                                                                                                                        |  |  |  |   | 41,590     |   |  |  |  |  |  |   | 36,626     |   |  | 
|Provision for impairment of real estate assets                                                                                                                                                                       |  |  |  |   |           |   |  |  |  |  |  |   | 5,160      |   |  | 
|                                                                                                                                                                                                                     |  |  |  |  
|Total operating expenses                                                                                                                                                                                             |  |  |  |   | 101,318    |   |  |  |  |  |  |   | 91,005     |   |  | 
|                                                                                                                                                                                                                     |  |  |  |  
|                                                                                                                                                                                                                     |  |  |  |   |            |  
|Interest and other income                                                                                                                                                                                            |  |  |  |   | 1,496      |   |  |  |  |  |  |   | 2,099      |   |  | 
|Equity in earnings of unconsolidated joint ventures                                                                                                                                                                  |  |  |  |   | 19,740     |   |  |  |  |  |  |   | 308        |   |  | 
|Interest expense                                                                                                                                                                                                     |  |  |  |   | (32,254    | ) |  |  |  |  |  |   | (26,087    | ) |  | 
|Loss on early extinguishment of debt                                                                                                                                                                                 |  |  |  |   | (875       | ) |  |  |  |  |  |   | (688       | ) |  | 
|                                                                                                                                                                                                                     |  |  |  |  
|                                                                                                                                                                                                                     |  |  |  |   |            |  
|Income before minority interest, discontinued operations, gain on sale of real estate assets and cumulative effect of change
in accounting principle                                                                 |  |  |  |   | 21,498     |   |  |  |  |  |  |   | 963        |   |  | 
|Minority interest (including share of discontinued operations and gain on sale of real estate assets)                                                                                                                |  |  |  |   | (4,270     | ) |  |  |  |  |  |   | 475        |   |  | 
|                                                                                                                                                                                                                     |  |  |  |  
|Income before discontinued operations, gain on sale of real estate assets and cumulative effect of change in accounting
principle                                                                                    |  |  |  |   | 17,228     |   |  |  |  |  |  |   | 1,438      |   |  | 
|Discontinued operations (including net gain on sales of $19,653 and $54,246 in 2006 and 2005, respectively and gain related to
increase in fair value of property of $715 and $1,331 in 2006 and 2005, respectively) |  |  |  |   | 19,949     |   |  |  |  |  |  |   | 4,162      |   |  | 
|Gain on sale of real estate assets                                                                                                                                                                                   |  |  |  |   | 14,182     |   |  |  |  |  |  |   |           |   |  | 
|                                                                                                                                                                                                                     |  |  |  |  
|Income before cumulative effect of change in accounting principle                                                                                                                                                    |  |  |  |   | 51,359     |   |  |  |  |  |  |   | 5,600      |   |  | 
|Cumulative effect of change in accounting principle (see Note 18)                                                                                                                                                    |  |  |  |   | 277        |   |  |  |  |  |  |   |           |   |  | 
|                                                                                                                                                                                                                     |  |  |  |  
|Net income                                                                                                                                                                                                           |  |  |  |   | 51,636     |   |  |  |  |  |  |   | 5,600      |   |  | 
|Preferred dividends                                                                                                                                                                                                  |  |  |  |   | (5,435     | ) |  |  |  |  |  |   | (5,435     | ) |  | 
|Dividends declared on redeemed preferred stock                                                                                                                                                                       |  |  |  |   |           |   |  |  |  |  |  |   | (596       | ) |  | 
|Premium and write-off of original issuance costs on preferred stock redemption and repurchases                                                                                                                       |  |  |  |   |           |   |  |  |  |  |  |   | (5,309     | ) |  | 
|                                                                                                                                                                                                                     |  |  |  |  
|Net income (loss) available to Common Stockholders                                                                                                                                                                   |  |  |  | $ | 46,201     |   |  |  |  |  |  | $ | (5,740     | ) |  | 
|                                                                                                                                                                                                                     |  |  |  |  
|                                                                                                                                                                                                                     |  |  |  |   |            |  
|Basic Income (Loss) Per Share Data:                                                                                                                                                                                  |  |  |  |   |            |   |  |  |  |  |  |   |            |   |  | 
|Continuing operations (including gain on sale of real estate assets of $0.40 in 2006)                                                                                                                                |  |  |  | $ | 0.85       |   |  |  |  |  |  | $ | (0.27      | ) |  | 
|Discontinued operations                                                                                                                                                                                              |  |  |  |   | 0.57       |   |  |  |  |  |  |   | 0.11       |   |  | 
|Cumulative effect of change in accounting principle                                                                                                                                                                  |  |  |  |   | 0.01       |   |  |  |  |  |  |   |           |   |  | 
|                                                                                                                                                                                                                     |  |  |  |  
|Net income (loss) available to Common Stockholders                                                                                                                                                                   |  |  |  | $ | 1.43       |   |  |  |  |  |  | $ | (0.16      | ) |  | 
|                                                                                                                                                                                                                     |  |  |  |  
|                                                                                                                                                                                                                     |  |  |  |   |            |  
|Basic weighted average shares outstanding                                                                                                                                                                            |  |  |  |   | 32,246,947 |   |  |  |  |  |  |   | 35,915,389 |   |  | 
|                                                                                                                                                                                                                     |  |  |  |  
|                                                                                                                                                                                                                     |  |  |  |   |            |  
|Diluted Income (Loss) Per Share Data:                                                                                                                                                                                |  |  |  |   |            |   |  |  |  |  |  |   |            |   |  | 
|Continuing operations (including gain on sale of real estate assets of $0.40 in 2006)                                                                                                                                |  |  |  | $ | 0.85       |   |  |  |  |  |  | $ | (0.27      | ) |  | 
|Discontinued operations                                                                                                                                                                                              |  |  |  |   | 0.56       |   |  |  |  |  |  |   | 0.11       |   |  | 
|Cumulative effect of change in accounting principle                                                                                                                                                                  |  |  |  |   | 0.01       |   |  |  |  |  |  |   |           |   |  | 
|                                                                                                                                                                                                                     |  |  |  |  
|Net income (loss) available to Common Stockholders                                                                                                                                                                   |  |  |  | $ | 1.42       |   |  |  |  |  |  | $ | (0.16      | ) |  | 
|                                                                                                                                                                                                                     |  |  |  |  
|                                                                                                                                                                                                                     |  |  |  |   |            |  
|Diluted weighted average shares outstanding                                                                                                                                                                          |  |  |  |   | 35,424,077 |   |  |  |  |  |  |   | 35,915,389 |   |  | 
|                                                                                                                                                                                                                     |  |  |  |  
|                                                                                                                                                                                                                     |  |  |  |   |            |  
|Dividends declared per common share outstanding                                                                                                                                                                      |  |  |  | $ | 0.90       |   |  |  |  |  |  | $ | 1.05       |   |  | 
|                                                                                                                                                                                                                     |  |  |  |  
|                                                                                                                                                                                                                     |  |  |  |   |            |  
|Dividends declared per preferred share outstanding                                                                                                                                                                   |  |  |  | $ | 1.45       |   |  |  |  |  |  | $ | 1.45       |   |  | 
|                                                                                                                                                                                                                     |  |  |  |  

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, 2006

(in thousands)

(unaudited)



|                                                                     |  |              |  |                 |   |        |  |          |  |                          |   |                                              |   |       |  |  |  |  |       |  |  |  |  |  |   |   |  |  |  |  |  |   |         |   |  |  |  |  |  |   |          |   |  |  |  |  |  |   |         |   |  | 
|-------------------------------------------------------------------- |  | ------------ |  | --------------- | - | ------ |  | -------- |  | ------------------------ | - | -------------------------------------------- | - | ----- |  |  |  |  | ----- |  |  |  |  |  | - | - |  |  |  |  |  | - | ------- | - |  |  |  |  |  | - | -------- | - |  |  |  |  |  | - | ------- | - |  | 
|                                                                     |  | Common Stock |  | Preferred Stock |   |        |  |          |  |                         
|                                                                     |  |              |  |                 |   |        |  |          |  |                         
|                                                                     |  | Shares       |  | ParValue        |   | Shares |  | ParValue |  | AdditionalPaid-inCapital |   | Distributionsin excess ofaccumulatedearnings |   | Total
|                                                                     |  |              |  |                 |   |        |  |          |  |                          |   |                                              |   |      
|Balance at December 31, 2005                                         |  |              |  | 33,710          |   |        |  |          |  |                          | $ | 34                                           |   |       |  |  |  |  | 3,740 |  |  |  |  |  | $ | 4 |  |  |  |  |  | $ | 751,183 |   |  |  |  |  |  | $ | (303,577 | ) |  |  |  |  |  | $ | 447,644 |   |  | 
|Exercise of stock options                                            |  |              |  | 365             |   |        |  |          |  |                          |   |                                             |   |       |  |  |  |  |      |  |  |  |  |  |   |  |  |  |  |  |  |   | 5,987   |   |  |  |  |  |  |   |         |   |  |  |  |  |  |   | 5,987   |   |  | 
|Share-based compensation expense                                     |  |              |  |                |   |        |  |          |  |                          |   |                                             |   |       |  |  |  |  |      |  |  |  |  |  |   |  |  |  |  |  |  |   | 1,181   |   |  |  |  |  |  |   |         |   |  |  |  |  |  |   | 1,181   |   |  | 
|Issuance of restricted common stock                                  |  |              |  | 14              |   |        |  |          |  |                          |   |                                             |   |       |  |  |  |  |      |  |  |  |  |  |   |  |  |  |  |  |  |   |        |   |  |  |  |  |  |   |         |   |  |  |  |  |  |   |        |   |  | 
|Common stock repurchases                                             |  |              |  | (1,805          | ) |        |  |          |  |                          |   | (2                                           | ) |       |  |  |  |  |      |  |  |  |  |  |   |  |  |  |  |  |  |   | (34,330 | ) |  |  |  |  |  |   |         |   |  |  |  |  |  |   | (34,332 | ) |  | 
|Cancellation of stock grants                                         |  |              |  | (10             | ) |        |  |          |  |                          |   |                                             |   |       |  |  |  |  |      |  |  |  |  |  |   |  |  |  |  |  |  |   |        |   |  |  |  |  |  |   |         |   |  |  |  |  |  |   |        |   |  | 
|Reallocation of limited partners interests in Operating Partnership |  |              |  |                |   |        |  |          |  |                          |   |                                             |   |       |  |  |  |  |      |  |  |  |  |  |   |  |  |  |  |  |  |   | (1,776  | ) |  |  |  |  |  |   |         |   |  |  |  |  |  |   | (1,776  | ) |  | 
|Dividends declared on common and preferred stock                     |  |              |  |                |   |        |  |          |  |                          |   |                                             |   |       |  |  |  |  |      |  |  |  |  |  |   |  |  |  |  |  |  |   |        |   |  |  |  |  |  |   | (34,396  | ) |  |  |  |  |  |   | (34,396 | ) |  | 
|Cumulative effect of change in accounting principle                  |  |              |  |                |   |        |  |          |  |                          |   |                                             |   |       |  |  |  |  |      |  |  |  |  |  |   |  |  |  |  |  |  |   | (277    | ) |  |  |  |  |  |   |         |   |  |  |  |  |  |   | (277    | ) |  | 
|Net income                                                           |  |              |  |                |   |        |  |          |  |                          |   |                                             |   |       |  |  |  |  |      |  |  |  |  |  |   |  |  |  |  |  |  |   |        |   |  |  |  |  |  |   | 51,636   |   |  |  |  |  |  |   | 51,636  |   |  | 
|                                                                     |  |              |  |                 |   |        |  |          |  |                          |   |                                              |   |       |  |  |  |  |       |  |  |  |  |  |   |   |  |  |  |  |  |   |         |   |  |  |  |  |  |   |          |   |  |  |  |  |  |   |         |   |  | 
|Balance at September 30, 2006                                        |  |              |  | 32,274          |   |        |  |          |  |                          | $ | 32                                           |   |       |  |  |  |  | 3,740 |  |  |  |  |  | $ | 4 |  |  |  |  |  | $ | 721,968 |   |  |  |  |  |  | $ | (286,337 | ) |  |  |  |  |  | $ | 435,667 |   |  | 
|                                                                     |  |              |  |                 |   |        |  |          |  |                          |   |                                              |   |      

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, 2006 and 2005

(in thousands)

(unaudited)



|                                                                                            |  |  |  |   |          |   |  |  |  |  |  |   |          |   |  | 
|------------------------------------------------------------------------------------------- |  |  |  | - | -------- | - |  |  |  |  |  | - | -------- | - |  | 
|                                                                                            |  |  |  |   | 2006     |   |  |  |  |  |  |   | 2005     |   |  | 
|                                                                                            |  |  |  |  
|Cash flows from operating activities:                                                       |  |  |  |   |          |   |  |  |  |  |  |   |          |   |  | 
|Net income                                                                                  |  |  |  | $ | 51,636   |   |  |  |  |  |  | $ | 5,600    |   |  | 
|Adjustments to reconcile net income to net cash provided by operating activities:           |  |  |  |   |          |   |  |  |  |  |  |   |          |   |  | 
|Depreciation and amortization (including discontinued operations)                           |  |  |  |   | 42,269   |   |  |  |  |  |  |   | 44,341   |   |  | 
|Amortization of loan fees, included in interest expense (including discontinued operations) |  |  |  |   | 1,465    |   |  |  |  |  |  |   | 1,771    |   |  | 
|Accrued interest on mortgage loans receivable                                               |  |  |  |   | (1,133   | ) |  |  |  |  |  |   | (1,072   | ) |  | 
|Minority interest in income from operations                                                 |  |  |  |   | 4,270    |   |  |  |  |  |  |   | (475     | ) |  | 
|Equity in earnings of unconsolidated joint ventures                                         |  |  |  |   | (19,740  | ) |  |  |  |  |  |   | (308     | ) |  | 
|Distributions of earnings from unconsolidated joint ventures                                |  |  |  |   | 2,890    |   |  |  |  |  |  |   | 308      |   |  | 
|Gain on sales of real estate assets                                                         |  |  |  |   | (14,182  | ) |  |  |  |  |  |   |         |   |  | 
|Gain on sales of real estate assets (included in discontinued operations)                   |  |  |  |   | (19,653  | ) |  |  |  |  |  |   | (54,246  | ) |  | 
|Loss on early extinguishment of debt (including discontinued operations)                    |  |  |  |   | 875      |   |  |  |  |  |  |   | 3,265    |   |  | 
|Provision for impairment of real estate assets (including discontinued operations)          |  |  |  |   | 561      |   |  |  |  |  |  |   | 59,245   |   |  | 
|Gain related to increase in fair value of property                                          |  |  |  |   | (715     | ) |  |  |  |  |  |   | (1,331   | ) |  | 
|Cumulative effect of change in accounting principle                                         |  |  |  |   | (277     | ) |  |  |  |  |  |   |         |   |  | 
|Stock-based compensation                                                                    |  |  |  |   | 1,181    |   |  |  |  |  |  |   | 960      |   |  | 
|Increase in other assets                                                                    |  |  |  |   | (7,982   | ) |  |  |  |  |  |   | (17,606  | ) |  | 
|Increase (decrease) in other liabilities                                                    |  |  |  |   | (5,820   | ) |  |  |  |  |  |   | 3,764    |   |  | 
|                                                                                            |  |  |  |  
|Net cash provided by operating activities                                                   |  |  |  |   | 35,645   |   |  |  |  |  |  |   | 44,216   |   |  | 
|                                                                                            |  |  |  |  
|                                                                                            |  |  |  |   |          |  
|Cash flows from investing activities:                                                       |  |  |  |   |          |   |  |  |  |  |  |   |          |   |  | 
|Net proceeds from sales of real estate assets                                               |  |  |  |   | 171,562  |   |  |  |  |  |  |   | 192,992  |   |  | 
|Acquisitions of rental properties                                                           |  |  |  |   | (48,269  | ) |  |  |  |  |  |   | (157,902 | ) |  | 
|Payments for capital and tenant improvements                                                |  |  |  |   | (12,312  | ) |  |  |  |  |  |   | (20,148  | ) |  | 
|Investments in land and development                                                         |  |  |  |   | (11,830  | ) |  |  |  |  |  |   | (5,834   | ) |  | 
|Net investments in unconsolidated joint ventures                                            |  |  |  |   | (7,772   | ) |  |  |  |  |  |   |         |   |  | 
|Distributions from unconsolidated joint ventures                                            |  |  |  |   | 24,989   |   |  |  |  |  |  |   | 125      |   |  | 
|Principal payments from mortgage loans receivable                                           |  |  |  |   | 1,309    |   |  |  |  |  |  |   | 10,081   |   |  | 
|Advances on note receivable                                                                 |  |  |  |   |         |   |  |  |  |  |  |   | (3,500   | ) |  | 
|                                                                                            |  |  |  |  
|Net cash provided by investing activities                                                   |  |  |  |   | 117,677  |   |  |  |  |  |  |   | 15,814   |   |  | 
|                                                                                            |  |  |  |  
|                                                                                            |  |  |  |   |          |  
|Cash flows from financing activities:                                                       |  |  |  |   |          |   |  |  |  |  |  |   |          |   |  | 
|Borrowings from mortgage loans                                                              |  |  |  |   | 129,628  |   |  |  |  |  |  |   | 160,000  |   |  | 
|Repayment of mortgage loans                                                                 |  |  |  |   | (205,382 | ) |  |  |  |  |  |   | (113,867 | ) |  | 
|Borrowings from line of credit                                                              |  |  |  |   | 122,599  |   |  |  |  |  |  |   | 174,820  |   |  | 
|Repayment of line of credit                                                                 |  |  |  |   | (129,802 | ) |  |  |  |  |  |   | (149,785 | ) |  | 
|Payment of deferred financing costs                                                         |  |  |  |   | (1,186   | ) |  |  |  |  |  |   | (2,991   | ) |  | 
|Prepayment penalties on loan payoffs                                                        |  |  |  |   | (561     | ) |  |  |  |  |  |   | (2,853   | ) |  | 
|Contributions from minority interest holders                                                |  |  |  |   | 100      |   |  |  |  |  |  |   | 170      |   |  | 
|Distributions to minority interest holders                                                  |  |  |  |   | (2,960   | ) |  |  |  |  |  |   | (3,149   | ) |  | 
|Dividends paid to common and preferred stockholders                                         |  |  |  |   | (37,319  | ) |  |  |  |  |  |   | (43,342  | ) |  | 
|Proceeds from issuance of common stock, net of offering costs                               |  |  |  |   |         |   |  |  |  |  |  |   | (175     | ) |  | 
|Preferred stock redemption                                                                  |  |  |  |   |         |   |  |  |  |  |  |   | (77,748  | ) |  | 
|Dividends paid on redeemed preferred stock                                                  |  |  |  |   |         |   |  |  |  |  |  |   | (2,102   | ) |  | 
|Premium on preferred stock redemption                                                       |  |  |  |   |         |   |  |  |  |  |  |   | (1,857   | ) |  | 
|Repurchases of common stock                                                                 |  |  |  |   | (34,332  | ) |  |  |  |  |  |   |         |   |  | 
|Exercise of stock options                                                                   |  |  |  |   | 5,987    |   |  |  |  |  |  |   | 2,483    |   |  | 
|                                                                                            |  |  |  |  
|Net cash used for financing activities                                                      |  |  |  |   | (153,228 | ) |  |  |  |  |  |   | (60,396  | ) |  | 
|                                                                                            |  |  |  |  

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, 2006 and 2005

(in thousands)

(unaudited)



|                                                                                                         |  |      |  |   |        |      |  |  |  |  |  |  |  |   |        |   |  | 
|-------------------------------------------------------------------------------------------------------- |  | ---- |  | - | ------ | ---- |  |  |  |  |  |  |  | - | ------ | - |  | 
|                                                                                                         |  | 2006 |  |   |        | 2005
|                                                                                                         |  |      |  |   |        |     
|Net increase (decrease) in cash and cash equivalents                                                     |  |      |  | $ | 94     |      |  |  |  |  |  |  |  | $ | (366   | ) |  | 
|Cash and cash equivalents at beginning of period after adjustment for properties held for sale           |  |      |  |   | 3,661  |      |  |  |  |  |  |  |  |   | 6,003  |   |  | 
|Cash and cash equivalents at properties held for sale                                                    |  |      |  |   | 963    |      |  |  |  |  |  |  |  |   | (312   | ) |  | 
|                                                                                                         |  |      |  |   |        |      |  |  |  |  |  |  |  |   |        |   |  | 
|Cash and cash equivalents at end of period                                                               |  |      |  | $ | 4,718  |      |  |  |  |  |  |  |  | $ | 5,325  |   |  | 
|                                                                                                         |  |      |  |   |        |     
|                                                                                                         |  |      |  |   |        |      | 
|Supplemental disclosure of cash flow information:                                                        |  |      |  |   |        |      |  |  |  |  |  |  |  |   |        |   |  | 
|Cash paid for interest (net of capitalized interest of $1,867 and $3,387 in 2006 and 2005, respectively) |  |      |  | $ | 31,717 |      |  |  |  |  |  |  |  | $ | 27,661 |   |  | 
|                                                                                                         |  |      |  |   |        |     
|                                                                                                         |  |      |  |   |        |      | 
|Supplemental disclosure of non-cash investing and financing activities:                                  |  |      |  |   |        |      |  |  |  |  |  |  |  |   |        |   |  | 
|Assumption of mortgage loan in acquisition of real estate                                                |  |      |  | $ |       |      |  |  |  |  |  |  |  | $ | 74,114 |   |  | 
|                                                                                                         |  |      |  |   |        |     
|Mortgage loan receivable related to disposition of investment in land and development                    |  |      |  | $ |       |      |  |  |  |  |  |  |  | $ | (7,000 | ) |  | 
|                                                                                                         |  |      |  |   |        |     
|Write-off of original issuance costs on preferred stock redemption                                       |  |      |  | $ |       |      |  |  |  |  |  |  |  | $ | 3,452  |   |  | 
|                                                                                                         |  |      |  |   |        |     
|Reallocation of limited partners interests in Operating Partnership                                     |  |      |  | $ | (1,776 | )    |  |  |  |  |  |  |  | $ | 1,376  |   |  | 
|                                                                                                         |  |      |  |   |        |     
|Common and preferred stock dividends declared but not yet paid                                           |  |      |  | $ | 10,687 |      |  |  |  |  |  |  |  | $ | 14,493 |   |  | 
|                                                                                                         |  |      |  |   |        |     

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

September 30, 2006 and 2005

(unaudited)



|NOTE 1. | ORGANIZATION
|------- | ------------

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

As of September 30, 2006, 32,273,566 shares of Common Stock
and 3,740,277 shares of Preferred Stock were issued and outstanding. Common and preferred shares authorized are 188,000,000 and 12,000,000, respectively. The issuance of 2,996,715 shares of Common Stock issuable upon redemption of 2,996,715
partnership units in the Operating Partnership (as defined below), would result in 35,270,281 shares of Common Stock outstanding as of September 30, 2006. As of May 8, 2006, the Companys Board of Directors authorized the repurchase
of up to 14,710,700 shares of Common Stock and 3,450,000 shares of Preferred Stock. As of September 30, 2006, 10,726,316 shares of Common Stock and 1,543,700 shares of Preferred Stock have been repurchased at a total cost of approximately
$213.0 million.

