##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended June 30, 2005



OR



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



Commission File Number: 001-14162



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GLENBOROUGH REALTY TRUST INCORPORATED

(Exact name of registrant as specified in its charter)



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|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Maryland                                                      |  | 94-3211970                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)



|                                                                           |  |           
|-------------------------------------------------------------------------- |  | ----------
|400 South El Camino Real, Suite 1100, San Mateo, California (650) 343-9300 |  | 94402-1708
|(Address of principal executive offices and telephone number)              |  | (Zip Code)



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



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



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



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



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



As of August 5, 2005, 36,226,166 shares of Common Stock ($0.001 par value) and 3,740,277
shares of 7.75% Series A Convertible Preferred Stock ($0.001 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 June 30, 2005 and December 31, 2004 (as restated)                      |  | 3       
|              |  |                                                                                                      
|              |  | Consolidated Statements of Operations for the three months ended June 30, 2005 and 2004 (as restated) |  | 4       
|              |  |                                                                                                      
|              |  | Consolidated Statements of Operations for the six months ended June 30, 2005 and 2004 (as restated)   |  | 5       
|              |  |                                                                                                      
|              |  | Consolidated Statement of Stockholders Equity for the six months ended June 30, 2005 (as restated)   |  | 6       
|              |  |                                                                                                      
|              |  | Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004 (as restated)   |  | 7-9     
|              |  |                                                                                                      
|              |  | Notes to Consolidated Financial Statements                                                            |  | 10-35   
|              |  |                                                                                                      
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                 |  | 36-54   
|              |  |                                                                                                      
|Item 3.       |  | Quantitative and Qualitative Disclosures About Market Risk                                            |  | 54-55   
|              |  |                                                                                                      
|Item 4.       |  | Controls and Procedures                                                                               |  | 55-56   
|              |  |                                                                                                      
|PART II       |  | OTHER INFORMATION                                                                                     |  |         
|              |  |                                                                                                      
|Item 1.       |  | Legal Proceedings                                                                                     |  | 57      
|              |  |                                                                                                      
|Item 2.       |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities                      |  | 57      
|              |  |                                                                                                      
|Item 4.       |  | Submission of Matters to a Vote of Security Holders                                                   |  | 57      
|              |  |                                                                                                      
|Item 6.       |  | Exhibits                                                                                              |  | 57      
|              | 
|SIGNATURES    |  | 58                                                                                                   
|              | 
|EXHIBIT INDEX |  | 59                                                                                                   



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)



|                                                                                                                                                                                                                       |  |              |           |   |                          |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ------------------------ | - | --------- | -
|                                                                                                                                                                                                                       |  | June 30,2005 |           |   | December 31,2004         |  
|                                                                                                                                                                                                                       |  |              |           |   | (As restated,see Note 2) |  
|ASSETS                                                                                                                                                                                                                 |  |              |           |   |                          |   |           |  
|Rental properties, gross                                                                                                                                                                                               |  | $            | 1,205,652 |   |                          | $ | 1,367,310 |  
|Accumulated depreciation and amortization                                                                                                                                                                              |  |              | (193,199  | ) |                          |   | (220,229  | )
|                                                                                                                                                                                                                       |  |              |           |   |                          |   |           |  
|Rental properties, net                                                                                                                                                                                                 |  |              | 1,012,453 |   |                          |   | 1,147,081 |  
|                                                                                                                                                                                                                       |  |             
|Properties held for sale                                                                                                                                                                                               |  |              | 119,886   |   |                          |   | 57,327    |  
|Investments in land and development                                                                                                                                                                                    |  |              | 134,372   |   |                          |   | 147,435   |  
|Investments in unconsolidated operating joint ventures                                                                                                                                                                 |  |              | 11,936    |   |                          |   | 12,014    |  
|Mortgage loans receivable                                                                                                                                                                                              |  |              | 11,073    |   |                          |   | 12,872    |  
|Leasing and financing costs (net of accumulated amortization of $15,746 and $17,856 as of June 30, 2005 and December 31, 2004,
respectively)                                                                           |  |              | 26,659    |   |                          |   | 24,403    |  
|Straight-line rent receivable (net of allowances of $176 and $528 as of June 30, 2005 and December 31, 2004, respectively)                                                                                             |  |              | 16,344    |   |                          |   | 15,764    |  
|Cash and cash equivalents                                                                                                                                                                                              |  |              | 4,832     |   |                          |   | 6,003     |  
|Other assets                                                                                                                                                                                                           |  |              | 15,229    |   |                          |   | 10,202    |  
|                                                                                                                                                                                                                       |  |              |           |   |                          |   |           |  
|TOTAL ASSETS                                                                                                                                                                                                           |  | $            | 1,352,784 |   |                          | $ | 1,433,101 |  
|                                                                                                                                                                                                                       |  |              |           |   |                          |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                   |  |              |           |   |                          |   |           |  
|Liabilities:                                                                                                                                                                                                           |  |              |           |   |                          |   |           |  
|Mortgage loans                                                                                                                                                                                                         |  | $            | 728,151   |   |                          | $ | 654,748   |  
|Unsecured bank line of credit                                                                                                                                                                                          |  |              | 44,119    |   |                          |   | 21,320    |  
|Obligations associated with properties held for sale                                                                                                                                                                   |  |              | 2,848     |   |                          |   | 43,300    |  
|Other liabilities                                                                                                                                                                                                      |  |              | 45,542    |   |                          |   | 47,213    |  
|                                                                                                                                                                                                                       |  |              |           |   |                          |   |           |  
|Total liabilities                                                                                                                                                                                                      |  |              | 820,660   |   |                          |   | 766,581   |  
|                                                                                                                                                                                                                       |  |              |           |   |                          |   |           |  
|Minority Interest                                                                                                                                                                                                      |  |              | 34,718    |   |                          |   | 39,336    |  
|                                                                                                                                                                                                                       |  |             
|Stockholders Equity:                                                                                                                                                                                                  |  |              |           |   |                          |   |           |  
|Common stock, $0.001 par value, 188,000,000 shares authorized, 36,216,166 and 36,033,126 shares issued and outstanding at June 30, 2005 and
December 31, 2004, respectively                                            |  |              | 36        |   |                          |   | 36        |  
|Convertible preferred stock, $0.001 par value, 12,000,000 shares authorized, $25.00 liquidation preference, 3,740,277 and 6,850,325 shares
issued and outstanding at June 30, 2005 and December 31, 2004, respectively |  |              | 4         |   |                          |   | 7         |  
|Additional paid-in capital                                                                                                                                                                                             |  |              | 798,575   |   |                          |   | 870,622   |  
|Deferred compensation                                                                                                                                                                                                  |  |              | (3,653    | ) |                          |   | (4,056    | )
|Distributions in excess of accumulated earnings                                                                                                                                                                        |  |              | (297,556  | ) |                          |   | (239,425  | )
|                                                                                                                                                                                                                       |  |              |           |   |                          |   |           |  
|Total stockholders equity                                                                                                                                                                                             |  |              | 497,406   |   |                          |   | 627,184   |  
|                                                                                                                                                                                                                       |  |              |           |   |                          |   |           |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                             |  | $            | 1,352,784 |   |                          | $ | 1,433,101 |  
|                                                                                                                                                                                                                       |  |              |           |   |                          |   |           |  