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

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

The Company, through its majority owned subsidiaries, is engaged primarily in the ownership, operation,
management, leasing, acquisition, expansion and development of various income-producing properties. The Companys principal consolidated subsidiary, in which it holds a 1% general partner interest and a 90.54% limited partner interest at
September 30, 2006, is Glenborough Properties, L.P. (the Operating Partnership). Each of the holders of the remaining interests in the Operating Partnership (OP Units) has the option to redeem its OP Units and to
receive, at the option of the Company, in exchange for each OP Unit, either (i) one share of common stock of the Company, or (ii) cash equal to the fair market value of one share of common stock of the Company. As of September 30,
2006, the Operating Partnership, directly and through the subsidiaries in which it and the Company own 100% of the ownership interests, controls a portfolio of 44 real estate projects.

NOTE 2.           PROPOSED MERGER WITH A SUBSIDIARY OF CERTAIN FUNDS MANAGED BY MORGAN STANLEY REAL ESTATE

On August 20, 2006, we entered into an Agreement and Plan of Merger (the Merger Agreement) by and among us, Glenborough Properties, L.P.
(the Operating Partnership), Gridiron Holdings LLC and Gridiron Acquisition LLC (Merger Sub) pursuant to which we will be merged with and into Merger Sub, with Merger Sub continuing as the surviving entity (the
Merger).

Pursuant to the terms of the Merger Agreement, each share of our common stock (Common Stock) issued and
outstanding immediately prior to the effective time of the Merger will be converted into the right to receive (i) $26.00 in cash, plus (ii) an amount in cash equal to $0.275, multiplied by the quotient obtained by dividing (A) the
number of days elapsed since the last day of the last quarter for which full quarterly dividends were declared and





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GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



paid on the shares of Common Stock to the Closing Date (as such term is defined by the Merger Agreement), by (B) the total number of days in the fiscal quarter during which the Closing Date
occurs, without interest.

Immediately prior to the effective time of the Merger, each outstanding option to purchase Common Stock will be
accelerated in full such that each such outstanding option will be fully vested and exercisable. At the effective time of the Merger, each outstanding option (taking into account the vesting acceleration described in the previous sentence) will be
converted into the right to receive $26.00 in cash minus the exercise price required to be paid to acquire the underlying share of Common Stock. If the exercise price per share of Common Stock with respect to an option is equal to or greater than
$26.00, such option shall be canceled without any cash payment.

Immediately prior to the effective time of the Merger, each outstanding
restricted share award will receive an amount in cash, equal to the product of (i) the aggregate number of shares of out Common Stock underlying such restricted share award, multiplied by (ii) (x) $26.00 in cash, plus (y) an
amount in cash equal to $0.275, multiplied by the quotient obtained by dividing (A) the number of days elapsed since the last day of the last quarter for which full quarterly dividends were declared and paid on the shares of Common Stock to the
Closing Date (as such term is defined by the Merger Agreement), by (B) the total number of days in the fiscal quarter during which the Closing Date occurs, without interest.

Immediately prior to the effective time of the Merger, each outstanding performance share unit will receive an amount in cash equal to the product of (i) the aggregate number of shares of
our common stock underlying such performance share unit, multiplied by (ii) $26.00.

In addition, in connection with the Merger, each
share of 73/4% Series A Convertible Preferred Stock of the Company (the Series A Preferred Stock)
issued and outstanding immediately prior to the effective time of the Merger will be redeemed at the redemption price per share specified in our charter documents plus an amount in cash to be paid by us equal to $0.484375 multiplied by the quotient
obtained by dividing (i) the number of days between the last day of the last fiscal quarter for which full quarterly dividends on the Series A Preferred Stock have been declared and paid and the Closing Date (including the Closing Date) by
(ii) the total number of days in the fiscal quarter during which the Closing Date occurs, without interest in accordance with our charter documents.

Holders of limited partnership units in the Operating Partnership will receive $26.00 per unit in cash or, at their election, will have the right to receive either common units in the surviving operating partnership
similar in their terms to the existing common units or, alternatively, to receive a certain number of preferred units in the surviving operating partnership. Preference units in the surviving operating partnership will have the following terms:



| |  |  | each preferred unit will have a stated liquidation preference of $25.00 and will be entitled to distributions of legally
| | - |  | ------------------------------------------------------------------------------------------------------------------------

available assets by the surviving operating partnership when, as and if made by the surviving operating partnership,

in preference to all holders of other classes of partnership interests in the surviving operating partnership at the

closing and senior or pari passu with any classes of partnership units issued after the merger effective time,

equal to 61/4% per annum on the stated liquidation preference.

| |  |  | the preferred units will be redeemable for cash, or for an in-kind distribution of the properties of the operating
| | - |  | ------------------------------------------------------------------------------------------------------------------

partnership, in an amount equal to the liquidation preference plus any accrued but unpaid distributions at the

option of the holder or, in certain circumstances related to a redemption for an in-kind distribution of the

properties of the operating partnership, for an amount equal to 97.5% of the liquidation preference.

| |  |  | the preferred units may be redeemable at the option of the operating partnership beginning no earlier than the
| | - |  | --------------------------------------------------------------------------------------------------------------

tenth anniversary of the merger effective times; and

| |  |  | holders of the preferred units will generally have no voting or other consent rights in the surviving operating
| | - |  | ---------------------------------------------------------------------------------------------------------------

partnership other than the right to vote on (1) any material adverse change to their rights, (2) the creation or

reclassification of any class or series of preferred partnership units which would rank senior to the preferred units

with respect to distributions or rights upon liquidation or the creation of any class or series of securities

convertible into preferred partnership



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GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



units ranking senior to the preferred units with respect to distributions or rights upon liquidation and (3) in certain

circumstances, mergers or reorganizations involving REIT Merger Sub or the surviving operating partnership.

The Merger Agreement contains restrictions on our ability to solicit or engage in discussions or negotiations with a third party regarding specified
transactions involving us or our subsidiaries. Notwithstanding these restrictions, under certain circumstances and subject to certain conditions, our board of directors may respond to an unsolicited written acquisition proposal or terminate the
Merger Agreement and enter into an acquisition agreement with respect to a superior proposal.

The closing of the Merger is subject to
customary closing conditions, including, but not limited to, the adoption of the Merger Agreement and the approval of the Merger by a majority of the holders of our Common Stock. The Merger, the Merger Agreement and the transactions contemplated
thereby have been approved by our board of directors, which has also recommended that the holders of the Common Stock approve both the Merger Agreement and the Merger.

Pending the completion of the Merger, we have agreed to carry on our business in the usual, regular and ordinary course, consistent with past practice, subject to certain exceptions in the Merger Agreement.



|NOTE 3. | 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, 2006 and December 31, 2005, and the consolidated results of operations of the Company and its subsidiaries for the three and nine months ended September 30, 2006 and
2005, and cash flows of the Company for the nine months ended September 30, 2006 and 2005. All significant intercompany transactions, receivables and payables have been eliminated in consolidation.

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

Reclassifications

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

Use of Estimates

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

Variable Interest Entities

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



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GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



7 and 9 have been deemed to be VIEs under the provisions of FIN 46 Revised. There are other alliances which are VIEs, but the Company is not the primary beneficiary of them.

Stock-Based Compensation

The Company
has an employee stock incentive plan and issues stock options and stock grants (restricted shares of common stock) to employees, officers and directors. Prior to January 1, 2006, the Company accounted for the stock options and stock grants in
the plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, as permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. On December 16, 2004, the FASB issued Statement No. 123(R),Share-Based Payment (SFAS 123(R)). SFAS 123(R) supersedes SFAS 123 and requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements and measured based on the fair value of the equity or liability instruments issued. The Company adopted the fair value recognition provisions of SFAS 123(R) using the modified prospective transition
method. Under that transition method, no restatement is necessary to compensation cost recognized in prior periods. SFAS 123(R) requires measurement of compensation cost for the stock grants at fair value on date of grant and recognition of
compensation over the service period for awards expected to vest.

See Note 18 for further discussion.

Rental Properties

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

Purchase accounting is applied to the assets and liabilities related to real estate properties acquired by the Company subsequent to June 30, 2001, the effective date of Statement of Financial Accounting Standards No. 141,
Business Combinations, whereby the fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the
value of above-market and below-market leases, the value of at-market in-place leases and the value of tenant relationships, based in each case on their fair values.

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

In allocating the fair value of the identified intangible
assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference
between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) managements estimate of fair market lease rates for the corresponding in-



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GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values (included in rental properties, gross in the accompanying
consolidated balance sheet) are amortized as a reduction of rental revenue over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values (included in other liabilities in the accompanying consolidated
balance sheet) are amortized as an increase to rental revenue over the initial term and any fixed rate renewal periods in the respective leases.

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

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



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

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

Investments in Land and Development

The Company, through mezzanine loans and equity contributions, invests in various development alliances with projects currently under development. The
interest on advances and other direct project costs incurred by the Company are capitalized to the investments during the period in which the projects are under development. See Note 7 for further discussion.

Investments in Unconsolidated Joint Ventures

The Companys investments in joint ventures are accounted for using the equity method. The Company does not hold a controlling interest in any joint venture. These investments are recorded initially at cost, net of any deferred gains
and subsequently adjusted for equity in earnings and cash contributions and distributions. To the extent the Companys cost basis is different than the basis reflected at the joint venture level, the basis difference is amortized over the life
of the underlying asset which created the basis difference and is included in the Companys share of equity in earnings of unconsolidated joint ventures. See Note 8 for further discussion.

Mortgage Loans Receivable

The
Company monitors the recoverability of its mortgage loans receivable through ongoing contact with the borrowers to ensure timely receipt of interest and principal payments, and where appropriate, obtains financial information concerning the
operation of the properties. Interest on mortgage loans receivable is recognized as revenue as it accrues during the period the loan is outstanding. Mortgage loans receivable will be evaluated for impairment at least quarterly or if it becomes
evident that the borrower is unable to meet its debt service obligations in a timely manner and cannot satisfy its payments using sources other than the operations of the property securing the loan. If it is concluded that such circumstances exist,
then such loan will be considered to be impaired and its



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GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



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 9 for further discussion.

Cash and Cash Equivalents

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

Restricted Cash

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

Fair Value of Financial Instruments

For certain financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities (included in other liabilities), and the unsecured bank line of credit, the recorded amounts approximate fair value due to the relatively short maturity period. Based on
interest rates that the Company would be able to obtain for mortgage loans to third parties with similar terms, the carrying value of the Companys mortgage loans receivable approximates fair value. Based on interest rates available to the
Company for debt with comparable maturities and other terms, the estimated fair value of the Companys secured mortgage loans as of September 30, 2006 and December 31, 2005, would be approximately $620,249 and $704,035 (in thousands),
respectively.

Leasing and Financing Costs

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

Minority Interest

Minority interest
represents the 8.46% and 7.74% limited partner interests in the Operating Partnership not held by the Company at September 30, 2006 and December 31, 2005, respectively. The Company periodically adjusts the carrying value of minority
interest to reflect its share of the book value of the Operating Partnership. Such adjustments are recorded to stockholders equity as a reallocation of limited partnership interest in the Operating Partnership.

Revenues

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

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

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

Fee and reimbursement revenue consists of fees for property management and asset
management, and transaction fees for acquisition, disposition, refinancing, leasing and construction supervision services from related parties and third parties. Such fees are recognized when earned and are considered non-refundable.



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GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



Sales of Real Estate

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

Income Taxes

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

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

Recently Issued Accounting Literature

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

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (SAB
108), which becomes effective beginning on January 1, 2007. SAB 108 provides guidance on the consideration of the effects of prior period misstatements in quantifying current year misstatements for the purpose of a materiality assessment.
SAB 108 provides for the quantification of the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. If a misstatement is material to the
current year financial statements, the prior year financial statements should also be corrected, even though such revision was, and continues to be, immaterial to the prior year financial statements.



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GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. Such correction should be made in the current period filings. The
Company is currently evaluating the impact of adopting SAB 108.



|NOTE 4. | RENTAL PROPERTIES
|------- | -----------------

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



|                    |  |                          |  |                          |         |            |  |                         |  |                  |   |           |  |  |  |  |  |   |           |  |  |  |  |  |   |           |   |  |  |  |  |  |   |           |   |  | 
|------------------- |  | ------------------------ |  | ------------------------ | ------- | ---------- |  | ----------------------- |  | ---------------- | - | --------- |  |  |  |  |  | - | --------- |  |  |  |  |  | - | --------- | - |  |  |  |  |  | - | --------- | - |  | 
|                    |  | As of September 30, 2006
|                    |  |                         
|                    |  | Land                     |  | Buildings& Improve-ments |         | Total Cost |  | AccumulatedDepreciation |  | NetRecordedValue
|                    |  |                         
|Washington D.C.     |  |                          |  | $                        | 45,968  |            |  |                         |  |                  | $ | 303,184   |  |  |  |  |  | $ | 349,152   |  |  |  |  |  | $ | (33,622   | ) |  |  |  |  |  | $ | 315,530   | * |  | 
|Southern California |  |                          |  |                          | 45,055  |            |  |                         |  |                  |   | 215,557   |  |  |  |  |  |   | 260,612   |  |  |  |  |  |   | (36,140   | ) |  |  |  |  |  |   | 224,472   | * |  | 
|Northern New Jersey |  |                          |  |                          | 28,616  |            |  |                         |  |                  |   | 137,131   |  |  |  |  |  |   | 165,747   |  |  |  |  |  |   | (34,903   | ) |  |  |  |  |  |   | 130,844   | * |  | 
|Boston              |  |                          |  |                          | 21,067  |            |  |                         |  |                  |   | 159,213   |  |  |  |  |  |   | 180,280   |  |  |  |  |  |   | (38,908   | ) |  |  |  |  |  |   | 141,372   | * |  | 
|San Francisco       |  |                          |  |                          | 47,429  |            |  |                         |  |                  |   | 153,917   |  |  |  |  |  |   | 201,346   |  |  |  |  |  |   | (23,667   | ) |  |  |  |  |  |   | 177,679   | * |  | 
|Tampa/Orlando       |  |                          |  |                          | 7,805   |            |  |                         |  |                  |   | 41,626    |  |  |  |  |  |   | 49,431    |  |  |  |  |  |   | (11,994   | ) |  |  |  |  |  |   | 37,437    | * |  | 
|Denver              |  |                          |  |                          | 4,887   |            |  |                         |  |                  |   | 41,064    |  |  |  |  |  |   | 45,951    |  |  |  |  |  |   | (8,228    | ) |  |  |  |  |  |   | 37,723    | * |  | 
|Las Vegas           |  |                          |  |                          | 4,628   |            |  |                         |  |                  |   | 22,550    |  |  |  |  |  |   | 27,178    |  |  |  |  |  |   | (7,616    | ) |  |  |  |  |  |   | 19,562    |   |  | 
|All others          |  |                          |  |                          | 2,741   |            |  |                         |  |                  |   | 22,164    |  |  |  |  |  |   | 24,905    |  |  |  |  |  |   | (10,417   | ) |  |  |  |  |  |   | 14,488    |   |  | 
|                    |  |                          |  |                          |         |            |  |                         |  |                  |   |           | 
|                    |  |                          |  |                          |         |            |  |                         |  |                  |   |           |  |  | 
|Total               |  |                          |  | $                        | 208,196 |            |  |                         |  |                  | $ | 1,096,406 |  |  |  |  |  | $ | 1,304,602 |  |  |  |  |  | $ | (205,495) |   |  |  |  |  |  | $ | 1,099,107 |   |  | 
|                    |  |                          |  |                          |         |            |  |                         |  |                  |   |           | 

* Includes acquisition costs allocated to at-market and above-market rate in-place leases, net of
accumulated amortization, of $11,128 in Washington D.C., $3,168 in Southern California, $1,013 in Northern New Jersey, $2,290 in Boston, $4078 in San Francisco, $384 in Tampa/Orlando, and $769 in Denver.



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

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



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



|NOTE 5. | ACQUISITION OF RENTAL PROPERTY
|------- | ------------------------------

On April 28, 2006, the Company acquired 3330 Cahuenga Boulevard, a 103,781 square foot, five-story multi-tenant office building located in Los Angeles. The total acquisition cost of approximately $30.6 million was funded with a new
mortgage loan and a draw on the Companys unsecured bank line of credit (as defined in Note 11). The acquisition was structured as a reverse 1031 tax-deferred exchange such that the net proceeds received from the sale of One Pacific
were used to pay down the mortgage loan. SFAS No. 141 requires the acquirer to allocate a portion of the acquisition costs to intangible assets and liabilities in applying the purchase method of accounting. In accordance with SFAS No. 141,
intangible assets related to at-market and above-market rate in-place leases recognized in this transaction amounted to approximately $1.9 million. Liabilities related to below-market rate in-place leases amounted to approximately $571,000. The
Company is amortizing the intangible value of the leases over 3 years, which is the weighted average remaining life of the existing leases.

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

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



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



|NOTE 6. | DISPOSITIONS OF RENTAL PROPERTIES
|------- | ---------------------------------

During the nine months ended September 30, 2006, the Company contributed two properties valued at $37.8 million, to an unconsolidated joint venture with an investment advisor. The Company recognized a gain of $14.2 million on the
contribution related to the outside partners purchase of its interest in the contributed properties. Additionally, the Company sold five properties for an aggregate sales price of approximately $86.0 million and recognized an aggregate gain on
sale of approximately $19.7 million on four of the properties, Capitol Center, Thousand Oaks, Vreeland Business Center and One Pacific Place. In addition, due to higher than anticipated costs to sell the Osram Building, an additional provision for
impairment of real estate assets of $561,000 was recognized. The two properties contributed to the joint venture and the five properties sold were:



| |  |                             |  |              |  |                |  |  |  |                 |  |  |  | 
| |  | --------------------------- |  | ------------ |  | -------------- |  |  |  | --------------- |  |  |  | 
| |  | Property                    |  | Market       |  | Square Footage |  |  |  | Property Status |  |  |  | 
| |  | Capitol Center              |  | Des Moines   |  | 165,127 sf     |  |  |  | Sold            |  |  |  | 
| |  | Osram Building              |  | Indianapolis |  | 45,265 sf      |  |  |  | Sold            |  |  |  | 
| |  | Thousand Oaks               |  | Memphis      |  | 422,363 sf     |  |  |  | Sold            |  |  |  | 
| |  | Vreeland Business Center    |  | New Jersey   |  | 133,090 sf     |  |  |  | Sold            |  |  |  | 
| |  | One Pacific Place           |  | Omaha        |  | 128,392 sf     |  |  |  | Sold            |  |  |  | 
| |  | Montgomery Executive Center |  | Gaithersburg |  | 119,679 sf     |  |  |  | Joint Venture   |  |  |  | 
| |  | Gatehall I                  |  | Parsippany   |  | 113,469 sf     |  |  |  | Joint Venture   |  |  |  | 

In accordance with SFAS 144 Accounting for the Impairment or Disposal of Long Lived
Assets, the gain on sale and the related operating results from the five sold properties are classified as discontinued operations in the accompanying consolidated statements of operations for all periods presented. The properties that were
contributed to a joint venture in which the Company retains an interest were not accounted for as discontinued operations due to



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



the Companys significant continuing involvement in the operations and cash flows of the properties through its joint venture interest. In addition, real estate properties classified as held
for sale are presented separately on the consolidated balance sheet with the related results from operations classified as discontinued operations in the accompanying consolidated statements of operations for all periods presented.

There were no properties classified as held for sale at September 30, 2006. As of December 31, 2005, there were five assets classified as held
for sale.