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 June 30, 2005 and 2004

(in thousands, except share and per share amounts)

(unaudited)



|                                                                                                       |  |      |            |   |                          |   |            |  
|------------------------------------------------------------------------------------------------------ |  | ---- | ---------- | - | ------------------------ | - | ---------- | -
|                                                                                                       |  | 2005 |            |   | 2004                     |  
|                                                                                                       |  |      |            |   | (As restated,see Note 2) |  
|OPERATING REVENUE                                                                                      |  |      |            |   |                          |   |            |  
|Rental revenue                                                                                         |  | $    | 40,556     |   |                          | $ | 38,302     |  
|Fees and reimbursements, including from related parties                                                |  |      | 1,359      |   |                          |   | 1,032      |  
|                                                                                                       |  |      |            |   |                          |   |            |  
|Total operating revenue                                                                                |  |      | 41,915     |   |                          |   | 39,334     |  
|                                                                                                       |  |      |            |   |                          |   |            |  
|OPERATING EXPENSES                                                                                     |  |      |            |   |                          |   |            |  
|Property operating expenses                                                                            |  |      | 13,305     |   |                          |   | 12,493     |  
|General and administrative                                                                             |  |      | 3,925      |   |                          |   | 3,999      |  
|Depreciation and amortization                                                                          |  |      | 12,990     |   |                          |   | 12,240     |  
|                                                                                                       |  |      |            |   |                          |   |            |  
|Total operating expenses                                                                               |  |      | 30,220     |   |                          |   | 28,732     |  
|                                                                                                       |  |      |            |   |                          |   |            |  
|Interest and other income                                                                              |  |      | 615        |   |                          |   | 638        |  
|Equity in earnings of unconsolidated operating joint ventures                                          |  |      | 169        |   |                          |   | 249        |  
|Interest expense                                                                                       |  |      | (9,724     | ) |                          |   | (8,104     | )
|                                                                                                       |  |      |            |   |                          |   |            |  
|Income before minority interest and discontinued operations                                            |  |      | 2,755      |   |                          |   | 3,385      |  
|Minority interest (including share of discontinued operations)                                         |  |      | (994       | ) |                          |   | (799       | )
|                                                                                                       |  |      |            |   |                          |   |            |  
|Income before discontinued operations                                                                  |  |      | 1,761      |   |                          |   | 2,586      |  
|Discontinued operations (including gain on sales of $9,309 and $12,408 in 2005 and 2004, respectively) |  |      | 11,892     |   |                          |   | 15,288     |  
|                                                                                                       |  |      |            |   |                          |   |            |  
|Net income                                                                                             |  |      | 13,653     |   |                          |   | 17,874     |  
|Preferred dividends                                                                                    |  |      | (1,812     | ) |                          |   | (3,318     | )
|Dividends paid on redeemed preferred stock                                                             |  |      |           |   |                          |   | (568       | )
|Premium and write-off of original issuance costs on preferred stock redemption                         |  |      |           |   |                          |   | (5,909     | )
|                                                                                                       |  |      |            |   |                          |   |            |  
|Net income available to Common Stockholders                                                            |  | $    | 11,841     |   |                          | $ | 8,079      |  
|                                                                                                       |  |      |            |   |                          |   |            |  
|Basic Earnings Per Share Data:                                                                         |  |      |            |   |                          |   |            |  
|Continuing operations                                                                                  |  | $    | 0.02       |   |                          | $ | (0.18      | )
|Discontinued operations                                                                                |  |      | 0.31       |   |                          |   | 0.44       |  
|                                                                                                       |  |      |            |   |                          |   |            |  
|Net income available to Common Stockholders                                                            |  | $    | 0.33       |   |                          | $ | 0.26       |  
|                                                                                                       |  |      |            |   |                          |   |            |  
|Basic weighted average shares outstanding                                                              |  |      | 35,921,157 |   |                          |   | 31,662,622 |  
|                                                                                                       |  |      |            |   |                          |   |            |  
|Diluted Earnings Per Share Data:                                                                       |  |      |            |   |                          |   |            |  
|Continuing operations                                                                                  |  | $    | 0.02       |   |                          | $ | (0.18      | )
|Discontinued operations                                                                                |  |      | 0.31       |   |                          |   | 0.44       |  
|                                                                                                       |  |      |            |   |                          |   |            |  
|Net income available to Common Stockholders                                                            |  | $    | 0.33       |   |                          | $ | 0.26       |  
|                                                                                                       |  |      |            |   |                          |   |            |  
|Diluted weighted average shares outstanding                                                            |  |      | 39,159,087 |   |                          |   | 31,662,622 |  
|                                                                                                       |  |      |            |   |                          |   |            |  
|Dividends declared per common share outstanding                                                        |  | $    | 0.35       |   |                          | $ | 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 six months ended June 30, 2005 and 2004

(in thousands, except share and per share amounts)

(unaudited)



|                                                                                                                        |  |      |            |   |                          |   |            |  
|----------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ------------------------ | - | ---------- | -
|                                                                                                                        |  | 2005 |            |   | 2004                     |  
|                                                                                                                        |  |      |            |   | (As restated,see Note 2) |  
|OPERATING REVENUE                                                                                                       |  |      |            |   |                          |   |            |  
|Rental revenue                                                                                                          |  | $    | 79,969     |   |                          | $ | 74,728     |  
|Fees and reimbursements, including from related parties                                                                 |  |      | 2,454      |   |                          |   | 1,861      |  
|                                                                                                                        |  |      |            |   |                          |   |            |  
|Total operating revenue                                                                                                 |  |      | 82,423     |   |                          |   | 76,589     |  
|                                                                                                                        |  |      |            |   |                          |   |            |  
|OPERATING EXPENSES                                                                                                      |  |      |            |   |                          |   |            |  
|Property operating expenses                                                                                             |  |      | 27,570     |   |                          |   | 25,377     |  
|General and administrative                                                                                              |  |      | 7,210      |   |                          |   | 6,170      |  
|Depreciation and amortization                                                                                           |  |      | 26,181     |   |                          |   | 23,751     |  
|Provision for impairment of real estate assets                                                                          |  |      | 29,810     |   |                          |   |           |  
|                                                                                                                        |  |      |            |   |                          |   |            |  
|Total operating expenses                                                                                                |  |      | 90,771     |   |                          |   | 55,298     |  
|                                                                                                                        |  |      |            |   |                          |   |            |  
|Interest and other income                                                                                               |  |      | 1,645      |   |                          |   | 1,469      |  
|Equity in earnings of unconsolidated operating joint ventures                                                           |  |      | 302        |   |                          |   | 437        |  
|Interest expense                                                                                                        |  |      | (18,922    | ) |                          |   | (16,122    | )
|Loss on early extinguishment of debt                                                                                    |  |      | (561       | ) |                          |   | (85        | )
|                                                                                                                        |  |      |            |   |                          |   |            |  
|Income (loss) before minority interest, discontinued operations and cumulative effect of change in accounting principle |  |      | (25,884    | ) |                          |   | 6,990      |  
|Minority interest (including share of discontinued operations)                                                          |  |      | 2,727      |   |                          |   | (787       | )
|                                                                                                                        |  |      |            |   |                          |   |            |  
|Income (loss) before discontinued operations and cumulative effect of change in accounting principle                    |  |      | (23,157    | ) |                          |   | 6,203      |  
|Discontinued operations (including gain on sales of $26,629 and $12,528 in 2005 and 2004, respectively - see Note 6)    |  |      | (152       | ) |                          |   | 17,283     |  
|                                                                                                                        |  |      |            |   |                          |   |            |  
|Income (loss) before cumulative effect of change in accounting principle                                                |  |      | (23,309    | ) |                          |   | 23,486     |  
|Cumulative effect of change in accounting principle (Note 16)                                                           |  |      |           |   |                          |   | (912       | )
|                                                                                                                        |  |      |            |   |                          |   |            |  
|Net income (loss)                                                                                                       |  |      | (23,309    | ) |                          |   | 22,574     |  
|Preferred dividends                                                                                                     |  |      | (3,624     | ) |                          |   | (6,636     | )
|Dividends paid on redeemed preferred stock                                                                              |  |      | (596       | ) |                          |   | (2,073     | )
|Premium and write-off of original issuance costs on preferred stock redemption                                          |  |      | (5,309     | ) |                          |   | (5,909     | )
|                                                                                                                        |  |      |            |   |                          |   |            |  
|Net income (loss) available to Common Stockholders                                                                      |  | $    | (32,838    | ) |                          | $ | 7,956      |  
|                                                                                                                        |  |      |            |   |                          |   |            |  
|Basic Earnings (Loss) Per Share Data:                                                                                   |  |      |            |   |                          |   |            |  
|Continuing operations                                                                                                   |  | $    | (0.91      | ) |                          | $ | (0.23      | )
|Discontinued operations                                                                                                 |  |      | (0.01      | ) |                          |   | 0.52       |  
|Cumulative effect of change in accounting principle                                                                     |  |      |           |   |                          |   | (0.03      | )
|                                                                                                                        |  |      |            |   |                          |   |            |  
|Net income (loss) available to Common Stockholders                                                                      |  | $    | (0.92      | ) |                          | $ | 0.26       |  
|                                                                                                                        |  |      |            |   |                          |   |            |  
|Basic weighted average shares outstanding                                                                               |  |      | 35,870,534 |   |                          |   | 30,114,060 |  
|                                                                                                                        |  |      |            |   |                          |   |            |  
|Diluted Earnings (Loss) Per Share Data:                                                                                 |  |      |            |   |                          |   |            |  
|Continuing operations                                                                                                   |  | $    | (0.91      | ) |                          | $ | (0.23      | )
|Discontinued operations                                                                                                 |  |      | (0.01      | ) |                          |   | 0.52       |  
|Cumulative effect of change in accounting principle                                                                     |  |      |           |   |                          |   | (0.03      | )
|                                                                                                                        |  |      |            |   |                          |   |            |  
|Net income (loss) available to Common Stockholders                                                                      |  | $    | (0.92      | ) |                          | $ | 0.26       |  
|                                                                                                                        |  |      |            |   |                          |   |            |  
|Diluted weighted average shares outstanding                                                                             |  |      | 35,870,534 |   |                          |   | 30,114,060 |  
|                                                                                                                        |  |      |            |   |                          |   |            |  
|Dividends declared per common share outstanding                                                                         |  | $    | 0.70       |   |                          | $ | 0.70       |  
|                                                                                                                        |  |      |            |   |                          |   |            |  
|Dividends declared per preferred share outstanding                                                                      |  | $    | 0.97       |   |                          | $ | 0.97       |  
|                                                                                                                        |  |      |            |   |                          |   |            |  



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



5



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

For the six months ended June 30, 2005

(in thousands)