The major classes of assets and liabilities of Capitol Center, Osram Building, Thousand Oaks, Vreeland Business Center and
Marina Shores (see Note 7), classified as held for sale at December 31, 2005 are as follows (dollars in thousands):



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

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



|                                                         |  |                                 |  |                                |        |      |  |      |  |  |   |        |  |  |  |  |  |   |        |   |  |  |  |  |  |   |         |   |  | 
|-------------------------------------------------------- |  | ------------------------------- |  | ------------------------------ | ------ | ---- |  | ---- |  |  | - | ------ |  |  |  |  |  | - | ------ | - |  |  |  |  |  | - | ------- | - |  | 
|                                                         |  | Three months endedSeptember 30, |  | Nine months endedSeptember 30,
|                                                         |  |                                 |  |                               
|                                                         |  | 2006                            |  | 2005                           |        | 2006 |  | 2005
|                                                         |  |                                 |  |                                |        |      |  |     
|                                                         |  |                                 |  |                                |        |      |  |      |  |  |   |       
|Total rental revenue                                     |  |                                 |  | $                              | 576    |      |  |      |  |  | $ | 9,116  |  |  |  |  |  | $ | 2,582  |   |  |  |  |  |  | $ | 30,207  |   |  | 
|                                                         |  |                                 |  |                                |        |      |  |     
|                                                         |  |                                 |  |                                |        |      |  |      |  |  |   |       
|Property operating expenses                              |  |                                 |  |                                | 181    |      |  |      |  |  |   | 4,069  |  |  |  |  |  |   | 1,071  |   |  |  |  |  |  |   | 13,301  |   |  | 
|General and administrative                               |  |                                 |  |                                |       |      |  |      |  |  |   | 1      |  |  |  |  |  |   |       |   |  |  |  |  |  |   | 1       |   |  | 
|Depreciation and amortization                            |  |                                 |  |                                |       |      |  |      |  |  |   | 1,277  |  |  |  |  |  |   | 679    |   |  |  |  |  |  |   | 7,715   |   |  | 
|Provision for impairment of real estate assets           |  |                                 |  |                                |       |      |  |      |  |  |   | 946    |  |  |  |  |  |   | 561    |   |  |  |  |  |  |   | 54,085  |   |  | 
|Interest expense                                         |  |                                 |  |                                | 104    |      |  |      |  |  |   | 1,289  |  |  |  |  |  |   | 696    |   |  |  |  |  |  |   | 3,943   |   |  | 
|Loss on early extinguishment of debt                     |  |                                 |  |                                |       |      |  |      |  |  |   | 65     |  |  |  |  |  |   |       |   |  |  |  |  |  |   | 2,577   |   |  | 
|                                                         |  |                                 |  |                                |        |      |  |     
|                                                         |  |                                 |  |                                |        |      |  |      |  |  |   |       
|Total expenses                                           |  |                                 |  |                                | 285    |      |  |      |  |  |   | 7,647  |  |  |  |  |  |   | 3,007  |   |  |  |  |  |  |   | 81,622  |   |  | 
|                                                         |  |                                 |  |                                |        |      |  |     
|                                                         |  |                                 |  |                                |        |      |  |      |  |  |   |       
|Interest and other income                                |  |                                 |  |                                |       |      |  |      |  |  |   |       |  |  |  |  |  |   | 6      |   |  |  |  |  |  |   |        |   |  | 
|                                                         |  |                                 |  |                                |        |      |  |      |  |  |   |       
|Income (loss) before gain on sales of real estate assets |  |                                 |  |                                | 291    |      |  |      |  |  |   | 1,469  |  |  |  |  |  |   | (419   | ) |  |  |  |  |  |   | (51,415 | ) |  | 
|Gain on sales of real estate assets                      |  |                                 |  |                                | 12,697 |      |  |      |  |  |   | 27,617 |  |  |  |  |  |   | 19,653 |   |  |  |  |  |  |   | 54,246  |   |  | 
|Gain related to increase in fair value of property       |  |                                 |  |                                |       |      |  |      |  |  |   | 1,331  |  |  |  |  |  |   | 715    |   |  |  |  |  |  |   | 1,331   |   |  | 
|                                                         |  |                                 |  |                                |        |      |  |     
|                                                         |  |                                 |  |                                |        |      |  |      |  |  |   |       
|Discontinued operations                                  |  |                                 |  | $                              | 12,988 |      |  |      |  |  | $ | 30,417 |  |  |  |  |  | $ | 19,949 |   |  |  |  |  |  | $ | 4,162   |   |  | 
|                                                         |  |                                 |  |                                |        |      |  |     





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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



|NOTE 7. | INVESTMENTS IN LAND AND DEVELOPMENT
|------- | -----------------------------------

The Companys investments in land and development increased from $51,750,000 at December 31, 2005, to $59,831,000 at September 30, 2006. This increase is primarily due to the acquisition of Courtyard
II, a 39,000 square foot vacant office building for a total purchase price of $7.8 million located in San Diego, California. The Company plans to upgrade the property and to convert it to for-sale office condominiums, subject to certain approvals.
The increase was partially offset by the sales of approximately 27.3 acres of the land at Gateway Park located in Denver, Colorado in which the Company had a partial interest.

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

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



|                                |  |                             |  |                                                                                                                |  |                          |  |                       |  |                  |  |                                       |  |                                      |  |     |         |  |  |  |  |  |        |         |  |  |  |  |  |        |     |  | 
|------------------------------- |  | --------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | ------------------------ |  | --------------------- |  | ---------------- |  | ------------------------------------- |  | ------------------------------------ |  | --- | ------- |  |  |  |  |  | ------ | ------- |  |  |  |  |  | ------ | --- |  | 
|                               
|Market                          |  | Properties                  |  | Description                                                                                                    |  | City                     |  | ProposedSquareFootage |  | EconomicInterest |  | InvestmentBalance atSeptember 30,2006 |  | InvestmentBalance atDecember 31,2005
|                               
|                                |  |                             |  |                                                                                                                |  |                          |  |                       |  |                  |  |                                       |  |                                      | 
|Boston                          |  | Marlborough Corporate Place |  | Three office buildings to be constructed as the eighth, ninth, and tenth phases of Marlborough Corporate Place |  | Marlborough              |  |                       |  | 235,000          |  |                                       |  |                                      |  | 100 | %       |  |  |  |  |  | $5,283 |         |  |  |  |  |  | $5,248 |     |  | 
|                                |  |                             |  |                                                                                                                |  |                          |  |                       |  |                  |  |                                      
|                                |  | Subtotal - Boston           |  |                                                                                                                |  |                          |  |                       |  | 235,000          |  |                                       |  |                                      |  |     |         |  |  |  |  |  | 5,283  |         |  |  |  |  |  | 5,248  |     |  | 
|                                |  |                             |  |                                                                                                                |  |                          |  |                       |  |                  |  |                                       |  |                                      | 
|Denver                          |  | Gateway Park                |  | 1,200 acre mixed-use park near Denver International Airport; approximately 395 acres undeveloped               |  | Denver                   |  |                       |  | n/a              |  |                                       |  |                                      |  | 50  | %(1)    |  |  |  |  |  | 35,988 | (1)     |  |  |  |  |  | 35,994 | (1) |  | 
|                                |  |                             |  |                                                                                                                |  |                          |  |                       |  |                  |  |                                       |  |                                      | 
|                                |  | Lima Street                 |  | 19.5 acres of undeveloped land in Englewood, Colorado, zoned for office use                                    |  | Denver                   |  |                       |  | 150,000          |  |                                       |  |                                      |  | 100 | %       |  |  |  |  |  | 5,179  |         |  |  |  |  |  | 4,750  |     |  | 
|                                |  |                             |  |                                                                                                                |  |                          |  |                       |  |                  |  |                                      
|                                |  | Subtotal - Denver           |  |                                                                                                                |  |                          |  |                       |  | 150,000          |  |                                       |  |                                      |  |     |         |  |  |  |  |  | 41,167 |         |  |  |  |  |  | 40,744 |     |  | 
|                                |  |                             |  |                                                                                                                |  |                          |  |                       |  |                  |  |                                       |  |                                      | 
|Southern     California         |  | Courtyard II                |  | Vacant office building in San Diego, California, to be converted to for-sale office condominiums               |  | San Diego                |  |                       |  | 39,000           |  |                                       |  |                                      |  | 100 | %       |  |  |  |  |  | 7,810  |         |  |  |  |  |  |       |     |  | 
|                                |  |                             |  |                                                                                                                |  |                          |  |                       |  |                  |  |                                      
|                                |  | Subtotal  San Diego        |  |                                                                                                                |  |                          |  |                       |  | 39,000           |  |                                       |  |                                      |  |     |         |  |  |  |  |  | 7,810  |         |  |  |  |  |  |       |     |  | 
|                                |  |                             |  |                                                                                                                |  |                          |  |                       |  |                  |  |                                       |  |                                      | 
|                                |  |                             |  | Other land held for development                                                                                |  | New Jersey/San Francisco |  |                       |  |                  |  |                                       |  |                                      |  |     |         |  |  |  |  |  | 5,571  |         |  |  |  |  |  | 5,758  |     |  | 
|                               
|                                |  |                             |  |                                                                                                                |  |                          |  |                       |  |                  |  |                                      
|TOTAL LAND HELD FOR DEVELOPMENT |  |                             |  | 424,000                                                                                                        |  |                          |  |                       |  |                  |  |                                       |  |                                      |  |     | $59,831 |  |  |  |  |  |        | $51,750 |  |  | 
|                               



|(1) | Interest in the form of mezzanine loans and equity. In addition, the Company holds a mortgage loan receivable secured by adjacent parcels of land with a balance
of $11,055 and $11,231 at September 30, 2006 and December 31, 2005, respectively (see Note 9 for further discussion).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company has no further contractual obligations for the future funding of these developments; however, the Company will likely be funding a portion of their working capital needs until such time as other financing is obtained. Under a
development alliance, the Company has provided an aggregate of approximately $2.5 million in debt guarantees; however, some of the loans were not fully drawn as of September 30, 2006. These guarantees will remain in place until such time as the
related development financing has been replaced or repaid, the terms of which





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GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



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, 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 $124.6 million and $70.0 million, respectively, at September 30, 2006, and $97.6 million and $60.0 million,
respectively, at December 31, 2005. The Companys maximum exposure to loss is equal to its investments in these arrangements, plus the related debt guarantees, as described above.



|NOTE 8. | INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
|------- | --------------------------------------------

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

Presented in the tables below are the
Companys investments in unconsolidated joint ventures as of September 30, 2006 and December 31, 2005 and a combined summarized statement of operations of the two assets (Rincon Center I & II and 2000 Corporate Ridge) that were
sold which contributed a substantial amount of the equity in earnings of unconsolidated joint ventures during the nine months ended September 30, 2006. A combined summarized balance sheet as of September 30, 2006 of the two assets was not presented
as the assets were sold during the second quarter of 2006.



|                            |  |                   |  |                    |  |                      |  |                 |  |                    |             |  |   |            
|--------------------------- |  | ----------------- |  | ------------------ |  | -------------------- |  | --------------- |  | ------------------ | ----------- |  | - | -----------
|(Dollars in thousands)      |  |                   |  |                    |  |                      |  |                 |  | Investment Balance
|Joint Venture               |  | OwnershipInterest |  | Property Location  |  | SquareFootage/ Units |  | Property Type   |  |                    | Sep 30,2006 |  |   | Dec 31,2005
|                            |  |                   |  |                    |  |                      |  |                 |  |                    |             | 
|Rincon Center I & II        |  | 10%               |  | San Francisco, CA  |  | 757,250 sf           |  | Office          |  | $                  |            |  | $ | 4,304      
|2000 Corporate Ridge        |  | 10%               |  | McLean, VA         |  | 256,022 sf           |  | Office          |  |                    |            |  |   | 3,174      
|Gateway Retail I            |  | 50%               |  | Denver, CO         |  | 12,000 sf            |  | Retail          |  |                    | 444         |  |   | 444        
|Lakecrest Apartments        |  | 27%               |  | Aurora, CO         |  | 440 units            |  | Residential     |  |                    | 3,802       |  |   | 4,118      
|Montgomery Executive Center |  | 25%               |  | Gaithersburg, MD   |  | 119,679 sf           |  | Office          |  |                    | (714)       |  |   |           
|Tri-City Corporate Centre   |  | 7%                |  | San Bernardino, CA |  | 1,208,206 sf         |  | Office / Retail |  |                    | 7,966       |  |   |           
|Gatehall I                  |  | 25%               |  | Parsippany, NJ     |  | 113,469 sf           |  | Office          |  |                    | 529         |  |   |           
|                            |  |                   |  |                    |  |                      |  |                 |  |                    |             |  |   |            
|                            |  |                   |  |                    |  |                      |  |                 |  | $                  | 12,027      |  | $ | 12,040     
|                            |  |                   |  |                    |  |                      |  |                 |  |                    |             |  |   |            



|                                              |  |                          |        
|--------------------------------------------- |  | ------------------------ | -------
|                                              |  | For the ninemonths ended
|(In thousands)                                |  | September 30,2006       
|Statement of Operations:                      |  |                          |        
|Revenues                                      |  | $                        | 14,901 
|Expenses                                      |  |                          |        
|Operating expenses                            |  |                          | 7,530  
|Interest expense                              |  |                          | 4,368  
|Depreciation and amortization                 |  |                          | 1,661  
|                                              |  |                          |        
|Total expenses                                |  |                          | 13,559 
|                                              |  |                          |        
|Net income before gain on sale of real estate |  |                          | 1,342  
|Gain on sale of real estate                   |  |                          | 195,680
|                                              |  |                          |        
|Net income                                    |  | $                        | 197,022
|                                              |  |                          |        
|Our share of:                                 |  |                          |        
|Net income                                    |  | $                        | 19,702 
|Depreciation and amortization                 |  | $                        | 166    
|Gain on sale of real estate                   |  | $                        | 19,568 

On September 26, 2006, the Company contributed Gatehall I, an 113,469 square foot office
building in Parsippany, New Jersey, at a value of $14.3 million for 100% of the property, to an existing joint venture with an investment advisor. The investment advisor contributed $5.1 million in cash for a 75% ownership interest and the joint
venture borrowed $7.3 million from a third party lender. The Company received net cash proceeds of $12.4 million which were used to pay down the Companys unsecured bank line of credit. The Company recognized a gain from the transaction of $3.7
million related to 75% of the asset now owned by the outside partner. The Company retained a 25% ownership interest in the joint venture and will provide property management, leasing and asset management services to the joint venture on an on-going
basis. The investment balance is net of a deferred gain on the sale of $1.2 million, which will be recognized when the joint venture sells the contributed property.

On June 16, 2006, the Company contributed Montgomery Executive Center, an 119,679 square foot office building in Gaithersburg, Maryland, at a value of $23.5 million for 100% of the property, to a new joint
venture with an investment advisor. The investment advisor contributed $8.2 million in cash for a 75% ownership interest and the





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GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



joint venture borrowed $12.5 million from a third party lender. The Company received net cash proceeds of $20.6 million which were used to pay down the Companys unsecured bank line of
credit. The Company recognized a gain from the transaction of $10.5 million related to 75% of the asset now owned by the outside partner. The Company retained a 25% ownership interest in the joint venture and will provide property management,
leasing and asset management services to the joint venture on an on-going basis. The investment balance is net of a deferred gain on the sale of $3.5 million, which will be recognized when the joint venture sells the contributed property.

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

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

As of
September 30, 2006, the Company purchased 3,722 or 5.7% and 6,044 or 7.2% of the units in Rancon Realty Fund IV, a California Limited Partnership and Rancon Realty Fund V, a California Limited Partnership, respectively, Rancon
Partnership. Together these partnerships own Tri-City Corporate Centre which is a mixed use project containing 1,011,159 square feet of class A office and 197,047 square feet of retail, located in San Bernardino, California in the
Inland Empire. Since January 1995, the Company has been contracted by each of the partnerships to perform property and asset management as well as construction, leasing, financing and development services. See Note 13 for discussion of related party
transactions.



|NOTE 9. | MORTGAGE LOANS RECEIVABLE
|------- | -------------------------

The Company holds a first mortgage collateralized by a 50% interest in 134 acres of land at Gateway Business Park in Aurora, Colorado. The balance of this mortgage loan receivable decreased from $11,231,000 at December 31, 2005, to
$11,055,000 at September 30, 2006 due to principal payments received of $1,309,000, offset by monthly interest accruals of $1,133,000. The loan was originally funded in June 1998 and has an interest rate of 9.0%. Periodic payments of interest
and principal are received on the loan from proceeds of land parcel sales in the project. Gateway Business Park is a development project where the Company and the Pauls Corporation have an alliance and where the Company has also acquired property.
In this arrangement, the Company has rights under certain conditions and subject to certain contingencies to purchase the properties upon completion of development. No loan loss reserves have been recorded related to this loan. The borrowing
entities in this loan arrangement have been deemed to be VIEs, but the Company is not deemed to be the primary beneficiary as defined by FIN 46 Revised. The Companys maximum exposure to loss is equal to the recorded amount of its loan,
including accrued interest.









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GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



|NOTE 10. | OTHER ASSETS
|-------- | ------------

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



|                                                                    |  |                    |       |                   |   |      
|------------------------------------------------------------------- |  | ------------------ | ----- | ----------------- | - | -----
|                                                                    |  | September 30, 2006 |       | December 31, 2005
|Other receivables                                                   |  | $                  | 678   |                   | $ | 378  
|Prepaid expenses and deposits                                       |  |                    | 4,343 |                   |   | 4,070
|Notes receivable                                                    |  |                    | 1,288 |                   |   | 1,288
|Investment in management contracts, net of accumulated amortization |  |                    | 325   |                   |   | 578  
|Other                                                               |  |                    | 1,413 |                   |   | 1,627
|                                                                    |  |                    |       |                   |   |      
|Total other assets                                                  |  | $                  | 8,047 |                   | $ | 7,941
|                                                                    |  |                    |       |                   |   |      











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GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



|NOTE 11. | MORTGAGE LOANS AND UNSECURED BANK LINE OF CREDIT
|-------- | ------------------------------------------------

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



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                    |         |                   |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ----------------- | - | -------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | September 30, 2006 |         | December 31, 2005
|Loans with various lenders, bearing interest at fixed rates between 4.73% and 7.01% at September 30, 2006, and 4.73% and 8.32% at December 31, 2005, with monthly
principal and interest payments ranging between $88 and $297 and maturing at various dates through July 1, 2016. These loans are collateralized by properties with an aggregate net carrying value of $666,329 and $737,499 at September 30,
2006 and December 31, 2005, respectively. One of these loans includes an unamortized premium of $668 and $896 at September 30, 2006 and December 31, 2005, respectively.                                                                                                                                         |  | $                  | 479,700 |                   | $ | 536,047
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                   
|Loan with an insurance company, net of unamortized discount of $87 and $255 at September 30, 2006 and December 31, 2005, respectively. The loan has two fixed rate
components. The fixed rate component of $13,694 at September 30, 2006 bears interest at 6.13%, matures on February 11, 2009, and requires monthly principal and interest payments of $96. The fixed rate component of $135,722 at
September 30, 2006 bears interest at 5.91%, matures on February 11, 2009, and requires monthly principal and interest payments of $923. The two components are cross-collateralized by properties with an aggregate net carrying value of
$198,692 and $217,514 at September 30, 2006 and December 31, 2005, respectively. |  |                    | 149,416 |                   |   | 168,823
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                    |         |                   |   |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                   
|Total mortgage loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                    | 629,116 |                   |   | 704,870
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                   
|Unsecured $180,000 line of credit with a group of commercial banks, with a variable interest rate of 30-day LIBOR plus 1.15% at September 30, 2006 and 30-day LIBOR plus
1.20% at December 31, 2005 (7.0% and 5.59%, respectively), monthly interest only payments and a maturity date of March 26, 2009, with a one-year extension option.                                                                                                                                                                                                                                                                                                                                                                                     |  |                    | 99,466  |                   |   | 106,669
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                    |         |                   |   |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                   
|Total mortgage loans and unsecured bank line of credit before adjustment for properties held for sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | $                  | 728,582 |                   | $ | 811,539
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                    |         |                   |   |        

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



|                                                            |  |                    |         |                   |   |         
|----------------------------------------------------------- |  | ------------------ | ------- | ----------------- | - | --------
|                                                            |  | September 30, 2006 |         | December 31, 2005
|Total mortgage loans                                        |  | $                  | 629,116 |                   | $ | 704,870 
|Mortgage loans related to properties held for sale (Note 6) |  |                    |        |                   |   | (45,000)
|                                                            |  |                    |         |                   |   |         
|Total mortgage loans adjusted for properties held for sale  |  | $                  | 629,116 |                   | $ | 659,870 
|                                                            |  |                    |         |                   |   |         





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GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



At September 30, 2006 and December 31, 2005, the Companys indebtedness included fixed-rate debt of $629,116,000 and $704,870,000, respectively, and floating-rate debt of
$99,466,000 and $106,669,000, respectively.

Outstanding borrowings under the Companys unsecured bank line of credit decreased from
$106,669,000 at December 31, 2005, to $99,466,000 at September 30, 2006. The decrease was due to pay downs totaling $129,802,000 generated from the proceeds of property and land sales and cash flow from operations, partially offset by
draws totaling $122,599,000 for common stock repurchases, property acquisitions, mortgage loan payoffs and dividend distributions. The unsecured bank line of credit requires the Company, among other things, to be in compliance with certain financial
and operating covenants. The Company has been in compliance during all of 2005 and 2006.

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



| |                                                                                                             |  |  |                   |          |   |  |  | 
| | ----------------------------------------------------------------------------------------------------------- |  |  | ----------------- | -------- | - |  |  | 
| |                                                                                                             |  |  | September 30,2006
| |                                                                                                             |  | 
| | Balance at beginning of year before adjustment for held for sale                                            |  |  |                   | $704,870 |   |  | 
| | Repayments and scheduled principal amortization                                                             |  |  |                   | (160,382 | ) |  | 
| | New borrowings and refinancing (a)                                                                          |  |  |                   | 129,628  |   |  | 
| | Repaid upon sale of properties and joint venture interest (see Note 7  Investment in Land and
Development) |  |  |                   | (45,000  | ) |  | 
| |                                                                                                             |  | 
| | Balance at end of period                                                                                    |  |  |                   | $629,116 |   |  | 
| |                                                                                                             |  | 



| | (a) | On April 27, 2006, the Company obtained a new mortgage loan of $30.6 million in connection with the acquisition of 3330 Cahuenga Boulevard. The loan bears
interest at a fixed rate of 6.93%, matures in December 2006 and requires monthly interest only payments of $108,000.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On May 31, 2006, the Company completed a $30 million refinancing of its King Street Station II property. The loan bears interest at a fixed rate of 5.62%, matures in June 2016 and requires monthly interest only
payments of $141,000. Proceeds from the refinancing were used to repay the existing loan.

On May 31, 2006, the
Company completed a $28 million refinancing of its 400 South El Camino property. The loan bears interest at a fixed rate of 5.78%, matures in June 2016 and requires monthly interest only payments of $135,000 for the first three years and monthly
principal and interest payments of $164,000 for the remaining seven years. Proceeds from the refinancing were used to repay the existing loan.

On June 30, 2006, the Company completed a $41 million refinancing of its CenterPointe I-IV properties. The loan bears interest at a fixed rate of 6.39%, matures in July 2016 and requires monthly interest only
payments of $218,000 for the first two years and monthly principal and interest payments of $256,000 for the remaining eight years. Net proceeds of $2.5 million were used to pay down the Companys unsecured bank line of credit after repaying
two existing loans and closing costs.