(unaudited)



|                                                                               |  |              |  |                 |    |        |                          |   |          |                       |    |   |                                              |   |         |       |  |   |        |   |  |   |          |   |  |   |         |  
|------------------------------------------------------------------------------ |  | ------------ |  | --------------- | -- | ------ | ------------------------ | - | -------- | --------------------- | -- | - | -------------------------------------------- | - | ------- | ----- |  | - | ------ | - |  | - | -------- | - |  | - | ------- | -
|                                                                               |  | Common Stock |  | Preferred Stock |    |        | AdditionalPaid-inCapital |   |          | DeferredCompen-sation |    |   | Distributionsin excess ofaccumulatedearnings |   |         | Total | 
|                                                                               |  | Shares       |  | ParValue        |    | Shares |                          |   | ParValue |                       |    |   |                                              |  
|Balance at December 31, 2004*                                                  |  | 36,033       |  | $               | 36 |        | 6,850                    |   |          | $                     | 7  |   |                                              | $ | 870,622 |       |  | $ | (4,056 | ) |  | $ | (239,425 | ) |  | $ | 627,184 |  
|Exercise of stock options                                                      |  | 157          |  |                 |   |        |                         |   |          |                       |   |   |                                              |   | 2,269   |       |  |   |       |   |  |   |         |   |  |   | 2,269   |  
|Conversion of Operating Partnership units into common stock                    |  | 9            |  |                 |   |        |                         |   |          |                       |   |   |                                              |   |        |       |  |   |       |   |  |   |         |   |  |   |        |  
|Offering costs incurred related to December 2004 common stock offering         |  |             |  |                 |   |        |                         |   |          |                       |   |   |                                              |   | (158    | )     |  |   |       |   |  |   |         |   |  |   | (158    | )
|Mark-to-market of performance-based restricted common stock grant              |  |             |  |                 |   |        |                         |   |          |                       |   |   |                                              |   | (35     | )     |  |   | 35     |   |  |   |         |   |  |   |        |  
|Issuance of restricted common stock                                            |  | 17           |  |                 |   |        |                         |   |          |                       |   |   |                                              |   | 261     |       |  |   | (261   | ) |  |   |         |   |  |   |        |  
|Amortization of deferred compensation on restricted common stock grants        |  |             |  |                 |   |        |                         |   |          |                       |   |   |                                              |   |        |       |  |   | 629    |   |  |   |         |   |  |   | 629     |  
|Preferred stock redemption                                                     |  |             |  |                 |   |        | (3,110                   | ) |          |                       | (3 | ) |                                              |   | (77,745 | )     |  |   |       |   |  |   |         |   |  |   | (77,748 | )
|Premium and write-off of original issuance costs on preferred stock redemption |  |             |  |                 |   |        |                         |   |          |                       |   |   |                                              |   | 3,452   |       |  |   |       |   |  |   | (5,309   | ) |  |   | (1,857  | )
|Reallocation of limited partners interests in Operating Partnership           |  |             |  |                 |   |        |                         |   |          |                       |   |   |                                              |   | (91     | )     |  |   |       |   |  |   |         |   |  |   | (91     | )
|Dividends declared to common and preferred stockholders                        |  |             |  |                 |   |        |                         |   |          |                       |   |   |                                              |   |        |       |  |   |       |   |  |   | (28,917  | ) |  |   | (28,917 | )
|Dividends paid on redeemed preferred stock                                     |  |             |  |                 |   |        |                         |   |          |                       |   |   |                                              |   |        |       |  |   |       |   |  |   | (596     | ) |  |   | (596    | )
|Net loss                                                                       |  |             |  |                 |   |        |                         |   |          |                       |   |   |                                              |   |        |       |  |   |       |   |  |   | (23,309  | ) |  |   | (23,309 | )
|                                                                               |  |              |  |                 |    |        |                          |   |          |                       |    |   |                                              |   |         |       |  |   |        |   |  |   |          |   |  |   |         |  
|Balance at June 30, 2005                                                       |  | 36,216       |  | $               | 36 |        | 3,740                    |   |          | $                     | 4  |   |                                              | $ | 798,575 |       |  | $ | (3,653 | ) |  | $ | (297,556 | ) |  | $ | 497,406 |  
|                                                                               |  |              |  |                 |    |        |                          |   |          |                       |    |   |                                              |   |         |       |  |   |        |   |  |   |          |   |  |   |         |  

---

|* | As restated, see Note 2.
|- | ------------------------



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 six months ended June 30, 2005 and 2004

(in thousands)

(unaudited)



|                                                                                            |  |      |          |   |                          |   |          |  
|------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ------------------------ | - | -------- | -
|                                                                                            |  | 2005 |          |   | 2004                     |  
|                                                                                            |  |      |          |   | (As restated,see Note 2) |  
|Cash flows from operating activities:                                                       |  |      |          |   |                          |   |          |  
|Net income (loss)                                                                           |  | $    | (23,309  | ) |                          | $ | 22,574   |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities:    |  |      |          |   |                          |   |          |  
|Depreciation and amortization (including discontinued operations)                           |  |      | 29,949   |   |                          |   | 30,856   |  
|Amortization of loan fees, included in interest expense (including discontinued operations) |  |      | 1,280    |   |                          |   | 1,600    |  
|Accrued interest on mortgage loans receivable                                               |  |      | (701     | ) |                          |   | (1,028   | )
|Minority interest (including share of discontinued operations)                              |  |      | (2,727   | ) |                          |   | 787      |  
|Equity in earnings of unconsolidated operating joint ventures                               |  |      | (302     | ) |                          |   | (437     | )
|Gain on sales of real estate assets (included in discontinued operations)                   |  |      | (26,629  | ) |                          |   | (12,528  | )
|Loss on early extinguishment of debt (including discontinued operations)                    |  |      | 3,073    |   |                          |   | 85       |  
|Provision for impairment of real estate assets (including discontinued operations)          |  |      | 58,236   |   |                          |   |         |  
|Cumulative effect of change in accounting principle                                         |  |      |         |   |                          |   | 912      |  
|Amortization of deferred compensation                                                       |  |      | 629      |   |                          |   | 484      |  
|Increase in other assets                                                                    |  |      | (14,637  | ) |                          |   | (2,505   | )
|Increase/(decrease) in other liabilities                                                    |  |      | 1,621    |   |                          |   | (5,742   | )
|                                                                                            |  |      |          |   |                          |   |          |  
|Net cash provided by operating activities                                                   |  |      | 26,483   |   |                          |   | 35,058   |  
|                                                                                            |  |      |          |   |                          |   |          |  
|Cash flows from investing activities:                                                       |  |      |          |   |                          |   |          |  
|Net proceeds from sales of real estate assets                                               |  |      | 115,262  |   |                          |   | 13,664   |  
|Acquisitions of rental properties                                                           |  |      | (34,022  | ) |                          |   | (17,165  | )
|Payments for capital and tenant improvements                                                |  |      | (13,208  | ) |                          |   | (13,134  | )
|Investments in land and development                                                         |  |      | (4,265   | ) |                          |   | (20,233  | )
|Distributions from unconsolidated operating joint ventures                                  |  |      | 380      |   |                          |   | 515      |  
|Principal payments from mortgage loans receivable                                           |  |      | 9,500    |   |                          |   | 14,952   |  
|                                                                                            |  |      |          |   |                          |   |          |  
|Net cash provided by/(used for) investing activities                                        |  |      | 73,647   |   |                          |   | (21,401  | )
|                                                                                            |  |      |          |   |                          |   |          |  
|Cash flows from financing activities:                                                       |  |      |          |   |                          |   |          |  
|Proceeds from borrowings                                                                    |  |      | 188,737  |   |                          |   | 200,008  |  
|Repayment of borrowings                                                                     |  |      | (175,248 | ) |                          |   | (193,754 | )
|Payment of deferred financing costs                                                         |  |      | (1,634   | ) |                          |   | (1,681   | )
|Prepayment penalties on loan payoffs                                                        |  |      | (2,725   | ) |                          |   |         |  
|Contributions from minority interest holders                                                |  |      | 120      |   |                          |   | 80       |  
|Distributions to minority interest holders                                                  |  |      | (2,102   | ) |                          |   | (2,101   | )
|Dividends paid to common and preferred stockholders                                         |  |      | (28,853  | ) |                          |   | (29,052  | )
|Proceeds from issuance of common stock, net of offering costs                               |  |      | (158     | ) |                          |   | 81,396   |  
|Preferred stock redemption                                                                  |  |      | (77,748  | ) |                          |   | (77,459  | )
|Dividends paid on redeemed preferred stock                                                  |  |      | (2,102   | ) |                          |   | (2,073   | )
|Premium on preferred stock redemption                                                       |  |      | (1,857   | ) |                          |   | (2,461   | )
|Exercise of stock options                                                                   |  |      | 2,269    |   |                          |   | 1,132    |  
|                                                                                            |  |      |          |   |                          |   |          |  
|Net cash used for financing activities                                                      |  |      | (101,301 | ) |                          |   | (25,965  | )
|                                                                                            |  |      |          |   |                          |   |          |  



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 six months
ended June 30, 2005 and 2004

(in thousands)

(unaudited)



|                                                                                                         |  |      |         |   |                          |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ------------------------ | - | ------- | -
|                                                                                                         |  | 2005 |         |   | 2004                     |  
|                                                                                                         |  |      |         |   | (As restated,see Note 2) |  
|Net decrease in cash and cash equivalents                                                                |  | $    | (1,171  | ) |                          | $ | (12,308 | )
|                                                                                                         |  |     
|Cash and cash equivalents at Marina Shores on January 1, 2004 (see below)                                |  |      |        |   |                          |   | 1,035   |  
|                                                                                                         |  |     
|Cash and cash equivalents at beginning of period                                                         |  |      | 6,003   |   |                          |   | 18,992  |  
|                                                                                                         |  |      |         |   |                          |   |         |  
|Cash and cash equivalents at end of period                                                               |  | $    | 4,832   |   |                          | $ | 7,719   |  
|                                                                                                         |  |      |         |   |                          |   |         |  
|Supplemental disclosure of cash flow information:                                                        |  |      |         |   |                          |   |         |  
|Cash paid for interest (net of capitalized interest of $2,196 and $1,574 in 2005 and 2004, respectively) |  | $    | 18,010  |   |                          | $ | 16,801  |  
|                                                                                                         |  |      |         |   |                          |   |         |  
|Supplemental disclosure of non-cash investing and financing activities:                                  |  |      |         |   |                          |   |         |  
|Non-cash components of consolidation of Marina Shores:                                                   |  |      |         |   |                          |   |         |  
|Investments in land and development                                                                      |  | $    |        |   |                          | $ | 46,322  |  
|Cash and cash equivalents                                                                                |  |      |        |   |                          |   | 1,035   |  
|Mortgage loans payable                                                                                   |  |      |        |   |                          |   | (45,000 | )
|Minority interest                                                                                        |  |      |        |   |                          |   | (2,228  | )
|Other assets and liabilities, net                                                                        |  |      |        |   |                          |   | (129    | )
|                                                                                                         |  |      |         |   |                          |   |         |  
|Total                                                                                                    |  | $    |        |   |                          | $ |        |  
|                                                                                                         |  |      |         |   |                          |   |         |  
|Assumption of mortgage loans in acquisition of real estate:                                              |  |      |         |   |                          |   |         |  
|Rental properties, gross                                                                                 |  | $    | 39,391  |   |                          | $ | 21,049  |  
|Mortgage loans                                                                                           |  |      | (39,391 | ) |                          |   | (21,049 | )
|                                                                                                         |  |      |         |   |                          |   |         |  
|Total                                                                                                    |  | $    |        |   |                          | $ |        |  
|                                                                                                         |  |      |         |   |                          |   |         |  
|Disposition of real estate involving buyers assumption of mortgage loans:                               |  |      |         |   |                          |   |         |  
|Rental properties, gross                                                                                 |  | $    |        |   |                          | $ | (17,175 | )
|Mortgage loans                                                                                           |  |      |        |   |                          |   | 17,175  |  
|                                                                                                         |  |      |         |   |                          |   |         |  
|Total                                                                                                    |  | $    |        |   |                          | $ |        |  
|                                                                                                         |  |      |         |   |                          |   |         |  
|Mortgage loan receivable related to disposition of investment in land and development:                   |  |      |         |   |                          |   |         |  
|Investments in land and development                                                                      |  | $    | (7,000  | ) |                          | $ |        |  
|Mortgage loans receivable                                                                                |  |      | 7,000   |   |                          |   |        |  
|                                                                                                         |  |      |         |   |                          |   |         |  
|Total                                                                                                    |  | $    |        |   |                          | $ |        |  
|                                                                                                         |  |      |         |   |                          |   |         |  
|Write-off of original issuance costs on preferred stock redemption:                                      |  |      |         |   |                          |   |         |  
|Additional paid-in capital                                                                               |  | $    | (3,452  | ) |                          | $ | (3,448  | )
|Distributions in excess of accumulated earnings                                                          |  |      | 3,452   |   |                          |   | 3,448   |  
|                                                                                                         |  |      |         |   |                          |   |         |  
|Total                                                                                                    |  | $    |        |   |                          | $ |        |  
|                                                                                                         |  |      |         |   |                          |   |         |  



continued



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



8



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS - continued

For the six months ended
June 30, 2005 and 2004

(in thousands)