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





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GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



The required principal payments on the Companys debt for the next five years and thereafter, as of September 30, 2006, are as follows (in thousands). Included in the year ending
December 31, 2009, is the unsecured bank line of credit balance of $99,466,000 which has an initial maturity of March 26, 2009.



|                                                |  |   |  |  |  |  |  |  |  |  |        
|----------------------------------------------- |  | - |  |  |  |  |  |  |  |  | -------
|Year Ending December 31,                        |  |   |  |  |  |  |  |  |  |  |        
|2006                                            |  | $ |  |  |  |  |  |  |  |  | 43,293 
|2007                                            |  |   |  |  |  |  |  |  |  |  | 22,962 
|2008                                            |  |   |  |  |  |  |  |  |  |  | 106,577
|2009                                            |  |   |  |  |  |  |  |  |  |  | 277,296
|2010                                            |  |   |  |  |  |  |  |  |  |  | 73,710 
|Thereafter                                      |  |   |  |  |  |  |  |  |  |  | 204,163
|                                                |  |   |  |  |  |  |  |  |  |  |        
|Total before adjusting for unamortized premiums |  |   |  |  |  |  |  |  |  |  | 728,001
|Add: Unamortized premiums                       |  |   |  |  |  |  |  |  |  |  | 581    
|                                                |  |   |  |  |  |  |  |  |  |  |        
|Total                                           |  | $ |  |  |  |  |  |  |  |  | 728,582
|                                                |  |   |  |  |  |  |  |  |  |  |        



|NOTE 12. | OTHER LIABILITIES
|-------- | -----------------

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



|                                                                       |  |                   |  |                  |  |  |  |  |  |           |  | 
|---------------------------------------------------------------------- |  | ----------------- |  | ---------------- |  |  |  |  |  | --------- |  | 
|                                                                       |  | September 30,2006 |  | December 31,2005
|                                                                       |  |                   |  |                 
|Accounts payable and accrued liabilities                               |  |                   |  | $  8,238         |  |  |  |  |  | $  7,718  |  | 
|SFAS No. 141 below market rate leases, net of accumulated amortization |  |                   |  | 9,645            |  |  |  |  |  | 10,809    |  | 
|Unsecured note payable                                                 |  |                   |  |                 |  |  |  |  |  | 2,846     |  | 
|Accrued retirement benefits                                            |  |                   |  | 5,432            |  |  |  |  |  | 5,321     |  | 
|Interest payable                                                       |  |                   |  | 1,979            |  |  |  |  |  | 2,210     |  | 
|Security deposits                                                      |  |                   |  | 5,452            |  |  |  |  |  | 5,928     |  | 
|Property taxes payable                                                 |  |                   |  | 2,839            |  |  |  |  |  | 1,459     |  | 
|Prepaid rents                                                          |  |                   |  | 3,491            |  |  |  |  |  | 3,949     |  | 
|Deferred gain on sale                                                  |  |                   |  | 1,032            |  |  |  |  |  | 1,000     |  | 
|Deferred income                                                        |  |                   |  |                 |  |  |  |  |  | 36        |  | 
|                                                                       |  |                   |  |                 
|Total other liabilities                                                |  |                   |  | $  38,108        |  |  |  |  |  | $  41,276 |  | 
|                                                                       |  |                   |  |                 



|NOTE 13. | RELATED PARTY TRANSACTIONS
|-------- | --------------------------

Fee and reimbursement income earned by the Company from related parties totaled approximately $680,000 and $134,000 for the three months ended September 30, 2006 and 2005, respectively, and $2,575,000 and $549,000 for the nine months
ended September 30, 2006 and 2005, respectively, and consisted of incentive fees, structuring fees, property and asset management fees and other fee income. Included in the three and nine months ended September 30, 2006 are property and
asset management fees, lease consulting and development fees from Rancon Partnership (Tri-City Corporate Centre) of $493,000 and $1,020,000 for the three and nine months ended September 30, 2006, respectively, as they became a related party
beginning in the second quarter of 2006.



|NOTE 14. | PROVISION FOR IMPAIRMENT OF REAL ESTATE ASSETS
|-------- | ----------------------------------------------

In the first quarter of 2006, in connection with the disposition of the Osram Building, an additional provision for impairment of real estate assets of $561,000 was recognized due to higher than anticipated costs to
sell the property. Separately, in the first quarter of 2005, in connection with the Companys decision to dispose of assets in its non-





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GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



core markets and certain non-core assets in core markets, the Company reduced the intended holding period of 21 assets to two years or less. Based on the Companys analysis of the
anticipated net disposition proceeds of each asset over the next two years, the Company determined that nine of the assets were impaired. The difference between the estimated fair value (calculated by sales proceeds) and the net book value was
approximately $49.3 million. When combined with impairment charges recognized on two additional assets sold during the first quarter of 2005 and additional impairments recognized during the third quarter of 2005, the total impairment charge
recognized during the nine months ended September 30, 2005, was approximately $59.2 million ($54.1 million of which is included in discontinued operations).



|NOTE 15. | LOSS ON EARLY EXTINGUISHMENT OF DEBT
|-------- | ------------------------------------

During the three and nine months ended September 30, 2006, the Company recorded losses on early extinguishment of debt of $772,000 and $875,000, which consisted primarily of write-offs of unamortized original
financing costs as well as prepayment penalties of $523,000 and $550,000 for the three and nine months ended September 30, 2006, respectively, in connection with the refinancing of debt and payoff of various loans. In connection with various
loan payoffs, including those related to properties classified as discontinued operations, the Company recorded aggregate losses on early extinguishment of debt of $192,000 and $3,265,000 during the three and nine months ended September 30,
2005, consisting of prepayment penalties of $0 and $2,725,000 for the three and nine months ended September 30, 2005, respectively, and write-off of unamortized original financing costs.



|NOTE 16. | EARNINGS PER SHARE
|-------- | ------------------

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



|                                                             |  |                                 |  |                                |            |      |  |      |  |  |   |            |  |  |  |  |  |   |            |  |  |  |  |  |   |            |   |  | 
|------------------------------------------------------------ |  | ------------------------------- |  | ------------------------------ | ---------- | ---- |  | ---- |  |  | - | ---------- |  |  |  |  |  | - | ---------- |  |  |  |  |  | - | ---------- | - |  | 
|                                                             |  | Three months endedSeptember 30, |  | Nine months endedSeptember 30,
|                                                             |  |                                 |  |                               
|                                                             |  | 2006                            |  | 2005                           |            | 2006 |  | 2005
|                                                             |  |                                 |  |                                |            |      |  |     
|                                                             |  |                                 |  |                                |            |      |  |      |  |  |   |           
|Net income (loss) available to Common Stockholders  Basic   |  |                                 |  | $                              | 11,468     |      |  |      |  |  | $ | 26,811     |  |  |  |  |  | $ | 46,201     |  |  |  |  |  | $ | (5,740     | ) |  | 
|Minority interest                                            |  |                                 |  |                                |           |      |  |      |  |  |   |           |  |  |  |  |  |   | 4,270      |  |  |  |  |  |   |           |   |  | 
|                                                             |  |                                 |  |                                |            |      |  |     
|Net income (loss) available to Common Stockholders  Diluted |  |                                 |  | $                              | 11,468     |      |  |      |  |  | $ | 26,811     |  |  |  |  |  | $ | 50,471     |  |  |  |  |  | $ | (5,740     | ) |  | 
|                                                             |  |                                 |  |                                |            |      |  |     
|                                                             |  |                                 |  |                                |            |      |  |      |  |  |   |           
|Weighted average shares:                                     |  |                                 |  |                                |            |      |  |      |  |  |   |            |  |  |  |  |  |   |            |  |  |  |  |  |   |            |   |  | 
|Basic                                                        |  |                                 |  |                                | 32,084,122 |      |  |      |  |  |   | 36,003,636 |  |  |  |  |  |   | 32,246,947 |  |  |  |  |  |   | 35,915,389 |   |  | 
|Stock options and restricted stock                           |  |                                 |  |                                |           |      |  |      |  |  |   |           |  |  |  |  |  |   | 182,065    |  |  |  |  |  |   |           |   |  | 
|Convertible Operating Partnership Units                      |  |                                 |  |                                |           |      |  |      |  |  |   |           |  |  |  |  |  |   | 2,995,065  |  |  |  |  |  |   |           |   |  | 
|                                                             |  |                                 |  |                                |            |      |  |     
|Diluted                                                      |  |                                 |  |                                | 32,084,122 |      |  |      |  |  |   | 36,003,636 |  |  |  |  |  |   | 35,424,077 |  |  |  |  |  |   | 35,915,389 |   |  | 
|                                                             |  |                                 |  |                                |            |      |  |     
|                                                             |  |                                 |  |                                |            |      |  |      |  |  |   |           
|Basic earnings (loss) per share                              |  |                                 |  | $                              | 0.36       |      |  |      |  |  | $ | 0.74       |  |  |  |  |  | $ | 1.43       |  |  |  |  |  | $ | (0.16      | ) |  | 
|Diluted earnings (loss) per share                            |  |                                 |  | $                              | 0.36       |      |  |      |  |  | $ | 0.74       |  |  |  |  |  | $ | 1.42       |  |  |  |  |  | $ | (0.16      | ) |  | 

Options to purchase shares of the Companys common stock of 1,806,434 and 1,900,035 for the
three and nine months ended September 30, 2006, respectively, and 2,355,507 and 2,379,915 for the three and nine months ended September 30, 2005, respectively, have been excluded from the computation of diluted earnings per share as the
exercise prices of the stock options were greater than or equal to the average share price for the period, and therefore, their inclusion would have been anti-dilutive. Convertible operating partnership units of 2,998,315 for the three months ended
September 30, 2006, and 2,993,030 and 2,996,286 for the three and nine months ended September 30, 2005, respectively, have been excluded from the computation of diluted earnings per share as they are anti-dilutive due to loss from
continuing operations after adjusting for preferred dividends. The conversion of preferred stock has been excluded from the calculation of diluted earnings per share as it is anti-dilutive in all periods presented.





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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



|NOTE 17. | SEGMENT INFORMATION
|-------- | -------------------

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

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



|                                               |  |                                    |  |                                    |  |                                   |        |                                   |  |  |  |  |  |  |  |  |   |        |  |  |  |  |  |  |  |  |  |   |        |  |  |  |  |  |  |  |  |  |   |        |  |  |  | 
|---------------------------------------------- |  | ---------------------------------- |  | ---------------------------------- |  | --------------------------------- | ------ | --------------------------------- |  |  |  |  |  |  |  |  | - | ------ |  |  |  |  |  |  |  |  |  | - | ------ |  |  |  |  |  |  |  |  |  | - | ------ |  |  |  | 
|                                               |  | Three MonthsEndedSeptember 30,2006 |  | Three MonthsEndedSeptember 30,2005 |  | Nine MonthsEndedSeptember 30,2006 |        | Nine MonthsEndedSeptember 30,2005
|                                               |  |                                   
|Washington D.C.                                |  |                                    |  |                                    |  |                                   |        |                                   |  |  |  |  |  |  |  |  |   |        |  |  |  |  |  |  |  |  |  |   |        |  |  |  |  |  |  |  |  |  |   |        |  |  |  | 
|Rental revenue and tenant reimbursements       |  |                                    |  |                                    |  | $                                 | 10,788 |                                   |  |  |  |  |  |  |  |  | $ | 10,163 |  |  |  |  |  |  |  |  |  | $ | 33,916 |  |  |  |  |  |  |  |  |  | $ | 27,278 |  |  |  | 
|Property operating expenses                    |  |                                    |  |                                    |  |                                   | 2,945  |                                   |  |  |  |  |  |  |  |  |   | 2,657  |  |  |  |  |  |  |  |  |  |   | 9,748  |  |  |  |  |  |  |  |  |  |   | 7,220  |  |  |  | 
|                                               |  |                                   
|Net operating income                           |  |                                    |  |                                    |  | $                                 | 7,843  |                                   |  |  |  |  |  |  |  |  | $ | 7,506  |  |  |  |  |  |  |  |  |  | $ | 24,168 |  |  |  |  |  |  |  |  |  | $ | 20,058 |  |  |  | 
|                                               |  |                                   
|Southern California                            |  |                                    |  |                                    |  |                                   |        |                                   |  |  |  |  |  |  |  |  |   |        |  |  |  |  |  |  |  |  |  |   |        |  |  |  |  |  |  |  |  |  |   |        |  |  |  | 
|Rental revenue and tenant reimbursements       |  |                                    |  |                                    |  | $                                 | 9,545  |                                   |  |  |  |  |  |  |  |  | $ | 8,458  |  |  |  |  |  |  |  |  |  | $ | 27,634 |  |  |  |  |  |  |  |  |  | $ | 25,837 |  |  |  | 
|Property operating expenses                    |  |                                    |  |                                    |  |                                   | 3,332  |                                   |  |  |  |  |  |  |  |  |   | 2,855  |  |  |  |  |  |  |  |  |  |   | 9,065  |  |  |  |  |  |  |  |  |  |   | 8,290  |  |  |  | 
|                                               |  |                                   
|Net operating income                           |  |                                    |  |                                    |  | $                                 | 6,213  |                                   |  |  |  |  |  |  |  |  | $ | 5,603  |  |  |  |  |  |  |  |  |  | $ | 18,569 |  |  |  |  |  |  |  |  |  | $ | 17,547 |  |  |  | 
|                                               |  |                                   
|Northern New Jersey                            |  |                                    |  |                                    |  |                                   |        |                                   |  |  |  |  |  |  |  |  |   |        |  |  |  |  |  |  |  |  |  |   |        |  |  |  |  |  |  |  |  |  |   |        |  |  |  | 
|Rental revenue and tenant reimbursements       |  |                                    |  |                                    |  | $                                 | 6,579  |                                   |  |  |  |  |  |  |  |  | $ | 5,966  |  |  |  |  |  |  |  |  |  | $ | 19,957 |  |  |  |  |  |  |  |  |  | $ | 18,119 |  |  |  | 
|Property operating expenses                    |  |                                    |  |                                    |  |                                   | 2,480  |                                   |  |  |  |  |  |  |  |  |   | 1,948  |  |  |  |  |  |  |  |  |  |   | 7,399  |  |  |  |  |  |  |  |  |  |   | 6,475  |  |  |  | 
|                                               |  |                                   
|Net operating income                           |  |                                    |  |                                    |  | $                                 | 4,099  |                                   |  |  |  |  |  |  |  |  | $ | 4,018  |  |  |  |  |  |  |  |  |  | $ | 12,558 |  |  |  |  |  |  |  |  |  | $ | 11,644 |  |  |  | 
|                                               |  |                                   
|Provision for impairment of real estate assets |  |                                    |  |                                    |  | $                                 |       |                                   |  |  |  |  |  |  |  |  | $ |       |  |  |  |  |  |  |  |  |  | $ |       |  |  |  |  |  |  |  |  |  | $ | 836    |  |  |  | 
|                                               |  |                                   
|Boston                                         |  |                                    |  |                                    |  |                                   |        |                                   |  |  |  |  |  |  |  |  |   |        |  |  |  |  |  |  |  |  |  |   |        |  |  |  |  |  |  |  |  |  |   |        |  |  |  | 
|Rental revenue and tenant reimbursements       |  |                                    |  |                                    |  | $                                 | 6,470  |                                   |  |  |  |  |  |  |  |  | $ | 6,209  |  |  |  |  |  |  |  |  |  | $ | 19,643 |  |  |  |  |  |  |  |  |  | $ | 19,045 |  |  |  | 
|Property operating expenses                    |  |                                    |  |                                    |  |                                   | 3,131  |                                   |  |  |  |  |  |  |  |  |   | 3,177  |  |  |  |  |  |  |  |  |  |   | 9,754  |  |  |  |  |  |  |  |  |  |   | 9,048  |  |  |  | 
|                                               |  |                                   
|Net operating income                           |  |                                    |  |                                    |  | $                                 | 3,339  |                                   |  |  |  |  |  |  |  |  | $ | 3,032  |  |  |  |  |  |  |  |  |  | $ | 9,889  |  |  |  |  |  |  |  |  |  | $ | 9,997  |  |  |  | 
|                                               |  |                                   
|San Francisco                                  |  |                                    |  |                                    |  |                                   |        |                                   |  |  |  |  |  |  |  |  |   |        |  |  |  |  |  |  |  |  |  |   |        |  |  |  |  |  |  |  |  |  |   |        |  |  |  | 
|Rental revenue and tenant reimbursements       |  |                                    |  |                                    |  | $                                 | 4,650  |                                   |  |  |  |  |  |  |  |  | $ | 3,525  |  |  |  |  |  |  |  |  |  | $ | 14,013 |  |  |  |  |  |  |  |  |  | $ | 8,362  |  |  |  | 
|Property operating expenses                    |  |                                    |  |                                    |  |                                   | 1,714  |                                   |  |  |  |  |  |  |  |  |   | 1,199  |  |  |  |  |  |  |  |  |  |   | 4,818  |  |  |  |  |  |  |  |  |  |   | 2,629  |  |  |  | 
|                                               |  |                                   
|Net operating income                           |  |                                    |  |                                    |  | $                                 | 2,936  |                                   |  |  |  |  |  |  |  |  | $ | 2,326  |  |  |  |  |  |  |  |  |  | $ | 9,195  |  |  |  |  |  |  |  |  |  | $ | 5,733  |  |  |  | 
|                                               |  |                                   
|Tampa/Orlando                                  |  |                                    |  |                                    |  |                                   |        |                                   |  |  |  |  |  |  |  |  |   |        |  |  |  |  |  |  |  |  |  |   |        |  |  |  |  |  |  |  |  |  |   |        |  |  |  | 
|Rental revenue and tenant reimbursements       |  |                                    |  |                                    |  | $                                 | 1,962  |                                   |  |  |  |  |  |  |  |  | $ | 1,920  |  |  |  |  |  |  |  |  |  | $ | 5,931  |  |  |  |  |  |  |  |  |  | $ | 6,322  |  |  |  | 
|Property operating expenses                    |  |                                    |  |                                    |  |                                   | 663    |                                   |  |  |  |  |  |  |  |  |   | 601    |  |  |  |  |  |  |  |  |  |   | 1,941  |  |  |  |  |  |  |  |  |  |   | 1,960  |  |  |  | 
|                                               |  |                                   
|Net operating income                           |  |                                    |  |                                    |  | $                                 | 1,299  |                                   |  |  |  |  |  |  |  |  | $ | 1,319  |  |  |  |  |  |  |  |  |  | $ | 3,990  |  |  |  |  |  |  |  |  |  | $ | 4,362  |  |  |  | 
|                                               |  |                                   