(unaudited)



|                                                                                    |  |      |        |   |                          |   |        |  
|----------------------------------------------------------------------------------- |  | ---- | ------ | - | ------------------------ | - | ------ | -
|                                                                                    |  | 2005 |        |   | 2004                     |  
|                                                                                    |  |      |        |   | (As restated,see Note 2) |  
|Supplemental disclosure of non-cash investing and financing activities  continued: |  |      |        |   |                          |   |        |  
|                                                                                    |  |     
|Reallocation of limited partners interests in Operating Partnership:               |  |      |        |   |                          |   |        |  
|Additional paid-in capital                                                          |  | $    | 91     |   |                          | $ | 915    |  
|Minority interest                                                                   |  |      | (91    | ) |                          |   | (915   | )
|                                                                                    |  |      |        |   |                          |   |        |  
|Total                                                                               |  | $    |       |   |                          | $ |       |  
|                                                                                    |  |      |        |   |                          |   |        |  
|Mark-to-market of performance-based restricted common stock grant:                  |  |      |        |   |                          |   |        |  
|Additional paid-in capital                                                          |  | $    | 35     |   |                          | $ | (8     | )
|Deferred compensation                                                               |  |      | (35    | ) |                          |   | 8      |  
|                                                                                    |  |      |        |   |                          |   |        |  
|Total                                                                               |  | $    |       |   |                          | $ |       |  
|                                                                                    |  |      |        |   |                          |   |        |  
|Issuance of restricted common stock:                                                |  |      |        |   |                          |   |        |  
|Additional paid-in capital                                                          |  | $    | (261   | ) |                          | $ | (2,220 | )
|Deferred compensation                                                               |  |      | 261    |   |                          |   | 2,220  |  
|                                                                                    |  |      |        |   |                          |   |        |  
|Total                                                                               |  | $    |       |   |                          | $ |       |  
|                                                                                    |  |      |        |   |                          |   |        |  
|Retirement of fully depreciated assets:                                             |  |      |        |   |                          |   |        |  
|Rental properties, gross                                                            |  | $    | (5,235 | ) |                          | $ | (5,474 | )
|Accumulated depreciation                                                            |  |      | 5,235  |   |                          |   | 5,474  |  
|                                                                                    |  |      |        |   |                          |   |        |  
|Total                                                                               |  | $    |       |   |                          | $ |       |  
|                                                                                    |  |      |        |   |                          |   |        |  
|Common and preferred stock dividends declared but not yet paid                      |  | $    | 14,489 |   |                          | $ | 15,931 |  
|                                                                                    |  |      |        |   |                          |   |        |  



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



9



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



Note 1.
ORGANIZATION



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



As of June 30, 2005, 36,216,166 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. Assuming the issuance of 2,993,030 shares of Common Stock issuable upon redemption
of 2,993,030 partnership units in the Operating Partnership (as defined below), there would be 39,209,196 shares of Common Stock outstanding as of June 30, 2005. In 1999 and 2000, the Companys Board of Directors authorized the repurchase of up
to 8,210,700 shares of Common Stock and 3,450,000 shares of Preferred Stock. As of June 30, 2005, 6,394,816 shares of Common Stock and 1,543,700 shares of Preferred Stock (excluding the redemptions discussed in Note 20) have been repurchased at a
total cost of approximately $131 million.



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



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 91.37% limited partner
interest at June 30, 2005, is Glenborough Properties, L.P. (the Operating Partnership). Each of the holders of the remaining interests in the Operating Partnership (OP Units) has the option to redeem its OP Units and to
receive, at the option of the Company, in exchange for each OP Unit, either (i) one share of common stock of the Company, or (ii) cash equal to the fair market value of one share of common stock of the Company. As of June 30, 2005, the Operating
Partnership, directly and through the subsidiaries in which it and the Company own 100% of the ownership interests, controls a portfolio of 53 real estate projects.



Note 2. RESTATEMENT



The Company has determined that a correction is required in the accounting for common and preferred stock dividends in accordance with generally accepted accounting
principles. The Companys historical accounting has been to record dividends in the period in which they were paid, rather than the period in which they were declared. The correction of this accounting error will require a restatement of the
Companys consolidated financial statements as of and for the years ended December 31, 2003 and 2004 (including all interim periods for 2003 and 2004), as well as the consolidated financial statements as of and for the quarter ended March 31,
2005. The restatement does not have an adverse impact on any covenants associated with the Companys unsecured bank line of credit. The consolidated financial statements and accompanying footnotes presented herein reflect this restatement. The
Company will file an amended Form 10-K for 2004 and an amended Form 10-Q for the first quarter of 2005 reflecting this restatement as soon as is practicable. Until these filings have occurred, the previous independent registered public accounting
firm will not have completed its review of the restatement.



10



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



The impact of the restatement on the Companys consolidated financial statements for the affected periods is
summarized below (dollars in thousands):