continued





27



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



|                                               |  |                                    |  |                                    |  |                                   |        |                                   |  |  |  |  |  |  |  |  |  |   |        |   |  |  |  |  |  |  |  |  |  |   |         |   |  |  |  |  |  |  |  |  |  |   |         |   |  |  |  | 
|---------------------------------------------- |  | ---------------------------------- |  | ---------------------------------- |  | --------------------------------- | ------ | --------------------------------- |  |  |  |  |  |  |  |  |  | - | ------ | - |  |  |  |  |  |  |  |  |  | - | ------- | - |  |  |  |  |  |  |  |  |  | - | ------- | - |  |  |  | 
|                                               |  | Three MonthsEndedSeptember 30,2006 |  | Three MonthsEndedSeptember 30,2005 |  | Nine MonthsEndedSeptember 30,2006 |        | Nine MonthsEndedSeptember 30,2005
|                                               |  |                                   
|Denver                                         |  |                                    |  |                                    |  |                                   |        |                                   |  |  |  |  |  |  |  |  |  |   |        |   |  |  |  |  |  |  |  |  |  |   |         |   |  |  |  |  |  |  |  |  |  |   |         |   |  |  |  | 
|Rental revenue and tenant reimbursements       |  |                                    |  |                                    |  | $                                 | 1,701  |                                   |  |  |  |  |  |  |  |  |  | $ | 1,619  |   |  |  |  |  |  |  |  |  |  | $ | 5,074   |   |  |  |  |  |  |  |  |  |  | $ | 4,999   |   |  |  |  | 
|Property operating expenses                    |  |                                    |  |                                    |  |                                   | 595    |                                   |  |  |  |  |  |  |  |  |  |   | 670    |   |  |  |  |  |  |  |  |  |  |   | 1,818   |   |  |  |  |  |  |  |  |  |  |   | 1,951   |   |  |  |  | 
|                                               |  |                                   
|Net operating income                           |  |                                    |  |                                    |  | $                                 | 1,106  |                                   |  |  |  |  |  |  |  |  |  | $ | 949    |   |  |  |  |  |  |  |  |  |  | $ | 3,256   |   |  |  |  |  |  |  |  |  |  | $ | 3,048   |   |  |  |  | 
|                                               |  |                                   
|                                               |  |                                    |  |                                    |  |                                   |        |                                   |  |  |  |  |  |  |  |  |  |   |        |  
|Provision for impairment of real estate assets |  |                                    |  |                                    |  | $                                 |       |                                   |  |  |  |  |  |  |  |  |  | $ |       |   |  |  |  |  |  |  |  |  |  | $ |        |   |  |  |  |  |  |  |  |  |  | $ | 3,136   |   |  |  |  | 
|                                               |  |                                   
|Las Vegas                                      |  |                                    |  |                                    |  |                                   |        |                                   |  |  |  |  |  |  |  |  |  |   |        |   |  |  |  |  |  |  |  |  |  |   |         |   |  |  |  |  |  |  |  |  |  |   |         |   |  |  |  | 
|Rental revenue and tenant reimbursements       |  |                                    |  |                                    |  | $                                 | 990    |                                   |  |  |  |  |  |  |  |  |  | $ | 1,302  |   |  |  |  |  |  |  |  |  |  | $ | 2,904   |   |  |  |  |  |  |  |  |  |  | $ | 3,835   |   |  |  |  | 
|Property operating expenses                    |  |                                    |  |                                    |  |                                   | 240    |                                   |  |  |  |  |  |  |  |  |  |   | 350    |   |  |  |  |  |  |  |  |  |  |   | 721     |   |  |  |  |  |  |  |  |  |  |   | 946     |   |  |  |  | 
|                                               |  |                                   
|Net operating income                           |  |                                    |  |                                    |  | $                                 | 750    |                                   |  |  |  |  |  |  |  |  |  | $ | 952    |   |  |  |  |  |  |  |  |  |  | $ | 2,183   |   |  |  |  |  |  |  |  |  |  | $ | 2,889   |   |  |  |  | 
|                                               |  |                                   
|All Others                                     |  |                                    |  |                                    |  |                                   |        |                                   |  |  |  |  |  |  |  |  |  |   |        |   |  |  |  |  |  |  |  |  |  |   |         |   |  |  |  |  |  |  |  |  |  |   |         |   |  |  |  | 
|Rental revenue and tenant reimbursements       |  |                                    |  |                                    |  | $                                 | 1,267  |                                   |  |  |  |  |  |  |  |  |  | $ | 9,175  |   |  |  |  |  |  |  |  |  |  | $ | 4,526   |   |  |  |  |  |  |  |  |  |  | $ | 29,444  |   |  |  |  | 
|Property operating expenses                    |  |                                    |  |                                    |  |                                   | 428    |                                   |  |  |  |  |  |  |  |  |  |   | 4,174  |   |  |  |  |  |  |  |  |  |  |   | 1,872   |   |  |  |  |  |  |  |  |  |  |   | 13,368  |   |  |  |  | 
|                                               |  |                                   
|Net operating income                           |  |                                    |  |                                    |  | $                                 | 839    |                                   |  |  |  |  |  |  |  |  |  | $ | 5,001  |   |  |  |  |  |  |  |  |  |  | $ | 2,654   |   |  |  |  |  |  |  |  |  |  | $ | 16,076  |   |  |  |  | 
|                                               |  |                                   
|                                               |  |                                    |  |                                    |  |                                   |        |                                   |  |  |  |  |  |  |  |  |  |   |        |  
|Provision for impairment of real estate assets |  |                                    |  |                                    |  | $                                 |       |                                   |  |  |  |  |  |  |  |  |  | $ | 1,008  |   |  |  |  |  |  |  |  |  |  | $ | 561     |   |  |  |  |  |  |  |  |  |  | $ | 55,273  |   |  |  |  | 
|                                               |  |                                   
|Discontinued Operations                        |  |                                    |  |                                    |  |                                   |        |                                   |  |  |  |  |  |  |  |  |  |   |        |   |  |  |  |  |  |  |  |  |  |   |         |   |  |  |  |  |  |  |  |  |  |   |         |   |  |  |  | 
|Rental revenue and tenant reimbursements       |  |                                    |  |                                    |  | $                                 | (576   | )                                 |  |  |  |  |  |  |  |  |  | $ | (9,116 | ) |  |  |  |  |  |  |  |  |  | $ | (2,582  | ) |  |  |  |  |  |  |  |  |  | $ | (30,207 | ) |  |  |  | 
|Property operating expenses                    |  |                                    |  |                                    |  |                                   | (181   | )                                 |  |  |  |  |  |  |  |  |  |   | (4,069 | ) |  |  |  |  |  |  |  |  |  |   | (1,071  | ) |  |  |  |  |  |  |  |  |  |   | (13,301 | ) |  |  |  | 
|                                               |  |                                   
|Net operating (income) loss                    |  |                                    |  |                                    |  | $                                 | (395   | )                                 |  |  |  |  |  |  |  |  |  | $ | (5,047 | ) |  |  |  |  |  |  |  |  |  | $ | (1,511  | ) |  |  |  |  |  |  |  |  |  | $ | (16,906 | ) |  |  |  | 
|                                               |  |                                   
|                                               |  |                                    |  |                                    |  |                                   |        |                                   |  |  |  |  |  |  |  |  |  |   |        |  
|Provision for impairment of real estate assets |  |                                    |  |                                    |  | $                                 |       |                                   |  |  |  |  |  |  |  |  |  | $ | (946   | ) |  |  |  |  |  |  |  |  |  | $ | (561    | ) |  |  |  |  |  |  |  |  |  | $ | (54,085 | ) |  |  |  | 
|                                               |  |                                   
|Total                                          |  |                                    |  |                                    |  |                                   |        |                                   |  |  |  |  |  |  |  |  |  |   |        |   |  |  |  |  |  |  |  |  |  |   |         |   |  |  |  |  |  |  |  |  |  |   |         |   |  |  |  | 
|Rental revenue and tenant reimbursements       |  |                                    |  |                                    |  | $                                 | 43,376 |                                   |  |  |  |  |  |  |  |  |  | $ | 39,221 |   |  |  |  |  |  |  |  |  |  | $ | 131,016 |   |  |  |  |  |  |  |  |  |  | $ | 113,034 |   |  |  |  | 
|Property operating expenses                    |  |                                    |  |                                    |  |                                   | 15,347 |                                   |  |  |  |  |  |  |  |  |  |   | 13,562 |   |  |  |  |  |  |  |  |  |  |   | 46,065  |   |  |  |  |  |  |  |  |  |  |   | 38,586  |   |  |  |  | 
|                                               |  |                                   
|Net operating income                           |  |                                    |  |                                    |  | $                                 | 28,029 |                                   |  |  |  |  |  |  |  |  |  | $ | 25,659 |   |  |  |  |  |  |  |  |  |  | $ | 84,951  |   |  |  |  |  |  |  |  |  |  | $ | 74,448  |   |  |  |  | 
|                                               |  |                                   
|                                               |  |                                    |  |                                    |  |                                   |        |                                   |  |  |  |  |  |  |  |  |  |   |        |  
|Provision for impairment of real estate assets |  |                                    |  |                                    |  | $                                 |       |                                   |  |  |  |  |  |  |  |  |  | $ | 62     |   |  |  |  |  |  |  |  |  |  | $ |        |   |  |  |  |  |  |  |  |  |  | $ | 5,160   |   |  |  |  | 
|                                               |  |                                   





28



---

##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



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 a
change in accounting principle for the periods presented above (in thousands):



|                                                                                                                                                     |  |                                    |  |                                    |         |                                   |  |                                   |  |  |  |   |         |   |  |  |  |  |  |   |         |   |  |  |  |  |  |   |         |   |  | 
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- |  | ---------------------------------- | ------- | --------------------------------- |  | --------------------------------- |  |  |  | - | ------- | - |  |  |  |  |  | - | ------- | - |  |  |  |  |  | - | ------- | - |  | 
|                                                                                                                                                     |  | Three MonthsEndedSeptember 30,2006 |  | Three MonthsEndedSeptember 30,2005 |         | Nine MonthsEndedSeptember 30,2006 |  | Nine MonthsEndedSeptember 30,2005
|                                                                                                                                                     |  |                                   
|                                                                                                                                                     |  |                                    |  |                                    |         |                                   |  |                                   |  |  |  |  
|Revenues                                                                                                                                             |  |                                    |  |                                    |         |                                   |  |                                   |  |  |  |   |         |   |  |  |  |  |  |   |         |   |  |  |  |  |  |   |         |   |  | 
|Rental revenue and tenant reimbursements for reportable segments                                                                                     |  |                                    |  | $                                  | 43,376  |                                   |  |                                   |  |  |  | $ | 39,221  |   |  |  |  |  |  | $ | 131,016 |   |  |  |  |  |  | $ | 113,034 |   |  | 
|Fees and reimbursements, including from related parties                                                                                              |  |                                    |  |                                    | 695     |                                   |  |                                   |  |  |  |   | 849     |   |  |  |  |  |  |   | 3,693   |   |  |  |  |  |  |   | 3,302   |   |  | 
|                                                                                                                                                     |  |                                   
|Total operating revenue                                                                                                                              |  |                                    |  | $                                  | 44,071  |                                   |  |                                   |  |  |  | $ | 40,070  |   |  |  |  |  |  | $ | 134,709 |   |  |  |  |  |  | $ | 116,336 |   |  | 
|                                                                                                                                                     |  |                                   
|                                                                                                                                                     |  |                                    |  |                                    |         |                                   |  |                                   |  |  |  |  
|Net Operating Income                                                                                                                                 |  |                                    |  |                                    |         |                                   |  |                                   |  |  |  |   |         |   |  |  |  |  |  |   |         |   |  |  |  |  |  |   |         |   |  | 
|Net operating income for reportable segments                                                                                                         |  |                                    |  | $                                  | 28,029  |                                   |  |                                   |  |  |  | $ | 25,659  |   |  |  |  |  |  | $ | 84,951  |   |  |  |  |  |  | $ | 74,448  |   |  | 
|Provision for impairment of real estate assets for reportable segments                                                                               |  |                                    |  |                                    |        |                                   |  |                                   |  |  |  |   | (62     | ) |  |  |  |  |  |   |        |   |  |  |  |  |  |   | (5,160  | ) |  | 
|Unallocated amounts:                                                                                                                                 |  |                                    |  |                                    |         |                                   |  |                                   |  |  |  |   |         |   |  |  |  |  |  |   |         |   |  |  |  |  |  |   |         |   |  | 
|Fees and reimbursements, including from related parties                                                                                              |  |                                    |  |                                    | 695     |                                   |  |                                   |  |  |  |   | 849     |   |  |  |  |  |  |   | 3,693   |   |  |  |  |  |  |   | 3,302   |   |  | 
|Interest and other income                                                                                                                            |  |                                    |  |                                    | 467     |                                   |  |                                   |  |  |  |   | 455     |   |  |  |  |  |  |   | 1,496   |   |  |  |  |  |  |   | 2,099   |   |  | 
|Equity in earnings of unconsolidated joint ventures                                                                                                  |  |                                    |  |                                    | (73     | )                                 |  |                                   |  |  |  |   | 6       |   |  |  |  |  |  |   | 19,740  |   |  |  |  |  |  |   | 308     |   |  | 
|General and administrative                                                                                                                           |  |                                    |  |                                    | (5,882  | )                                 |  |                                   |  |  |  |   | (3,423  | ) |  |  |  |  |  |   | (13,663 | ) |  |  |  |  |  |   | (10,633 | ) |  | 
|Depreciation and amortization                                                                                                                        |  |                                    |  |                                    | (14,175 | )                                 |  |                                   |  |  |  |   | (13,116 | ) |  |  |  |  |  |   | (41,590 | ) |  |  |  |  |  |   | (36,626 | ) |  | 
|Interest expense                                                                                                                                     |  |                                    |  |                                    | (10,604 | )                                 |  |                                   |  |  |  |   | (9,795  | ) |  |  |  |  |  |   | (32,254 | ) |  |  |  |  |  |   | (26,087 | ) |  | 
|Loss on early extinguishment of debt                                                                                                                 |  |                                    |  |                                    | (772    | )                                 |  |                                   |  |  |  |   | (127    | ) |  |  |  |  |  |   | (875    | ) |  |  |  |  |  |   | (688    | ) |  | 
|                                                                                                                                                     |  |                                   
|Income before minority interest, discontinued operations, gain on sale of real estate assets and cumulative effect of change in accounting principle |  |                                    |  |                                    | (2,315  | )                                 |  |                                   |  |  |  |   | 446     |   |  |  |  |  |  |   | 21,498  |   |  |  |  |  |  |   | 963     |   |  | 
|                                                                                                                                                     |  |                                    |  |                                    |         |                                   |  |                                   |  |  |  |  
|Gain on sale of real estate assets                                                                                                                   |  |                                    |  |                                    | 3,677   |                                   |  |                                   |  |  |  |   |        |   |  |  |  |  |  |   | 14,182  |   |  |  |  |  |  |   |        |   |  | 
|                                                                                                                                                     |  |                                   
|                                                                                                                                                     |  |                                    |  |                                    |         |                                   |  |                                   |  |  |  |  
|Income before minority interest, discontinued operations and cumulative effect of change in accounting principle                                     |  |                                    |  | $                                  | 1,362   |                                   |  |                                   |  |  |  | $ | 446     |   |  |  |  |  |  | $ | 35,680  |   |  |  |  |  |  | $ | 963     |   |  | 
|                                                                                                                                                     |  |                                   





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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



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



|                                                     |  |                        |  |                       |           |  |  |  |  |  |   |           |   |  | 
|---------------------------------------------------- |  | ---------------------- |  | --------------------- | --------- |  |  |  |  |  | - | --------- | - |  | 
|                                                     |  | As ofSeptember 30,2006 |  | As ofDecember 31,2005
|                                                     |  |                        |  |                      
|                                                     |  |                        |  |                       |           | 
|Washington D.C.                                      |  |                        |  | $                     | 315,530   |  |  |  |  |  | $ | 334,076   |   |  | 
|Southern California                                  |  |                        |  |                       | 224,472   |  |  |  |  |  |   | 197,647   |   |  | 
|Northern New Jersey                                  |  |                        |  |                       | 130,844   |  |  |  |  |  |   | 131,416   |   |  | 
|Boston                                               |  |                        |  |                       | 141,372   |  |  |  |  |  |   | 144,203   |   |  | 
|San Francisco                                        |  |                        |  |                       | 177,679   |  |  |  |  |  |   | 181,544   |   |  | 
|Tampa/Orlando                                        |  |                        |  |                       | 37,437    |  |  |  |  |  |   | 38,719    |   |  | 
|Denver                                               |  |                        |  |                       | 37,723    |  |  |  |  |  |   | 38,895    |   |  | 
|Las Vegas                                            |  |                        |  |                       | 19,562    |  |  |  |  |  |   | 20,333    |   |  | 
|All others                                           |  |                        |  |                       | 14,488    |  |  |  |  |  |   | 67,449    |   |  | 
|Properties held for sale                             |  |                        |  |                       |          |  |  |  |  |  |   | (44,674   | ) |  | 
|                                                     |  |                        |  |                      
|                                                     |  |                        |  |                       |           | 
|Total rental properties for reportable segments, net |  |                        |  |                       | 1,099,107 |  |  |  |  |  |   | 1,109,608 |   |  | 
|                                                     |  |                        |  |                       |           | 
|Unallocated amounts:                                 |  |                        |  |                       |           |  |  |  |  |  |   |           |   |  | 
|Properties held for sale                             |  |                        |  |                       |          |  |  |  |  |  |   | 103,548   |   |  | 
|Investments in land and development                  |  |                        |  |                       | 59,831    |  |  |  |  |  |   | 51,750    |   |  | 
|Investments in unconsolidated joint ventures         |  |                        |  |                       | 12,027    |  |  |  |  |  |   | 12,040    |   |  | 
|Mortgage loans receivable                            |  |                        |  |                       | 11,055    |  |  |  |  |  |   | 11,231    |   |  | 
|Leasing and financing costs, net                     |  |                        |  |                       | 21,749    |  |  |  |  |  |   | 21,465    |   |  | 
|Straight-line rent receivable                        |  |                        |  |                       | 20,100    |  |  |  |  |  |   | 16,874    |   |  | 
|Cash and cash equivalents                            |  |                        |  |                       | 4,718     |  |  |  |  |  |   | 3,661     |   |  | 
|Restricted cash                                      |  |                        |  |                       | 5,677     |  |  |  |  |  |   | 5,720     |   |  | 
|Accounts receivable, net                             |  |                        |  |                       | 2,504     |  |  |  |  |  |   | 2,292     |   |  | 
|Other assets, net                                    |  |                        |  |                       | 8,047     |  |  |  |  |  |   | 7,941     |   |  | 
|                                                     |  |                        |  |                      
|Total assets                                         |  |                        |  | $                     | 1,244,815 |  |  |  |  |  | $ | 1,346,130 |   |  | 
|                                                     |  |                        |  |                      

NOTE 18.             STOCK
COMPENSATION PLAN AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

Adoption of New Accounting Pronouncement

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







30



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



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

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

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

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



|                                 |  |        |  |                                  |   |  |  |  |  |  |            |  | 
|-------------------------------- |  | ------ |  | -------------------------------- | - |  |  |  |  |  | ---------- |  | 
|                                 |  | Shares |  | Weighted AvgGrant-DateFair Value
|                                 |  |        |  |                                 
|Nonvested at beginning of period |  |        |  | 183,800                          |   |  |  |  |  |  | $    20.71 |  | 
|Granted                          |  |        |  | 13,500                           |   |  |  |  |  |  | $    19.53 |  | 
|Vested                           |  |        |  | (24,725                          | ) |  |  |  |  |  | $    20.92 |  | 
|Forfeited                        |  |        |  | (10,280                          | ) |  |  |  |  |  | $    18.39 |  | 
|                                 |  |        |  |                                 
|Nonvested at end of period       |  |        |  | 162,295                          |   |  |  |  |  |  | $    20.70 |  | 

At September 30, 2006, there was $1.7 million of unrecognized compensation cost related to
nonvested stock grants that the Company expects to recognize over a weighted average period of 4.6 years.

In addition, under the Plan, the
Company, on February 15, 2006, issued a 2006 Annual Incentive Program and a 2006 Multi-Year Incentive Program to key executive officers that were approved by the Board of Directors in January 2006. The vesting of the 63,600 shares of the 2006
Annual Incentive Program is based on achieving performance and market condition metrics over a four-year requisite service period and compensation cost is recognized on an accelerated basis. The fair value of these stock grants is estimated on the
date of the grant using a lattice valuation model and estimated forfeitures of 40,048 shares. The Company recognized compensation cost of $38,484 and $115,452 for the 2006 Annual Incentive Program for the three and nine months ended
September 30, 2006. The vesting of the 181,088 shares of the 2006 Multi-Year Incentive Plan is based on achieving market condition metrics and compensation cost is recognized ratably over a four-year requisite service period. The fair value of
these stock grants is estimated on the date of grant using a lattice valuation model and estimated forfeitures of 117,314 shares. The Company recognized compensation cost of $72,145 and $216,435 for the 2006 Multi-Year Incentive Plan for the three
and nine months ended September 30, 2006.

Stock-Based Employee Compensation Plans

In May 1996, the Company adopted an employee stock incentive plan (the Plan) to provide incentives to attract and retain high quality
executive officers and key employees. Certain amendments to the Plan were ratified and approved by the stockholders of the Company at the Companys 1997 Annual Meeting of Stockholders. The Plan, as amended, provides for the grant of
(i) shares of Common Stock of the Company, (ii) options, stock appreciation rights (SARs) or similar rights with an exercise or conversion privilege at a fixed or variable price related to the Common Stock and/or the passage of
time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions, or (iii) any other security with the value derived from the value of the Common Stock of the Company or other securities issued by a
related entity. Such awards include, without limitation, options, SARs, sales or bonuses of restricted stock, dividend equivalent rights (DERs), Performance Units or Preference Shares. On May 4, 2006, the board of directors of the
Company amended and restated the Plan. New York Stock Exchange



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



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

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

For the three and nine months ended September 30, 2006, the Company recorded stock option compensation expense of $9,100 and $27,200, respectively, using an estimated weighted average fair
value of $1.68 using the Black-Scholes option-pricing model, based on options issued from date of inception forward, and the following weighted-average assumptions: dividend yield of 9.09%, risk-free interest rate of 4.73%, expected volatility
factor of 28.42%, and expected lives of 5-10 years.

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



|                                                   |  |                   |  |                                    |  |                                   |        |   |  |  |  |  |  |   |        |   |  | 
|-------------------------------------------------- |  | ----------------- |  | ---------------------------------- |  | --------------------------------- | ------ | - |  |  |  |  |  | - | ------ | - |  | 
|                                                   |  |                   |  | Three MonthsEndedSeptember 30,2005 |  | Nine monthsEndedSeptember 30,2005
|                                                   |  |                   |  |                                   
|Net income (loss) available to Common Stockholders |  | As reported       |  |                                    |  | $                                 | 26,811 |   |  |  |  |  |  | $ | (5,740 | ) |  | 
|                                                   |  | SFAS No. 123 Adj. |  |                                    |  |                                   | (14    | ) |  |  |  |  |  |   | (115   | ) |  | 
|                                                   |  |                   |  |                                   
|                                                   |  | Pro forma         |  |                                    |  | $                                 | 26,797 |   |  |  |  |  |  |   | (5,855 | ) |  | 
|                                                   |  |                   |  |                                   
|                                                   |  |                   |  |                                    |  |                                   |       
|Basic earnings (loss) per share                    |  | As reported       |  |                                    |  | $                                 | 0.74   |   |  |  |  |  |  | $ | (0.16  | ) |  | 
|                                                   |  | SFAS No. 123 Adj. |  |                                    |  |                                   |       |   |  |  |  |  |  |   |       |   |  | 
|                                                   |  |                   |  |                                   
|                                                   |  | Pro forma         |  |                                    |  | $                                 | 0.74   |   |  |  |  |  |  | $ | (0.16  | ) |  | 
|                                                   |  |                   |  |                                   
|                                                   |  |                   |  |                                    |  |                                   |       
|Diluted earnings (loss) per share                  |  | As reported       |  |                                    |  | $                                 | 0.74   |   |  |  |  |  |  | $ | (0.16  | ) |  | 
|                                                   |  | SFAS No. 123 Adj. |  |                                    |  |                                   |       |   |  |  |  |  |  |   |       |   |  | 
|                                                   |  |                   |  |                                   
|                                                   |  | Pro forma         |  |                                    |  | $                                 | 0.74   |   |  |  |  |  |  | $ | (0.16  | ) |  | 
|                                                   |  |                   |  |                                   







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GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



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



| |                                    |  |  |        |           |                          |  |                                      |  |  |  |   |       |  |  |  |  |  |            |  |  | 
| | ---------------------------------- |  |  | ------ | --------- | ------------------------ |  | ------------------------------------ |  |  |  | - | ----- |  |  |  |  |  | ---------- |  |  | 
| |                                    |  |  | Shares |           | WeightedAvgExercisePrice |  | Weighted AvgRemainingContractualLife
| |                                    |  |  |        |           |                          | 
| | Outstanding at beginning of period |  |  |        | 2,531,701 |                          |  |                                      |  |  |  | $ | 23.46 |  |  |  |  |  |            |  | 
| | Granted                            |  |  |        |          |                          |  |                                      |  |  |  | $ |      |  |  |  |  |  |            |  | 
| | Exercised                          |  |  |        | (365,215  | )                        |  |                                      |  |  |  | $ | 15.51 |  |  |  |  |  |            |  | 
| | Forfeited/Canceled                 |  |  |        | (93,430   | )                        |  |                                      |  |  |  | $ | 18.06 |  |  |  |  |  |            |  | 
| |                                    |  |  |        |           |                          | 
| | Outstanding at end of period       |  |  |        | 2,073,056 |                          |  |                                      |  |  |  | $ | 24.94 |  |  |  |  |  | 2.72 years |  | 
| | Exercisable at end of period       |  |  |        | 2,012,062 |                          |  |                                      |  |  |  | $ | 25.17 |  |  |  |  |  | 2.68 years |  | 

The total intrinsic value of options exercised during the three and nine months ended
September 30, 2006 were $0.7 million and $3.6 million, respectively. Cash received from option exercises for the three and nine months ended September 30, 2006 was $1.3 million and $6.0 million, respectively.

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

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



|                         |  |                             |  |                                           |  |                                |  |                             |  |                               
|------------------------ |  | --------------------------- |  | ----------------------------------------- |  | ------------------------------ |  | --------------------------- |  | ------------------------------
|                         |  | OPTIONS OUTSTANDING         |  | OPTIONS EXERCISABLE                      
|                         |  |                             |  |                                          
|                         |  | NumberOutstandingat 9/30/06 |  | Weighted-averageremainingcontractual life |  | Weighted-averageexercise price |  | NumberExercisable at9/30/06 |  | Weighted-averageexercise price
|                         |  |                             |  |                                           |  |                                |  |                             |  |                               
|Range of Exercise Prices |  |                             |  |                                           |  |                                |  |                             |  |                               
|                         |  |                             |  |                                           | 
|$11.35 to $15.14         |  | 103,724                     |  | 3.5 years                                 |  | $    12.00                     |  | 103,724                     |  | $    12.00                    
|$15.14 to $18.92         |  | 626,832                     |  | 4.0 years                                 |  | $    16.94                     |  | 567,504                     |  | $    16.89                    
|$18.92 to $22.70         |  | 327,500                     |  | 2.0 years                                 |  | $    21.47                     |  | 325,834                     |  | $    21.47                    
|$22.70 to $26.49         |  | 15,000                      |  | 1.1 years                                 |  | $    25.00                     |  | 15,000                      |  | $    25.00                    
|$26.49 to $30.27         |  | 333,333                     |  | 2.1 years                                 |  | $    27.03                     |  | 333,333                     |  | $    27.03                    
|$30.27 to $34.06         |  | 333,333                     |  | 2.1 years                                 |  | $    32.44                     |  | 333,333                     |  | $    32.44                    
|$34.06 to $37.84         |  | 333,334                     |  | 2.1 years                                 |  | $    37.84                     |  | 333,334                     |  | $    37.84                    
|                         |  |                             |  |                                           |  |                                |  |                             |  |                               
|                         |  | 2,073,056                   |  | 2.72 years                                |  | $    24.94                     |  | 2,012,062                   |  | $    25.17                    

The aggregate intrinsic value of stock options outstanding at September 30, 2006 was
$8.2 million. Intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the Companys closing stock price of $25.73 as of September 30, 2006.

Cumulative Effect of Change in Accounting Principle

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

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



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

Notes to Consolidated Financial Statements

September 30, 2006 and 2005

(unaudited)



|NOTE 19. | COMMITMENTS AND CONTINGENCIES
|-------- | -----------------------------

Environmental Matters

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

General Uninsured Losses

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

Tax indemnifications

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

Litigation

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



|NOTE 20. | EQUITY TRANSACTIONS
|-------- | -------------------

Stock Repurchases

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

Preferred Stock Redemptions

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









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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 Real Estate Investment Trust (REIT) with a nationwide portfolio of 44 primarily office properties, including 5 joint ventures, as of September 30, 2006. We focus on owning and managing high-quality,
multi-tenant office properties with strong demand attributes located in supply constrained locations within large diverse markets. Our portfolio encompasses approximately 8 million square feet with the largest concentrations in the following
markets: Washington D.C., Southern California, Northern New Jersey, Boston and San Francisco.

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

Availability of Reports on Website

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

Proposed Merger with A Subsidiary of Certain Funds Managed By Morgan Stanley Real Estate

On August 20, 2006, we entered into an Agreement and Plan of Merger (the Merger Agreement) by and among us, Glenborough Properties, L.P.
(the Operating Partnership), Gridiron Holdings LLC and Gridiron Acquisition LLC (Merger Sub) pursuant to which we will be merged with and into Merger Sub, with Merger Sub continuing as the surviving entity (the
Merger).

Pursuant to the terms of the Merger Agreement, each share of our common stock (Common Stock) issued and
outstanding immediately prior to the effective time of the Merger will be converted into the right to receive (i) $26.00 in cash, plus (ii) an amount in cash equal to $0.275, multiplied by the quotient obtained by dividing (A) the
number of days elapsed since the last day of the last quarter for which full quarterly dividends were declared and paid on the shares of Common Stock to the Closing Date (as such term is defined by the Merger Agreement), by (B) the total number
of days in the fiscal quarter during which the Closing Date occurs, without interest.

Immediately prior to the effective time of the
Merger, each outstanding option to purchase Common Stock will be accelerated in full such that each such outstanding option will be fully vested and exercisable. At the effective time of the Merger, each outstanding option (taking into account the
vesting acceleration described in the previous sentence) will be converted into the right to receive $26.00 in cash minus the exercise price required to be paid to acquire the underlying share of Common Stock. If the exercise price per share of
Common Stock with respect to an option is equal to or greater than $26.00, such option shall be canceled without any cash payment.

Immediately prior to the effective time of the Merger, each outstanding restricted share award will receive an amount in cash, equal to the product of (i) the aggregate number of shares of out Common Stock underlying such restricted
share award, multiplied by (ii) (x) $26.00 in cash, plus (y) an amount in cash equal to $0.275, multiplied by the quotient obtained by dividing (A) the number of days elapsed since the last day of the last quarter for which full
quarterly dividends were declared and paid on the shares of Common Stock to the Closing Date (as such term is defined by the Merger Agreement), by (B) the total number of days in the fiscal quarter during which the Closing Date occurs, without
interest.

Immediately prior to the effective time of the Merger, each outstanding performance share unit will receive an amount in cash
equal to the product of (i) the aggregate number of shares of our common stock underlying such performance share unit, multiplied by (ii) $26.00.







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In addition, in connection with the Merger, each share of 73/4% Series A Convertible Preferred Stock of the Company (the Series A Preferred Stock) issued and outstanding immediately prior to the effective
time of the Merger will be redeemed at the redemption price per share specified in our charter documents plus an amount in cash to be paid by us equal to $0.484375 multiplied by the quotient obtained by dividing (i) the number of days between
the last day of the last fiscal quarter for which full quarterly dividends on the Series A Preferred Stock have been declared and paid and the Closing Date (including the Closing Date) by (ii) the total number of days in the fiscal quarter
during which the Closing Date occurs, without interest in accordance with our charter documents.

Holders of limited partnership
units in the Operating Partnership will receive $26.00 per unit in cash or, at their election, will have the right to receive either common units in the surviving operating partnership similar in their terms to the existing common units or,
alternatively, to receive a certain number of preferred units in the surviving operating partnership. Preference units in the surviving operating partnership will have the following terms:



| |  |  | each preferred unit will have a stated liquidation preference of $25.00 and will be entitled to distributions of legally
| | - |  | ------------------------------------------------------------------------------------------------------------------------

available assets by the surviving operating partnership when, as and if made by the surviving operating partnership, in

preference to all holders of other classes of partnership interests in the surviving operating partnership at the closing

and senior or pari passu with any classes of partnership units issued after the merger effective time, equal to 61/4%

per annum on the stated liquidation preference.



| |  |  | the preferred units will be redeemable for cash, or for an in-kind distribution of the properties of the operating
| | - |  | ------------------------------------------------------------------------------------------------------------------

partnership, in an amount equal to the liquidation preference plus any accrued but unpaid distributions at the option

of the holder or, in certain circumstances related to a redemption for an in-kind distribution of the properties of

the operating partnership, for an amount equal to 97.5% of the liquidation preference.



| |  |  | the preferred units may be redeemable at the option of the operating partnership beginning no earlier than the
| | - |  | --------------------------------------------------------------------------------------------------------------

tenth anniversary of the merger effective times; and



| |  |  | holders of the preferred units will generally have no voting or other consent rights in the surviving operating
| | - |  | ---------------------------------------------------------------------------------------------------------------

partnership other than the right to vote on (1) any material adverse change to their rights, (2) the creation

or reclassification of any class or series of preferred partnership units which would rank senior to the preferred

units with respect to distributions or rights upon liquidation or the creation of any class or series of securities

convertible into preferred partnership units ranking senior to the preferred units with respect to distributions

or rights upon liquidation and (3) in certain circumstances, mergers or reorganizations involving REIT Merger

Sub or the surviving operating partnership.

The Merger Agreement contains restrictions on our ability to solicit or engage in discussions or negotiations with a third party regarding specified transactions involving us or our subsidiaries. Notwithstanding these
restrictions, under certain circumstances and subject to certain conditions, our board of directors may respond to an unsolicited written acquisition proposal or terminate the Merger Agreement and enter into an acquisition agreement with respect to
a superior proposal.

The closing of the Merger is subject to customary closing conditions, including, but not limited to, the adoption of
the Merger Agreement and the approval of the Merger by a majority of the holders of our Common Stock. The Merger, the Merger Agreement and the transactions contemplated thereby have been approved by our board of directors, which has also recommended
that the holders of the Common Stock approve both the Merger Agreement and the Merger.

Pending the completion of the Merger, we have
agreed to carry on our business in the usual, regular and ordinary course, consistent with past practice, subject to certain exceptions in the Merger Agreement.

Results of Operations

Overview

Portfolio Performance

Overall
portfolio occupancy (excluding joint ventures) increased from 90.2% at December 31, 2005 to 94.4% at September 30, 2006.







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Lease Maturities

During the three months ended September 30, 2006, we executed approximately 55,859 square feet of new office leases at an average rent of $17.41 per square foot. We also renewed approximately 184,107 square feet
of office leases which expired in 2006 at an average rent per square foot of $22.91. The renewals represented an increase in effective rents (annualized rents net of concessions) of 9.9% during the third quarter of 2006.

Comparison of the three months ended September 30, 2006 to the three months ended September 30, 2005.

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, 2006 and 2005 (in thousands), excluding discontinued operations. The data set forth below should be read in conjunction with Note 17. Segment Information in our consolidated financial statements included
in Item 1.



|                            |  |                    |  |                    |         |                     |  |  |  |  |  |   |         |   |  |  |  |  |  |   |        |   |  | 
|--------------------------- |  | ------------------ |  | ------------------ | ------- | ------------------- |  |  |  |  |  | - | ------- | - |  |  |  |  |  | - | ------ | - |  | 
|                            |  | Three Months ended
|                            |  | September 30, 2006 |  | September 30, 2005 |         | Variance in dollars
|Washington D.C.             |  |                    |  | $                  | 7,837   |                     |  |  |  |  |  | $ | 7,502   |   |  |  |  |  |  | $ | 335    |   |  | 
|Southern California         |  |                    |  |                    | 6,213   |                     |  |  |  |  |  |   | 5,603   |   |  |  |  |  |  |   | 610    |   |  | 
|Northern New Jersey         |  |                    |  |                    | 4,112   |                     |  |  |  |  |  |   | 3,836   |   |  |  |  |  |  |   | 276    |   |  | 
|Boston                      |  |                    |  |                    | 3,339   |                     |  |  |  |  |  |   | 3,032   |   |  |  |  |  |  |   | 307    |   |  | 
|San Francisco               |  |                    |  |                    | 2,936   |                     |  |  |  |  |  |   | 2,326   |   |  |  |  |  |  |   | 610    |   |  | 
|Tampa/Orlando               |  |                    |  |                    | 1,299   |                     |  |  |  |  |  |   | 1,320   |   |  |  |  |  |  |   | (21    | ) |  | 
|Denver                      |  |                    |  |                    | 1,106   |                     |  |  |  |  |  |   | 921     |   |  |  |  |  |  |   | 185    |   |  | 
|Las Vegas                   |  |                    |  |                    | 747     |                     |  |  |  |  |  |   | 644     |   |  |  |  |  |  |   | 103    |   |  | 
|All others                  |  |                    |  |                    | 440     |                     |  |  |  |  |  |   | 475     |   |  |  |  |  |  |   | (35    | ) |  | 
|                            |  |                    | 
|                            |  |                    |  |                    |         |                    
|Total Net Operating Income  |  |                    |  | $                  | 28,029  |                     |  |  |  |  |  | $ | 25,659  |   |  |  |  |  |  | $ | 2,370  |   |  | 
|                            |  |                    |  |                    |         |                    
|                            | 
|                            |  | Three Months ended
|                            |  | September 30, 2006 |  | September 30, 2005 |         | Variance in dollars
|Rental revenue              |  |                    |  | $                  | 38,831  |                     |  |  |  |  |  | $ | 35,577  |   |  |  |  |  |  | $ | 3,254  |   |  | 
|Tenant reimbursements       |  |                    |  |                    | 4,545   |                     |  |  |  |  |  |   | 3,644   |   |  |  |  |  |  |   | 901    |   |  | 
|Property operating expenses |  |                    |  |                    | (15,347 | )                   |  |  |  |  |  |   | (13,562 | ) |  |  |  |  |  |   | (1,785 | ) |  | 
|                            |  |                    |  |                    |         |                    
|Total Net Operating Income  |  |                    |  | $                  | 28,029  |                     |  |  |  |  |  | $ | 25,659  |   |  |  |  |  |  | $ | 2,370  |   |  | 
|                            |  |                    |  |                    |         |                    

Rental revenue

Rental revenue for the three months ended September 30, 2006 increased $3,254,000 to $38,831,000 from $35,577,000 for the comparable period in 2005. The increase for the three months ended
September 30, 2006 was primarily due to acquisitions of four properties and an overall increase in occupancy in the Southern California, Northern New Jersey, San Francisco and Boston markets.

Tenant reimbursements

Tenant
reimbursements for the three months ended September 30, 2006 increased $901,000 to $4,545,000 from $3,644,000 for the comparable period in 2005. Reimbursements from tenants increased for the three months ended September 30, 2006 due to
increases in operating expenses including utility costs at properties.

Property operating expenses

Property operating expenses for the three months ended September 30, 2006 increased $1,785,000 to $15,347,000 from $13,562,000 for the comparable
period in 2005. The increase for the three months ended September 30, 2006 was primarily due to an increase in utility costs across all segments as a result of increase higher utility rates, increased occupancy and higher property taxes
resulting from an acquisition in both the San Francisco and Washington D.C. markets.







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|                                                        |  |                    |  |                    |     |                     |  |  |  |  |   |     |  |  |  |  |  |   |      |   |  | 
|------------------------------------------------------- |  | ------------------ |  | ------------------ | --- | ------------------- |  |  |  |  | - | --- |  |  |  |  |  | - | ---- | - |  | 
|                                                        |  | Three Months ended
|                                                        |  | September 30, 2006 |  | September 30, 2005 |     | Variance in dollars
|Fees and reimbursements, including from related parties |  |                    |  | $                  | 695 |                     |  |  |  |  | $ | 849 |  |  |  |  |  | $ | (154 | ) |  | 

Fees and reimbursements, including from related parties

Fees and reimbursements, including from related parties, consist primarily of property management and asset management fees paid to us under property and
asset management agreements with the unconsolidated joint ventures including the Rancon Partnerships (Tri-City Corporate Centre). This revenue decreased $154,000 to $695,000 for the three months ended September 30, 2006 from $849,000 for the
comparable period in 2005. The decrease resulted primarily from lower property and asset management fees due to the sale of Rincon Center, partially offset by fees earned for the management of the two new joint venture properties in which we own a
25% interest.



|                              |  |                    |  |                    |        |                     |  |  |  |  |   |        |  |  |  |  |  |   |       |  | 
|----------------------------- |  | ------------------ |  | ------------------ | ------ | ------------------- |  |  |  |  | - | ------ |  |  |  |  |  | - | ----- |  | 
|                              |  | Three Months ended
|                              |  | September 30, 2006 |  | September 30, 2005 |        | Variance in dollars
|General and administrative    |  |                    |  | $                  | 5,882  |                     |  |  |  |  | $ | 3,423  |  |  |  |  |  | $ | 2,459 |  | 
|Depreciation and amortization |  |                    |  |                    | 14,175 |                     |  |  |  |  |   | 13,116 |  |  |  |  |  |   | 1,059 |  | 

General and administrative

General and administrative expenses increased $2,459,000 to $5,882,000 for the three months ended September 30, 2006 from $3,423,000 for the comparable period in 2005. The increase for the
three months ended September 30, 2006 was primarily due to transaction costs of $2,666,000 related to the proposed merger.

Depreciation and amortization

Depreciation and amortization for the three months ended September 30, 2006 increased
$1,059,000 to $14,175,000 from $13,116,000 for the comparable period in 2005. The increase for the three months ended September 30, 2006 was primarily due to four property acquisitions completed in the latter part of the third quarter of 2005
and during the first and second quarters of 2006 for a total purchase price of $193 million in the Washington D.C, San Francisco, Southern California and Northern New Jersey markets.



|                                                            |  |                    |  |                    |         |                     |  |  |  |  |  |   |        |   |  |  |  |  |  |      |   |  | 
|----------------------------------------------------------- |  | ------------------ |  | ------------------ | ------- | ------------------- |  |  |  |  |  | - | ------ | - |  |  |  |  |  | ---- | - |  | 
|                                                            |  | Three Months ended
|                                                            |  | September 30, 2006 |  | September 30, 2005 |         | Variance in dollars
|Interest and other income                                   |  |                    |  | $                  | 467     |                     |  |  |  |  |  | $ | 455    |   |  |  |  |  |  | 12   |   |  | 
|Equity in earnings (losses) of unconsolidated jointventures |  |                    |  |                    | (73     | )                   |  |  |  |  |  |   | 6      |   |  |  |  |  |  | (79  | ) |  | 
|Interest expense                                            |  |                    |  |                    | (10,604 | )                   |  |  |  |  |  |   | (9,795 | ) |  |  |  |  |  | (809 | ) |  | 
|Loss on early extinguishment of debt                        |  |                    |  |                    | (772    | )                   |  |  |  |  |  |   | (127   | ) |  |  |  |  |  | (645 | ) |  | 

Interest expense

Interest expense for the three months ended September 30, 2006 increased $809,000 to $10,604,000 from $9,795,000 for the comparable period in 2005. The increase was primarily attributable to
higher variable interest rates and a higher principal balance on our unsecured bank line of credit as well as the cessation of interest capitalization on the Marina Shores development project due to the decision to sell a majority of our interest in
the development project.

Loss on early extinguishment of debt

During the three months ended September 30, 2006, we recorded losses on early extinguishment of debt of $772,000, which consisted primarily of write-offs of unamortized original financing
costs as well as a prepayment penalty of $523,000 in connection with the payoff of a loan. During the three months ended September 30, 2005,







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losses on early extinguishment of debt of $127,000 represent the write-off of unamortized original
financing costs in connection with the refinancing of the Metro Place loan.

Discontinued operations

During the three months ended September 30, 2006, discontinued operations included the results of operations of an asset sold during the third
quarter and gain on sales real estate assets of $12,697,000. During the third quarter of 2005, the gain on sales of real estate assets of $27,617,000 resulted from the sale of four office properties, which were part of our plan to dispose of certain
assets in our non-core markets and certain non-core assets in core markets. In addition, in connection with the disposition of Oakbrook Terrace on October 7, 2005, we recorded a gain related to increase in fair value of property of
approximately $1.3 million in the third quarter of 2005.

Gain on sale of real estate assets

The gain on sales of real estate assets of $3,677,000 during the third quarter of 2006 resulted from the gain recognized from the contribution of a
property to an existing joint venture. On September 26, 2006, we contributed Gatehall I, an 113,469 square foot office building in Parsippany, New Jersey, at a value of $14.3 million for 100% of the property, to an existing joint venture with
an investment advisor. The investment advisor contributed $5.1 million in cash for a 75% ownership interest and the joint venture borrowed $7.3 million from a third party lender. We received net cash proceeds of $12.4 million which were used to pay
down our unsecured bank line of credit. We recognized a gain from the transaction of $3.7 million related to 75% of the asset now owned by the outside partner. We retained a 25% ownership interest in the joint venture and will provide property
management, leasing and asset management services to the joint venture on an on-going basis. The investment balance is net of a deferred gain on the sale of $1.2 million, which will be recognized when the joint venture sells the contributed
property.









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Comparison of the nine months ended September 30, 2006 to the nine months ended
September 30, 2005.