|                                                |  |                      |          |   |                         |   |          |                         |  |   |             |   |  |                     |          |   |             |   |          |   |  |   |          |  
|----------------------------------------------- |  | -------------------- | -------- | - | ----------------------- | - | -------- | ----------------------- |  | - | ----------- | - |  | ------------------- | -------- | - | ----------- | - | -------- | - |  | - | -------- | -
|Consolidated Balance Sheets:                    |  |                      |          |   |                         |   |          |                         |  |   |             |   |  |                     |          |   |             |   |          |   |  |   |          |  
|                                                |  | As of March 31, 2005 |          |   | As of December 31, 2004 |   |          | As of December 31, 2003 | 
|                                                |  | Previously Reported  |          |   | As Restated             |   |          | Previously Reported     |  |   | As Restated |   |  | Previously Reported |          |   | As Restated |  
|Other liabilities                               |  | $                    | 34,353   |   |                         | $ | 48,782   |                         |  | $ | 31,282      |   |  | $                   | 47,213   |   |             | $ | 37,221   |   |  | $ | 51,790   |  
|Total liabilities                               |  | $                    | 835,203  |   |                         | $ | 849,632  |                         |  | $ | 750,650     |   |  | $                   | 766,581  |   |             | $ | 776,425  |   |  | $ | 790,994  |  
|Minority interest                               |  | $                    | 34,501   |   |                         | $ | 34,616   |                         |  | $ | 39,124      |   |  | $                   | 39,336   |   |             | $ | 36,969   |   |  | $ | 37,048   |  
|Distributions in excess of accumulated earnings |  | $                    | (281,964 | ) |                         | $ | (296,508 | )                       |  | $ | (223,282    | ) |  | $                   | (239,425 | ) |             | $ | (184,843 | ) |  | $ | (199,491 | )
|Total stockholders equity                      |  | $                    | 510,340  |   |                         | $ | 495,796  |                         |  | $ | 643,327     |   |  | $                   | 627,184  |   |             | $ | 591,845  |   |  | $ | 577,197  |  
|                                                |  |                      |          |   |                         |  
|Consolidated Statements of Operations:          |  |                      |          |   |                         |   |          |                         |  |   |             |   |  |                     |          |   |             |   |          |   |  |   |          |  

|                                                   |  |                                   |         |   |                                      |   |         |                     |  |             |        |  |   |      
|-------------------------------------------------- |  | --------------------------------- | ------- | - | ------------------------------------ | - | ------- | ------------------- |  | ----------- | ------ |  | - | -----
|                                                   |  | Three months ended March 31, 2005 |         |   | Three months ended June 30, 2004    
|                                                   |  | Previously Reported               |         |   | As Restated                          |   |         | Previously Reported |  | As Restated
|Minority interest                                  |  | $                                 | (3,836  | ) |                                      | $ | (3,721  | )                   |  | $           | 667    |  | $ | 799  
|Dividends paid on redeemed preferred stock         |  | $                                 | 2,102   |   |                                      | $ | 596     |                     |  | $           | 2,073  |  | $ | 568  
|Net income (loss) available to Common Stockholders |  | $                                 | (46,069 | ) |                                      | $ | (44,678 | )                   |  | $           | 6,706  |  | $ | 8,079
|Basic earnings (loss) per share                    |  | $                                 | (1.28   | ) |                                      | $ | (1.24   | )                   |  | $           | 0.21   |  | $ | 0.26 
|Diluted earnings (loss) per share                  |  | $                                 | (1.28   | ) |                                      | $ | (1.24   | )                   |  | $           | 0.21   |  | $ | 0.26 
|                                                   |  |                                   |         |   |                                      |   |         |                     |  |             |        |  |   |      
|                                                   |  | Six months ended June 30, 2004    |         |   | Nine months ended September 30, 2004
|                                                   |  | Previously Reported               |         |   | As Restated                          |   |         | Previously Reported |  | As Restated
|Minority interest                                  |  | $                                 | 655     |   |                                      | $ | 787     |                     |  | $           | 684    |  | $ | 816  
|Preferred dividends                                |  | $                                 | 8,141   |   |                                      | $ | 6,636   |                     |  | $           | 11,459 |  | $ | 9,954
|Net income available to Common Stockholders        |  | $                                 | 6,583   |   |                                      | $ | 7,956   |                     |  | $           | 6,993  |  | $ | 8,366
|Basic earnings per share                           |  | $                                 | 0.22    |   |                                      | $ | 0.26    |                     |  | $           | 0.22   |  | $ | 0.27 
|Diluted earnings per share                         |  | $                                 | 0.22    |   |                                      | $ | 0.26    |                     |  | $           | 0.22   |  | $ | 0.27 



continued



11



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



|                                                 |  |                              |          |   |                              |   |          |                     |  |   |             |   |  |   |          |  
|------------------------------------------------ |  | ---------------------------- | -------- | - | ---------------------------- | - | -------- | ------------------- |  | - | ----------- | - |  | - | -------- | -
|                                                 |  |                              |          |  
|Consolidated Statements of Operations:           |  |                              |          |   |                              |   |          |                     |  |   |             |   |  |   |          |  
|                                                 |  | Year ended December 31, 2004 |          |   | Year ended December 31, 2003 |  
|                                                 |  | Previously Reported          |          |   | As Restated                  |   |          | Previously Reported |  |   | As Restated |  
|Minority interest                                |  | $                            | 465      |   |                              | $ | 597      |                     |  | $ | 1,101       |   |  | $ | 1,108    |  
|Preferred dividends                              |  | $                            | 14,777   |   |                              | $ | 13,272   |                     |  | $ | 19,491      |   |  | $ | 19,422   |  
|Net income available to Common Stockholders      |  | $                            | 4,825    |   |                              | $ | 6,198    |                     |  | $ | 10,417      |   |  | $ | 10,479   |  
|Basic earnings per share                         |  | $                            | 0.15     |   |                              | $ | 0.20     |                     |  | $ | 0.38        |   |  | $ | 0.38     |  
|Diluted earnings per share                       |  | $                            | 0.15     |   |                              | $ | 0.20     |                     |  | $ | 0.38        |   |  | $ | 0.38     |  
|                                                 |  |                              |          |  
|Consolidated Statements of Stockholders Equity: |  |                              |          |   |                              |   |          |                     |  |   |             |   |  |   |          |  
|                                                 |  | As of December 31, 2004      |          |   | As of December 31, 2003      |  
|                                                 |  | PreviouslyReported           |          |   | As Restated                  |   |          | PreviouslyReported  |  |   | As Restated |  
|Distributions in excess of accumulated earnings  |  | $                            | (223,282 | ) |                              | $ | (239,425 | )                   |  | $ | (184,843    | ) |  | $ | (199,491 | )
|Total stockholders equity                       |  | $                            | 643,327  |   |                              | $ | 627,184  |                     |  | $ | 591,845     |   |  | $ | 577,197  |  



For the three months ended March 31,
2003, and the three months ended September 30, 2003, the impact of the restatement on the statements of operations was a decrease in preferred dividends and an increase in net income available to common stockholders of $2,000 and $66,000,
respectively. There was no impact on earnings per share. There was no impact for any period in the year ended December 31, 2002.