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, 2006 and 2005 (in thousands), excluding discontinued operations. The data set forth below should be read in conjunction with Note 17. Segment Information in
our consolidated financial statements included in Item 1.



|                            |  |                    |  |                    |         |                     |  |  |  |  |  |   |         |   |  |  |  |  |  |   |        |   |  | 
|--------------------------- |  | ------------------ |  | ------------------ | ------- | ------------------- |  |  |  |  |  | - | ------- | - |  |  |  |  |  | - | ------ | - |  | 
|                            |  | Nine Months ended 
|                            |  | September 30, 2006 |  | September 30, 2005 |         | Variance in dollars
|Washington D.C.             |  |                    |  | $                  | 24,184  |                     |  |  |  |  |  | $ | 19,804  |   |  |  |  |  |  | $ | 4,380  |   |  | 
|Southern California         |  |                    |  |                    | 18,569  |                     |  |  |  |  |  |   | 17,547  |   |  |  |  |  |  |   | 1,022  |   |  | 
|Northern New Jersey         |  |                    |  |                    | 12,513  |                     |  |  |  |  |  |   | 11,135  |   |  |  |  |  |  |   | 1,378  |   |  | 
|Boston                      |  |                    |  |                    | 9,889   |                     |  |  |  |  |  |   | 9,973   |   |  |  |  |  |  |   | (84    | ) |  | 
|San Francisco               |  |                    |  |                    | 9,195   |                     |  |  |  |  |  |   | 5,733   |   |  |  |  |  |  |   | 3,462  |   |  | 
|Tampa/Orlando               |  |                    |  |                    | 3,938   |                     |  |  |  |  |  |   | 3,827   |   |  |  |  |  |  |   | 111    |   |  | 
|Denver                      |  |                    |  |                    | 3,256   |                     |  |  |  |  |  |   | 3,106   |   |  |  |  |  |  |   | 150    |   |  | 
|Las Vegas                   |  |                    |  |                    | 2,183   |                     |  |  |  |  |  |   | 1,919   |   |  |  |  |  |  |   | 264    |   |  | 
|All others                  |  |                    |  |                    | 1,224   |                     |  |  |  |  |  |   | 1,404   |   |  |  |  |  |  |   | (180   | ) |  | 
|                            |  |                    | 
|                            |  |                    |  |                    |         |                    
|Total Net Operating Income  |  |                    |  | $                  | 84,951  |                     |  |  |  |  |  | $ | 74,448  |   |  |  |  |  |  | $ | 10,503 |   |  | 
|                            |  |                    |  |                    |         |                    
|                            | 
|                            |  | Nine Months ended 
|                            |  | September 30, 2006 |  | September 30, 2005 |         | Variance in dollars
|Rental revenue              |  |                    |  | $                  | 115,710 |                     |  |  |  |  |  | $ | 102,044 |   |  |  |  |  |  | $ | 13,666 |   |  | 
|Tenant reimbursements       |  |                    |  |                    | 15,306  |                     |  |  |  |  |  |   | 10,990  |   |  |  |  |  |  |   | 4,316  |   |  | 
|Property operating expenses |  |                    |  |                    | (46,065 | )                   |  |  |  |  |  |   | (38,586 | ) |  |  |  |  |  |   | (7,479 | ) |  | 
|                            |  |                    |  |                    |         |                    
|Total Net Operating Income  |  |                    |  | $                  | 84,951  |                     |  |  |  |  |  | $ | 74,448  |   |  |  |  |  |  | $ | 10,503 |   |  | 
|                            |  |                    |  |                    |         |                    

Rental revenue

Rental revenue for the nine months ended September 30, 2006 increased $13,666,000 to $115,710,000 from $102,044,000 for the comparable period in 2005. The increase for the nine months ended
September 30, 2006 was primarily due to acquisitions of four properties and an overall increase in occupancy in the Southern California, Northern New Jersey, San Francisco and Tampa markets.

Tenant reimbursements

Tenant
reimbursements for the nine months ended September 30, 2006 increased $4,316,000 to $15,306,000 from $10,990,000 for the comparable period in 2005. Reimbursements from tenants increased for the nine months ended September 30, 2006 due to
increases in operating expenses including utility costs at properties.

Property operating expenses

Property operating expenses for the nine months ended September 30, 2006 increased $7,479,000 to $46,065,000 from $38,586,000 for the comparable
period in 2005. The increase for the nine months ended September 30, 2006 was primarily due to an increase in utility costs across all segments as a result of increase higher utility rates, increased occupancy and higher property taxes
resulting from an acquisition in both the San Francisco and Washington D.C. markets.





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|                                                        |  |                    |  |                    |       |                     |  |  |  |  |   |       |  |  |  |  |  |   |     |  | 
|------------------------------------------------------- |  | ------------------ |  | ------------------ | ----- | ------------------- |  |  |  |  | - | ----- |  |  |  |  |  | - | --- |  | 
|                                                        |  | Nine Months ended 
|                                                        |  | September 30, 2006 |  | September 30, 2005 |       | Variance in dollars
|Fees and reimbursements, including from related parties |  |                    |  | $                  | 3,693 |                     |  |  |  |  | $ | 3,302 |  |  |  |  |  | $ | 391 |  | 

Fees and reimbursements, including from related parties

Fees and reimbursements, including from related parties, consist primarily of property management and asset management fees paid to us under property and
asset management agreements with the unconsolidated joint ventures including the Rancon Partnerships (Tri-City Corporate Centre). This revenue increased $391,000 to $3,693,000 for the nine months ended September 30, 2006 from $3,302,000 for the
comparable period in 2005. The increase for the nine months ended September 30, 2006 was primarily due to an incentive fee of $1.1 million received upon the sale of 2000 Corporate Ridge (as discussed below) as a result of the economic returns
generated over the life of the joint venture and fees earned for the management of two new joint venture properties, partially offset by lower property and asset management fees due to the sale of Rincon Center



|                                               |  |                    |  |                    |        |                     |  |  |  |  |   |        |  |  |  |  |  |   |        |   |  | 
|---------------------------------------------- |  | ------------------ |  | ------------------ | ------ | ------------------- |  |  |  |  | - | ------ |  |  |  |  |  | - | ------ | - |  | 
|                                               |  | Nine Months ended 
|                                               |  | September 30, 2006 |  | September 30, 2005 |        | Variance in dollars
|General and administrative                     |  |                    |  | $                  | 13,663 |                     |  |  |  |  | $ | 10,633 |  |  |  |  |  | $ | 3,030  |   |  | 
|Depreciation and amortization                  |  |                    |  |                    | 41,590 |                     |  |  |  |  |   | 36,626 |  |  |  |  |  |   | 4,964  |   |  | 
|Provision for impairment of real estate assets |  |                    |  |                    |       |                     |  |  |  |  |   | 5,160  |  |  |  |  |  |   | (5,160 | ) |  | 

General and administrative

General and administrative expenses increased of $3,030,000 to $13,663,000 for the nine months ended September 30, 2006 from $10,633,000 for the comparable period in 2005. The increase for
the nine months ended September 30, 2006 resulted from transaction costs of $2,666,000 related to the proposed merger as well as higher professional fees related to the restatement of the December 31, 2004 annual and the 2005 quarterly
financials and increased travel expenses.

Depreciation and amortization

Depreciation and amortization for the nine months ended September 30, 2006 increased $4,964,000 to $41,590,000 from $36,626,000 for the comparable period in 2005. The increase for the nine
months ended September 30, 2006 was primarily due to four property acquisitions completed in the latter part of the third quarter of 2005 and during the first and second quarters of 2006 for a total purchase price of $193 million in the
Washington D.C, San Francisco, Southern California and Northern New Jersey markets.

Provision for impairment of real estate assets

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

















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|                                                    |  |                    |  |                    |         |                     |  |  |  |  |  |   |         |   |  |  |  |  |  |   |        |   |  | 
|--------------------------------------------------- |  | ------------------ |  | ------------------ | ------- | ------------------- |  |  |  |  |  | - | ------- | - |  |  |  |  |  | - | ------ | - |  | 
|                                                    |  | Nine Months ended 
|                                                    |  | September 30, 2006 |  | September 30, 2005 |         | Variance in dollars
|Interest and other income                           |  |                    |  | $                  | 1,496   |                     |  |  |  |  |  | $ | 2,099   |   |  |  |  |  |  | $ | (603   | ) |  | 
|Equity in earnings of unconsolidated joint ventures |  |                    |  |                    | 19,740  |                     |  |  |  |  |  |   | 308     |   |  |  |  |  |  |   | 19,432 |   |  | 
|Interest expense                                    |  |                    |  |                    | (32,254 | )                   |  |  |  |  |  |   | (26,087 | ) |  |  |  |  |  |   | (6,167 | ) |  | 
|Loss on early extinguishment of debt                |  |                    |  |                    | (875    | )                   |  |  |  |  |  |   | (688    | ) |  |  |  |  |  |   | (187   | ) |  | 

Interest and other income

Interest and other income decreased $603,000 to $1,496,000 for the nine months ended September 30, 2006 from $2,099,000 for the comparable period in 2005. The decrease was primarily due to a
fee we received in the first quarter of 2005 to waive our right to acquire the Gateway Office Five development project.

Equity in
earnings of unconsolidated joint ventures

Equity in earnings of unconsolidated joint ventures increased $19,432,000 to $19,740,000 for
the nine months ended September 30, 2006 from $308,000 for the comparable period in 2005. The increase was primarily due to our portion of the joint ventures gains on the sale of properties. On June 15, 2006, we and one of our joint
venture partners sold the property known as 2000 Corporate Ridge in McLean, Virginia for $79.1 million. We received from the joint venture net cash proceeds of $14.5 million and recognized our portion of the gain on sale of $10.1 million. In
addition, on June 9, 2006, we and one of our joint venture partners sold the property known as Rincon Center, a mixed-use property in San Francisco comprised of 528,000 square feet of class A office and retail and 320 apartment
units for $275.0 million. We received from the joint venture net cash proceeds of $13.6 million and recognized our portion of the gain on sale of $9.5 million.

Interest expense

Interest expense for the nine months ended September 30, 2006 increased
$6,167,000 to $32,254,000 from $26,087,000 for the comparable period in 2005. The increase for the nine months ended September 30, 2006 was primarily attributable to higher variable interest rates and a higher principal balance on our unsecured
bank line of credit as well as the cessation of interest capitalization on the Marina Shores development project due to the decision to sell a majority of our interest in the development project.

Loss on early extinguishment of debt

During the nine months ended September 30, 2006, we recorded losses on early extinguishment of debt of $875,000, which consisted primarily of write-offs of unamortized original financing costs as well as prepayment penalties of
$550,000 in connection with the refinancing of debts and payoff of various loans. During the nine months ended September 30, 2005, losses on early extinguishment of debt of $688,000 represented a prepayment penalty of $407,000 and the write-off
of unamortized original financing costs in connection with the refinancing of debts.

Discontinued operations

During the nine months ended September 30, 2006, discontinued operations included the gain on sales of real estate assets of approximately $20.4
million related to four office properties and the Marina Shores development project. Additionally, included in discontinued operations is a provision for impairment of real estate assets of $561,000 in connection with the sale of the Osram Building
due to higher than anticipated costs to sell the property. During the nine months ended September 30, 2005, discontinued operations included the gain on sales of real estate assets of $54,246 resulting from the sale of eight office properties
and two industrial properties. In addition, in connection with our decision in March 2005 to dispose of assets in our non-core markets and certain non-core assets in core markets, we reduced the intended holding period of 21 assets to two years or
less. Based on our analysis of the anticipated net disposition proceeds of each asset over the next two years, we determined that nine of the assets were impaired. The difference between the estimated fair value (based on by sales proceeds) and the
net book value was approximately $49.3 million. When combined with the impairment charge recognized on an asset sold during the first quarter of 2005 and additional impairments recognized during the third quarter of 2005, the total impairment charge
recognized during the nine months ended September 30, 2005, was approximately $54.1 million.







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See Note 6 in our consolidated financial statements included in Item 1 for additional information
regarding discontinued operations.

Gain on sale of real estate assets

During the nine months ended September 30, 2006, we contributed two properties to a joint venture and recognized an aggregate gain on sale of $14,182,000. On June 16, 2006, we
contributed Montgomery Executive Center, a 119,679 square foot office building in Gaithersburg, Maryland, at a value of $23.5 million for 100% of the property, to a new joint venture with an investment advisor. The investment advisor contributed
$8.2 million in cash for a 75% ownership interest and the joint venture borrowed $12.5 million from a third party lender. We received net cash proceeds of $20.6 million and recognized a gain of $10.5 million related to 75% of the asset now owned by
the outside partner; the remaining 25% of the gain of $3.5 million has been deferred and netted against the investment in unconsolidated joint venture balance and will be recognized by us when the joint venture sells the contributed property. On
September 26, 2006, we contributed Gatehall I, a 113,469 square foot office building in Parsippany, New Jersey, at a value of $14.3 million for 100% of the property, to existing joint venture with an investment advisor. The investment advisor
contributed $5.1 million in cash for a 75% ownership interest and the joint venture borrowed $7.3 million from a third party lender. We received net cash proceeds of $12.4 million which were used to pay down our unsecured bank line of credit. We
recognized a gain from the transaction of $3.7 related to 75% of the asset now owned by the outside partner. We retained a 25% ownership interest in the joint venture and will provide property management, leasing and asset management services to the
joint venture on an on-going basis. The investment balance is net of a deferred gain on the sale of $1.2 million, which will be recognized when the joint venture sells the contributed property.

Cumulative Effect of Change in Accounting Principle

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

Charges associated with the redemption of preferred stock

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

Liquidity and Capital Resources

Cash Flows

For the nine months ended September 30, 2006, cash provided by operating activities was $35,645,000 as compared to $44,216,000 for the same period in
2005. This change was primarily due to an increase in cash paid for lease commissions, increases in general and administrative expenses and an increase in interest expense (as discussed above), which were partially offset by an increase in net
operating income. Cash provided by investing activities was $117,677,000 for the nine months ended September 30, 2006, as compared to $15,814,000 for the same period in 2005. This change is primarily due to a decrease in funds used for
acquisition of properties and capital and tenant improvements as well as proceeds received from the sale of joint venture properties, partially offset by higher investments in land and development and investment in Tri-City Corporate Centre during
the nine months ended September 30, 2006. Cash used for financing activities was $153,228,000 for the nine months ended September 30, 2006, as compared to $60,396,000 for the same period in 2005. This change is due primarily to an increase
in repayments of debt and repurchases of common stock in 2006, partially offset by the costs of the preferred stock redemption in 2005.

During the nine months ended September 30, 2006 and 2005, cash provided by operating activities was insufficient to pay dividends by $1,454,000 and $2,338,000, respectively. The shortfalls were funded from property sales.

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







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

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

Investments in Land and Development

Our investments in land and development increased from $51,750,000 at December 31,
2005, to $59,831,000 at September 30, 2006. The increase is primarily due to the acquisition of Courtyard II, a 39,000 square foot vacant office building for a total purchase price of $7.8 million located in San Diego, California. We plan to
upgrade the property and to convert it to for-sale office condominiums, subject to certain approvals. The increase was partially offset by the sales of approximately 27.3 acres of the land at Gateway Park located in Denver, Colorado in which we had
a partial interest.

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

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



|                                |  |                             |  |                                                                                                                |  |                        |        |                           |  |                  |  |                                           |        |     |                                          |          
|------------------------------- |  | --------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | ------------------------- |  | ---------------- |  | ----------------------------------------- | ------ | --- | ---------------------------------------- | ---------
|Market                          |  | Properties                  |  | Description                                                                                                    |  | City                   |        | Proposed    SquareFootage |  | EconomicInterest |  | Investment    Balance
atSeptember 30,2006 |        |     | Investment    Balance
atDecember 31,2005
|                                |  |                             |  |                                                                                                                |  |                        |       
|Boston                          |  | Marlborough Corporate Place |  | Three office buildings to be constructed as the eighth, ninth, and tenth phases of Marlborough Corporate Place |  | Marlborough            |        | 235,000                   |  | 100%             |  | $                                         | 5,283  |     |                                          | $5,248   
|                                |  |                             |  |                                                                                                                |  |                        |        |                           |  |                  |  |                                           |       
|                                |  | Subtotal - Boston           |  |                                                                                                                |  |                        |        | 235,000                   |  |                  |  |                                           | 5,283  |     |                                          | 5,248    
|                                |  |                             |  |                                                                                                                |  |                        |       
|Denver                          |  | Gateway Park                |  | 1,200 acre mixed-use park near Denver International Airport; approximately 395 acres undeveloped               |  | Denver                 |        | n/a                       |  | 50%(1)           |  |                                           | 35,988 | (1) |                                          | 35,994(1)
|                                |  |                             |  |                                                                                                                |  |                        |       
|                                |  | Lima Street                 |  | 19.5 acres of undeveloped land in Englewood, Colorado, zoned for office use                                    |  | Denver                 |        | 150,000                   |  | 100%             |  |                                           | 5,179  |     |                                          | 4,750    
|                                |  |                             |  |                                                                                                                |  |                        |        |                           |  |                  |  |                                           |       
|                                |  | Subtotal - Denver           |  |                                                                                                                |  |                        |        | 150,000                   |  |                  |  |                                           | 41,167 |     |                                          | 40,744   
|                                |  |                             |  |                                                                                                                |  |                        |       
|Southern California             |  | Courtyard II                |  | Vacant office building in San Diego, California, to be converted to for-sale office condominiums               |  | San Diego              |        | 39,000                    |  | 100%             |  |                                           | 7,810  |     |                                          |         
|                                |  |                             |  |                                                                                                                |  |                        |        |                           |  |                  |  |                                           |       
|                                |  | Subtotal      San Diego    |  |                                                                                                                |  |                        |        | 39,000                    |  |                  |  |                                           | 7,810  |     |                                          |         
|                                |  |                             |  |                                                                                                                |  |                        |       
|                                |  |                             |  | Other land held for development                                                                                |  | NewJersey/SanFrancisco |        |                           |  |                  |  |                                           | 5,571  |     |                                          | 5,758    
|TOTAL LAND HELD FOR DEVELOPMENT |  | 424,000                     |  |                                                                                                                |  | $                      | 59,831 |                           |  | $51,750         



|(1) | Interest in the form of mezzanine loans and equity. In addition, we hold a mortgage loan receivable secured by adjacent parcels of land with a balance of $11,055
and $11,231 at September 30, 2006 and December 31, 2005, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







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

Certain of the alliances with which we conduct business have been deemed to be Variable Interest Entities (VIEs) as
defined by FIN 46 Revised; however, other than Marina Shores, none of these VIEs are required to be consolidated as we are not deemed to be the primary beneficiary as defined by FIN 46 Revised. The total assets and liabilities of such entities were
approximately $124.6 million and $70.0 million, respectively, at September 30, 2006, and $97.6 million and $60.0 million, respectively, at December 31, 2005. Our maximum exposure to loss is equal to our investments in these arrangements,
plus the related debt guarantees, as described above.

Investments in Unconsolidated Joint Ventures

Investments in unconsolidated joint ventures decreased from $12,040,000 at December 31, 2005 to $12,027,000 at September 30, 2006. This decrease
was primarily due to the sales of two joint venture properties, partially offset by our investment in Tri-City Corporate Centre. To the extent our cost basis is different than the basis reflected at the joint venture level, the basis difference is
amortized over the life of the underlying asset which created the basis difference and is included in our share of equity in earnings of unconsolidated joint ventures.

Mortgage Loans Receivable

Mortgage loans receivable consists primarily of a first mortgage secured
by a 50% interest in 134 acres of land at September 30, 2006 and December 31, 2005 at Gateway Business Park in Aurora, Colorado (as noted in above table). Periodic payments of interest and principal are received from proceeds of land
parcel sales in the project. The balance of this mortgage loan receivable decreased from $11,231,000 at December 31, 2005, to $11,055,000 at September 30, 2006 due to principal payments received of $1,309,000, offset by monthly interest
accruals of $1,133,000. The borrowing entities in this loan arrangement have been deemed to be VIEs, but we are not deemed to be the primary beneficiary as defined by FIN 46 Revised. Our maximum exposure to loss is equal to the recorded amount of
our loan, including accrued interest.

Mortgage Loans and Unsecured Bank Line of Credit

During the nine months ended September 30, 2006, mortgage loans payable decreased from $704,870,000 to $629,116,000. This decrease resulted from loan
payoffs of $96,117,000 in connection with new financings, $101,620,000 paid off in connection with dispositions of a property and a development project and $7,645,000 of scheduled principal amortization, offset by new mortgage loans obtained
totaling $129,628,000.

Outstanding borrowings under our unsecured bank line of credit decreased from $106,669,000 at December 31,
2005, to $99,466,000 at September 30, 2006. The decrease was due to pay downs totaling $129,802,000 generated from the proceeds of property and land sales and cash flow from operations, partially offset by draws totaling $122,599,000 for common
stock repurchases, property acquisition, mortgage loan payoff and dividend distributions. The unsecured bank line of credit requires us, among other things, to be in compliance with certain financial and operating covenants. We have been in
compliance during all of 2005 and 2006.















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



|                                                                                                            |  |                    |  |   |          |   |  | 
|----------------------------------------------------------------------------------------------------------- |  | ------------------ |  | - | -------- | - |  | 
|                                                                                                            |  | September 30, 2006
|                                                                                                            |  |                    | 
|Balance at beginning of year                                                                                |  |                    |  | $ | 704,870  |   |  | 
|Repayments and scheduled principal amortization                                                             |  |                    |  |   | (160,382 | ) |  | 
|New borrowings and refinancing (a)                                                                          |  |                    |  |   | 129,628  |   |  | 
|Repaid upon sale of properties and joint venture interest (see Note 7  Investment in Land and
Development) |  |                    |  |   | (45,000  | ) |  | 
|                                                                                                            |  |                   
|                                                                                                            |  |                    | 
|Balance at end of period                                                                                    |  |                    |  | $ | 629,116  |   |  | 
|                                                                                                            |  |                   



|(a) | On April 27, 2006, we obtained a new mortgage loan of $30.6 million in connection with the acquisition of 3330 Cahuenga Boulevard. The loan bears interest
at a fixed rate of 6.93%, matures in December 2006 and requires monthly interest only payments of $108,000.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On May 31, 2006, we completed a $30 million refinancing of our King Street Station II property. The loan bears interest at a fixed rate of 5.62%, matures in June 2016 and requires monthly interest only payments of $141,000. Proceeds
from the refinancing were used to repay the existing loan.

On May 31, 2006, we completed a $28 million refinancing of
our 400 South El Camino property. The loan bears interest at a fixed rate of 5.78%, matures in June 2016 and requires monthly interest only payments of $135,000 for the first three years and monthly principal and interest payments of $164,000 for
the remaining seven years. Proceeds from the refinancing were used to repay the existing loan.

On June 30, 2006, we
completed a $41 million refinancing of our CenterPointe I-IV properties. The loan bears interest at a fixed rate of 6.39%, matures in July 2016 and requires monthly interest only payments of $218,000 for the first two years and monthly principal and
interest payments of $256,000 for the remaining eight years. Net proceeds of $2.5 million were used to pay down our unsecured bank line of credit after repaying two existing loans and closing costs.

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

The required principal payments on our debt for the next five years and thereafter, as of September 30, 2006, are as follows (in thousands). Included in the year ending December 31, 2009, is the unsecured
bank line of credit balance of $99,466,000 which has an initial maturity of March 26, 2009.



|                                               |  |   |  |  |        
|---------------------------------------------- |  | - |  |  | -------
|Year EndingDecember 31,                        |  |   |  |  |        
|2006                                           |  | $ |  |  | 43,293 
|2007                                           |  |   |  |  | 22,962 
|2008                                           |  |   |  |  | 106,577
|2009                                           |  |   |  |  | 277,296
|2010                                           |  |   |  |  | 73,710 
|Thereafter                                     |  |   |  |  | 204,163
|                                               |  |   |  |  |        
|Total before adjusting forunamortized premiums |  |   |  |  | 728,001
|Add: Unamortized premiums                      |  |   |  |  | 581    
|                                               |  |   |  |  |        
|Total                                          |  | $ |  |  | 728,582
|                                               |  |   |  |  |        









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Stock Repurchases

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

Critical Accounting Policies

Our discussion and analysis of financial
condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the U.S. (GAAP). The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We
evaluate our assumptions and estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting
policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Revenue
recognized on a straight-line basis

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

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

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

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









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

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

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

Property dispositions

We report real estate dispositions under Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets,which requires us to separately report assets held for sale as discontinued operations if the operations and cash flows of the property have been (or will be) eliminated from our ongoing operations as a result of the
disposition. Amounts included in discontinued operations include operating results of the property and the related gain or loss upon sale. Results of prior periods are included in discontinued operations to conform to that presentation. Sales of
real estate are recognized when a contract has been executed, initial and continuing investment is adequate to demonstrate a commitment to pay for the property and we do not have substantial continuing involvement in the property. Sales to entities
in which the Company has or receives an interest are accounted for in accordance with partial sale accounting provisions as set forth in SFAS No. 66.

Our status as a real estate investment trust

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

Our variable interest entities under FIN 46 Revised

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

Stock-Based Compensation

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











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New Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109(FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in a companys financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The Interpretation also provides guidance on description, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 becomes effective on January 1,
2007. We anticipate that the adoption of Interpretation 48 will not have a material impact on our financial position, net earnings or cash flows.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (SAB 108), which becomes effective beginning on January 1, 2007. SAB 108 provides guidance on the consideration of the
effects of prior period misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 provides for the quantification of the impact of correcting all misstatements, including both the carryover and
reversing effects of prior year misstatements, on the current year financial statements. If a misstatement is material to the current year financial statements, the prior year financial statements should also be corrected, even though such revision
was, and continues to be, immaterial to the prior year financial statements. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. Such correction should be made in the current
period filings. We are currently evaluating the impact of adopting SAB 108.

Inflation

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

Funds from Operations

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

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

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

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









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(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 (loss) to funds from operations
(FFO) for the three and nine months ended September 30, 2006 and 2005 (in thousands):



|                                                                                  |  |                    |  |                   |         |                   |  |                   |  |  |  |   |         |   |  |  |  |  |  |   |         |   |  |  |  |  |  |   |         |   |  | 
|--------------------------------------------------------------------------------- |  | ------------------ |  | ----------------- | ------- | ----------------- |  | ----------------- |  |  |  | - | ------- | - |  |  |  |  |  | - | ------- | - |  |  |  |  |  | - | ------- | - |  | 
|                                                                                  |  | Three Months Ended |  | Nine months Ended
|                                                                                  |  | September 30,2006  |  | September 30,2005 |         | September 30,2006 |  | September 30,2005
|                                                                                  |  |                    |  |                   |         |                   |  |                   |  |  |  |  
|Net income                                                                        |  |                    |  | $                 | 13,280  |                   |  |                   |  |  |  | $ | 28,623  |   |  |  |  |  |  | $ | 51,636  |   |  |  |  |  |  | $ | 5,600   |   |  | 
|Cumulative effect of change in accounting principle                               |  |                    |  |                   |        |                   |  |                   |  |  |  |   |        |   |  |  |  |  |  |   | (277    | ) |  |  |  |  |  |   |        |   |  | 
|Real estate depreciation and amortization, net of minority interest(1)            |  |                    |  |                   | 12,883  |                   |  |                   |  |  |  |   | 12,993  |   |  |  |  |  |  |   | 38,259  |   |  |  |  |  |  |   | 40,040  |   |  | 
|Preferred dividends                                                               |  |                    |  |                   | (1,812  | )                 |  |                   |  |  |  |   | (1,812  | ) |  |  |  |  |  |   | (5,435  | ) |  |  |  |  |  |   | (5,435  | ) |  | 
|Dividends declared on redeemed preferred stock                                    |  |                    |  |                   |        |                   |  |                   |  |  |  |   |        |   |  |  |  |  |  |   |        |   |  |  |  |  |  |   | (596    | ) |  | 
|Premium and write-off of original issuance costs on preferred stock redemption    |  |                    |  |                   |        |                   |  |                   |  |  |  |   |        |   |  |  |  |  |  |   |        |   |  |  |  |  |  |   | (5,309  | ) |  | 
|Gain on sale of unconsolidated joint venture properties, net of minority interest |  |                    |  |                   |        |                   |  |                   |  |  |  |   |        |   |  |  |  |  |  |   | (18,052 | ) |  |  |  |  |  |   |        |   |  | 
|Gain on sale of real estate assets, net of minority interest                      |  |                    |  |                   | (3,363  | )                 |  |                   |  |  |  |   |        |   |  |  |  |  |  |   | (12,983 | ) |  |  |  |  |  |   |        |   |  | 
|Gain on sale from discontinued operations, net of minority interest               |  |                    |  |                   | (11,623 | )                 |  |                   |  |  |  |   | (25,506 | ) |  |  |  |  |  |   | (17,991 | ) |  |  |  |  |  |   | (50,093 | ) |  | 
|Adjustment to reflect FFO of unconsolidated joint ventures(2)                     |  |                    |  |                   | 221     |                   |  |                   |  |  |  |   | 178     |   |  |  |  |  |  |   | 629     |   |  |  |  |  |  |   | 535     |   |  | 
|Adjustment to reflect FFO of minority interest(3)                                 |  |                    |  |                   | 879     |                   |  |                   |  |  |  |   | 1,203   |   |  |  |  |  |  |   | 3,281   |   |  |  |  |  |  |   | (1,308  | ) |  | 
|                                                                                  |  |                    |  |                   |         |                   |  |                  
|FFO available to Common Stockholders                                              |  |                    |  | $                 | 10,465  |                   |  |                   |  |  |  | $ | 15,679  |   |  |  |  |  |  | $ | 39,067  |   |  |  |  |  |  | $ | (16,566 | ) |  | 
|                                                                                  |  |                    |  |                   |         |                   |  |                  



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

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

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

Forward-Looking
Statements; Factors That May Affect Operating Results

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



|n | 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;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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





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



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



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



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



|n | Statements regarding the effect of changes in interest rates on our financial instruments;
|- | ------------------------------------------------------------------------------------------



|n | Our plan to issue stock under the reserve plan pursuant to the exercise of stock options;
|- | -----------------------------------------------------------------------------------------



|n | Statements that we have no intention to sell or otherwise dispose of those properties in our portfolio that 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 or interests therein in taxable transactions during the restriction period; and
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|n | Our plan to upgrade the property known as Courtyard II and to convert it to for-sale office condominiums, subject to certain approvals.
|- | ---------------------------------------------------------------------------------------------------------------------------------------

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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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

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

Item 3.            Quantitative and Qualitative Disclosures about Market Risk

Interest Rates

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

It is our policy to manage our exposure to fluctuations in market interest rates for our borrowings through the use of fixed rate debt instruments to the extent that reasonably favorable rates
are obtainable with such arrangements. In order to maximize financial flexibility when selling properties and minimize potential prepayment penalties on fixed rate loans, we have also entered into several variable rate debt arrangements.
Approximately 14% at September 30, 2006 and 13% at December 31, 2005 of our outstanding debt, including amounts borrowed under our unsecured bank line of credit, were subject to variable rates. The average interest rate on our debt was
5.70% at December 31, 2005 and at September 30, 2006. We review interest rate exposure in the portfolio continually in an effort to minimize the risk of interest rate fluctuations. We do not have any other material market-sensitive
financial instruments. It is not our policy to engage in hedging activities for speculative or trading purposes.

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

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



|                      |  |                        |                |      |   |        |  |      |         |      |   |            |  |       |        |           |   |         |  |   |         |  |   |        
|--------------------- |  | ---------------------- | -------------- | ---- | - | ------ |  | ---- | ------- | ---- | - | ---------- |  | ----- | ------ | --------- | - | ------- |  | - | ------- |  | - | -------
|                      |  | Expected Maturity Date |                |      |   |       
|                      |  | 2006                   |                | 2007 |   | 2008   |  | 2009 |         | 2010 |   | Thereafter |  | Total |        | FairValue
|                      |  |                        | (in thousands) |      |   |        |  |      |        
|                      |  |                        |                |      |   |        |  |     
|Secured Fixed         |  | $                      | 43,361         |      | $ | 23,243 |  | $    | 106,815 |      | $ | 177,824    |  | $     | 73,710 |           | $ | 204,163 |  | $ | 629,116 |  | $ | 620,249
|Average interest rate |  |                        | 6.78%          |      |   | 6.27%  |  |      | 5.02%   |      |   | 5.72%      |  |       | 4.84%  |           |   | 5.55%   |  |   | 5.58%   |  |   |        
|                      |  |                        |                |      |   |        |  |     
|Unsecured Variable    |  | $                      |               |      | $ |       |  | $    |        |      | $ | 99,466     |  | $     |       |           | $ |        |  | $ | 99,466  |  | $ | 99,466 
|Average interest rate |  |                        |               |      |   |       |  |      |        |      |   | 6.47%      |  |       |       |           |   |        |  |   | 6.47%   |  |   |        

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 $124,000, based upon the balances outstanding on variable rate instruments at September 30, 2006.











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Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

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

PART II.        OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

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



|Item 1A. | Risk Factors
|-------- | ------------

Stockholders
or potential stockholders should read the Risk Factors section of our latest annual report on Form 10-K for the fiscal year ended December 31, 2005 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.

In addition to the risks identified in our 2005 10-K, we
are also subject to the following additional risks:

Risks Related to Our Proposed Merger

On August 20, 2006, we entered into a definitive Merger Agreement pursuant to which we have agreed, subject to the approval of our common
stockholders, to consummate the Merger, pursuant to which, we will be merged with and into Merger Sub, a subsidiary of certain funds managed by Morgan Stanley Real Estate. A definitive proxy statement in connection with this special meeting of
stockholders was filed with the Securities and Exchange Commission (the SEC) on October 17, 2006 and may be obtained by visiting the SECs website at www.sec.gov. The proxy statement contains important information about
us, the proposed merger and other related matters, and the discussions below contain only limited information about the Merger. As a result, you are encouraged to read the proxy statement in its entirety for additional information about the proposed
merger.

In connection with the proposed merger, we are subject to certain risks including, but not limited to, those set forth below.

If we are unable to consummate the proposed Merger, our business, financial condition, operating results and stock price could suffer.







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The completion of the proposed merger is subject to the satisfaction of numerous closing conditions,
including the adoption of the Merger Agreement and approval of the proposed Merger by our common stockholders. In addition, the occurrence of certain material events, changes or other circumstances could give rise to the termination of the Merger
Agreement. If our common stockholders choose not to approve the proposed Merger, we otherwise fail to satisfy, or obtain a waiver of the satisfaction of, the closing conditions to the transaction and the proposed Merger is not consummated, a
material event, change or circumstance has occurred that results in the termination of the Merger Agreement, we could be subject to various adverse consequences, including, but not limited to, the following:



| |  |  | we would remain liable for significant costs relating to the proposed Merger, including, among others, legal, accounting, financial advisory and financial
printing expenses;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may face various disruptions to the operation of our business as a result of the substantial time and effort invested by our management in connection with the
proposed Merger;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our decision to enter into the proposed Merger may cause substantial harm to relationships with our employees and/or may divert employee attention away from
day-to-day operations of our business;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an announcement that we have abandoned the proposed Merger could trigger a decline in our stock price to the extent that our stock price reflects a market
assumption that we will complete the Merger;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | under certain circumstances, in connection with the termination of the Merger Agreement, we will be required to pay a termination fee of $27.75 million, less any
expenses we previously paid. The Merger Agreement also provides that if either party terminates the Merger Agreement in certain circumstances, the breaching party must reimburse the non-breaching party for its reasonable transaction expenses up to a
limit of $5.0 million; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may forego alternative business opportunities or fail to respond effectively to competitive pressures.
| | - |  | ---------------------------------------------------------------------------------------------------------

Certain restrictive pre-closing covenants in the Merger Agreement may negatively affect our business, financial condition, operating results and cash
flows.

Pending completion of the proposed Merger, we have agreed to conduct our business in the ordinary course and consistent with our
past practices. We also have agreed, subject to certain exceptions, that we and our Operating Partnership will not, among other things:



| |  |  | amend our, our operating partnerships, or our other subsidiaries organizational documents;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | subject to certain exceptions, authorize for issuance, issue or sell, or agree or commit to issue or sell any shares of any class of our capital stock or any of
our subsidiaries capital stock or any options, warrants, convertible securities or other rights of any kind to acquire any shares of such capital stock, or any other ownership interest, of us or any of our subsidiaries or repurchase, redeem or
otherwise acquire any securities or equity equivalent;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reclassify, combine, split or subdivide any capital stock or other equity interest of us, our operating partnership or any of our subsidiaries;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | declare, set aside, make or pay dividends or other distributions with respect to our capital stock, any partnership units of our operating partnership or other
equity securities of any of our subsidiaries, other than (a) dividends paid by our direct or indirect subsidiaries, (b) regular quarterly dividend payments on our common stock not to exceed $0.275 per share, (c) the corresponding
quarterly distribution on existing partnership units of our operating partnership, and (d) cash dividends on our Series A preferred stock;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | acquire or enter into any option, commitment or agreement to acquire, any real property;
| | - |  | ----------------------------------------------------------------------------------------









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| |  |  | incur any indebtedness or issue any debt securities or assume, guarantee or endorse, or otherwise as an accommodation become responsible for, the obligations of
any person (other than a subsidiary) for indebtedness;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | modify or amend any material contract or enter into any new material contract or any non-compete contract;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | increase compensation or benefits payable to our directors, officers or employees, or grant termination pay to, or enter into any employment or severance
agreement with, any of our or our subsidiaries directors, officers or employees;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | establish, adopt, enter into or amend any collective bargaining, bonus, profit-sharing, thrift, compensation, stock option, restricted stock, pension,
retirement, deferred compensation, employment, termination, severance or other similar plan, agreement, trust, fund, policy or arrangement for the benefit of any director, officer or employee;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | prepay any of our long-term indebtedness or pay, discharge or satisfy any material claims, liabilities or obligations;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | take any material action with respect to our accounting policies or procedures;
| | - |  | -------------------------------------------------------------------------------



| |  |  | enter into a new lease or terminate, materially modify or amend any lease that relates to in excess of 11,000 square feet of net rentable area at any of our, our
subsidiaries and our joint ventures properties, or enter into, terminate or materially modify or amend any ground lease;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | authorize or enter into any commitment for any new material capital expenditure at any of our, our operating partnerships or our other subsidiaries
properties;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | waive, release, assign, settle or compromise any pending or threatened material legal actions or any pending or threatened claim brought by or on behalf of our
stockholders or the limited partners of the operating partnership;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | make any material tax election or settle or compromise any material tax liability; and
| | - |  | --------------------------------------------------------------------------------------



| |  |  | announce an intention, enter into an agreement or otherwise make a commitment to do any of the foregoing.
| | - |  | ---------------------------------------------------------------------------------------------------------

These restrictions could alter the manner in which we have customarily conducted our business and therefore significantly disrupt the operation of our
business, and could have a material adverse effect on our business, financial condition, cash flows and operating results.

Pending
consummation of the proposed Merger, existing or prospective tenants, vendors and other parties may delay or defer decisions concerning their business transactions or relationships with us, which may harm our results of operations going forward if
the proposed Merger is not consummated.

Because the proposed Merger is subject to several closing conditions, including the adoption
of the Merger Agreement and the approval of the proposed Merger by our stockholders, uncertainty exists regarding the completion of the proposed Merger. This uncertainty may cause existing or prospective tenants, vendors and other parties to delay
or defer decisions concerning their business transactions or relationships with us, which could negatively affect our business and results of operations.













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



|(a) | None.
|--- | -----



|(b) | None.
|--- | -----



|(c) | None.
|--- | -----



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None.



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

None



|Item 5. | Other Information
|------- | -----------------

None.











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|Item 6. | Exhibits
|------- | --------



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



|      |  |  |  |                                                                                                                                                                                                                                                                 
|----- |  |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.01  |  |  |  | Agreement and Plan of Merger with and among the Company, Glenborough Properties, L.P., Gridiron Holdings LLC and Gridiron Acquisition LLC, which is incorporated by reference to Exhibit 2.1 of a Form 8-K filed by the Company with the SEC on August 23, 2006.
|      |  | 
|3.01  |  |  |  | Articles of Amendment and Restatement of Articles of Incorporation of the Company are incorporated herein by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.                                      
|      |  | 
|3.02  |  |  |  | Amended Bylaws of the Company are incorporated herein by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.                                                                                           
|      |  | 
|3.03  |  |  |  | The Companys Form of Articles Supplementary relating to the 73/4% Series A Convertible Preferred Stock is incorporated herein by reference to Exhibit 3.03 to the Companys Annual Report on Form 10-K for the year ended December
31, 1997.                   
|      |  | 
|3.04  |  |  |  | Articles Supplementary of the Series B Preferred Stock (relating to the Rights Plan) are incorporated herein by reference to Exhibit 3.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.                                    
|      |  | 
|4.01  |  |  |  | Form of Common Stock Certificate of the Company is incorporated herein by reference to Exhibit 4.02 to the Companys Registration Statement on Form S-4 (Registration No. 33-83506), which became effective October 26, 1995.                                   
|      |  | 
|4.02  |  |  |  | Form of 7 3/4% Series A Convertible Preferred Stock Certificate of the Company is incorporated herein by reference to Exhibit D to
the Companys Registration Statement on Form 8-A which was filed on January 22, 1998.                                        
|      |  | 
|10.01 |  |  |  | Amended and Restated 1996 Stock Incentive Plan, which is incorporated by reference to Exhibit 10.1 of a Form 8-K filed by the Company with the SEC on May 5, 2006.                                                                                              
|      |  | 
|10.11 |  |  |  | Second Amendment to Executive Employment Agreement with Andrew Batinovich.                                                                                                                                                                                      
|      |  | 
|11.01 |  |  |  | Statement re: Computation of Earnings Per Share is shown in Note 16 of the Consolidated Financial Statements of the Company in Item 1.                                                                                                                          
|      |  | 
|31.01 |  |  |  | Section 302 Certification of Andrew Batinovich, Chief Executive Officer.                                                                                                                                                                                        
|      |  | 
|31.02 |  |  |  | Section 302 Certification of Brian Peay, Chief Financial Officer.                                                                                                                                                                                               
|      |  | 
|32.01 |  |  |  | Section 906 Certification of Andrew Batinovich, Chief Executive Officer.                                                                                                                                                                                        
|      |  | 
|32.02 |  |  |  | Section 906 Certification of Brian Peay, Chief Financial Officer.                                                                                                                                                                                               













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##### Table of Contents

SIGNATURES

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

GLENBOROUGH REALTY
TRUST INCORPORATED



By: Glenborough Realty Trust Incorporated,





| |  |                        |  |                              |  | 
| |  | ---------------------- |  | ---------------------------- |  | 
| |  | Date: November 9, 2006 |  | /s/ Andrew Batinovich        |  | 
| |  |                        |  | Andrew Batinovich            |  | 
| |  |                        |  | Director, President and      |  | 
| |  |                        |  | Chief Executive Officer      |  | 
| |  |                        | 
| |  | Date November 9, 2006  |  | /s/ Brian Peay               |  | 
| |  |                        |  | Brian Peay                   |  | 
| |  |                        |  | Executive Vice President and |  | 
| |  |                        |  | Chief Financial Officer      |  | 









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##### Table of Contents

EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                 
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Title                                                                                                                                                                                                                                                   
|            | 
|2.01        |  | Agreement and Plan of Merger with and among the Company, Glenborough Properties, L.P., Gridiron Holdings LLC and Gridiron Acquisition LLC, which is incorporated by reference to Exhibit 2.1 of a Form 8-K filed by the Company with the SEC on August 23, 2006.
|            | 
|3.01        |  | Articles of Amendment and Restatement of Articles of Incorporation of the Company are incorporated herein by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.                                      
|            | 
|3.02        |  | Amended Bylaws of the Company are incorporated herein by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.                                                                                           
|            | 
|3.03        |  | The Companys Form of Articles Supplementary relating to the 73/4% Series A Convertible Preferred Stock is incorporated herein by reference to Exhibit 3.03 to the Companys Annual Report on Form 10-K for the year ended December 31, 1997.                   
|            | 
|3.04        |  | Articles Supplementary of the Series B Preferred Stock (relating to the Rights Plan) are incorporated herein by reference to Exhibit 3.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.                                    
|            | 
|4.01        |  | Form of Common Stock Certificate of the Company is incorporated herein by reference to Exhibit 4.02 to the Companys Registration Statement on Form S-4 (Registration No. 33-83506), which became effective October 26, 1995.                                   
|            | 
|4.02        |  | Form of 73/4% Series A Convertible Preferred Stock Certificate of the Company is incorporated herein by reference to Exhibit D to
the Companys Registration Statement on Form 8-A which was filed on January 22, 1998.                                         
|            | 
|10.01       |  | Amended and Restated 1996 Stock Incentive Plan, which is incorporated by reference to Exhibit 10.1 of a Form 8-K filed by the Company with the SEC on May 5, 2006.                                                                                              
|            | 
|10.11       |  | Second Amendment to Executive Employment Agreement with Andrew Batinovich.                                                                                                                                                                                      
|            | 
|11.01       |  | Statement re: Computation of Earnings Per Share is shown in Note 16 of the Consolidated Financial Statements of the Company in Item 1.                                                                                                                          
|            | 
|31.01       |  | Section 302 Certification of Andrew Batinovich, Chief Executive Officer.                                                                                                                                                                                        
|            | 
|31.02       |  | Section 302 Certification of Brian Peay, Chief Financial Officer.                                                                                                                                                                                               
|            | 
|32.01       |  | Section 906 Certification of Andrew Batinovich, Chief Executive Officer.                                                                                                                                                                                        
|            | 
|32.02       |  | Section 906 Certification of Brian Peay, Chief Financial Officer.                                                                                                                                                                                               









60