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 June 30, 2005 and December 31, 2004, the consolidated results of operations of the Company
and its subsidiaries for the three and six months ended June 30, 2005 and 2004, and cash flows of the Company for the six months ended June 30, 2005 and 2004. All significant intercompany transactions, receivables and payables have been eliminated
in consolidation.



In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (consisting of only normal accruals) necessary to present fairly the financial position of the Company as of June 30, 2005 and December 31, 2004, the results of operations of the Company for the three and
six months ended June 30, 2005 and 2004, and cash flows of the Company for the six months ended June 30, 2005 and 2004.



Use of Estimates



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



Variable Interest Entities



In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 (FIN
46 Revised) resulting in multiple effective dates based on the nature as well as the creation date of the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on FIN 46 or FIN 46 Revised. However,
FIN 46 Revised must be applied no later than the first quarter of fiscal 2004. VIEs created after January 1, 2004 must be accounted for under FIN 46 Revised. Special Purpose Entities (SPEs) created prior to February 1, 2003 may be
accounted for under FIN 46 or FIN 46 Reviseds provisions no later than the fourth quarter of fiscal 2003. Non-SPEs created prior to February 1, 2003, should be accounted for under FIN 46 Reviseds provisions no later than the first



12



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



quarter of fiscal 2004. The Company has not entered into any arrangements which are considered SPEs. FIN 46 Revised
may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the
first year restated. The disclosure requirements of FIN 46 Revised are effective for all financial statements initially issued after December 31, 2003. Certain of the entities through which and with which the Company conducts business, including
those described in Notes 7 and 9 have been deemed to be VIEs under the provisions of FIN 46 Revised. In accordance with FIN 46 Revised, the Company began consolidating the entity known as Marina Shores, effective January 1, 2004, as the Company is
deemed to be the primary beneficiary as defined by FIN 46 Revised (see Note 16). The Company has other alliances which are VIEs, but the Company is 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



The Company has an employee stock incentive plan and it
accounts for stock options and stock grants (restricted shares of common stock) in the plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.
For incentive stock options, no stock-based employee compensation cost is reflected in net income (loss) as all options granted under the plan have an exercise price equal to the market value of the underlying common stock on the date of grant. The
options vest over periods between 1 and 7 years, and have a maximum term of 10 years.



As of June 30, 2005 and December 31, 2004, 392,741 and 376,241 shares of stock grants were outstanding under the Plan, respectively. The intrinsic value of the shares granted has been recorded as deferred compensation, with an offsetting
entry to additional paid-in-capital, in the accompanying financial statements. The vesting of 342,741 of these shares is time-based and the deferred compensation related to these shares is being amortized to general and administrative expense
ratably over the respective vesting periods that range from 1 to 10 years. As a result, additional compensation expense of $237,440 and $222,252 was recognized during the three months ended June 30, 2005 and 2004, respectively, and $511,342 and
$416,754 was recognized during the six months ended June 30, 2005 and 2004, respectively, in the accompanying consolidated statements of operations. The vesting of 50,000 of these shares, which were granted on March 30, 2004, is based on achieving
annual performance metrics over a ten-year period. The Company accounts for these shares under the recognition and measurement principles of FASB Interpretation No. 28. As a result, additional compensation expense of $71,175 and $67,183 was
recognized during the three months ended June 30, 2005 and 2004, respectively, and $117,452 and $67,183 was recognized during the six months ended June 30, 2005 and 2004, respectively, in the accompanying consolidated statements of operations.
Dividends paid on unvested stock grants have been recorded as dividends in the accompanying consolidated balance sheets.



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



As permitted by Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based
Compensation (SFAS 123), the Company has not changed its method of accounting for stock options but has provided the additional required disclosures. Had compensation cost for the Companys stock-based compensation plans been determined
based on the fair value at the grant dates for awards under those plans, consistent with the method of SFAS No. 123, 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 months ended |        |              | Six months ended |      
|                                                   |  | June 30, 2005      |        | June 30,2004 |                  |       | June 30, 2005 |  |   | June 30, 2004 |  
|Net income (loss) available to Common Stockholders |  |                    |        |              |                  |       |               |  |   |               |   |  |   |       |  
|As reported *                                      |  | $                  | 11,841 |              | $                | 8,079 |               |  | $ | (32,838       | ) |  | $ | 7,956 |  
|SFAS No. 123 Adj.                                  |  |                    | 16     |              |                  | (24   | )             |  |   | 8             |   |  |   | (83   | )
|                                                   |  |                    |        |              |                  |       |               |  |   |               |   |  |   |       |  
|Pro forma                                          |  | $                  | 11,857 |              | $                | 8,055 |               |  | $ | (32,830       | ) |  | $ | 7,873 |  
|                                                   |  |                    |        |              |                  |       |               |  |   |               |   |  |   |       |  
|Basic earnings (loss) per share                    |  |                    |        |              |                  |       |               |  |   |               |   |  |   |       |  
|As reported *                                      |  | $                  | 0.33   |              | $                | 0.26  |               |  | $ | (0.92         | ) |  | $ | 0.26  |  
|SFAS No. 123 Adj.                                  |  |                    |       |              |                  |      |               |  |   |              |   |  |   |      |  
|                                                   |  |                    |        |              |                  |       |               |  |   |               |   |  |   |       |  
|Pro forma                                          |  | $                  | 0.33   |              | $                | 0.26  |               |  | $ | (0.92         | ) |  | $ | 0.26  |  
|                                                   |  |                    |        |              |                  |       |               |  |   |               |   |  |   |       |  
|Diluted earnings (loss) per share                  |  |                    |        |              |                  |       |               |  |   |               |   |  |   |       |  
|As reported *                                      |  | $                  | 0.33   |              | $                | 0.26  |               |  | $ | (0.92         | ) |  | $ | 0.26  |  
|SFAS No. 123 Adj.                                  |  |                    |       |              |                  |      |               |  |   |              |   |  |   |      |  
|                                                   |  |                    |        |              |                  |       |               |  |   |               |   |  |   |       |  
|Pro forma                                          |  | $                  | 0.33   |              | $                | 0.26  |               |  | $ | (0.92         | ) |  | $ | 0.26  |  
|                                                   |  |                    |        |              |                  |       |               |  |   |               |   |  |   |       |  



There were no stock options granted
during the six months ended June 30, 2005 and 2004.

---

|* | As restated for the three and six months ended June 30, 2004. See Note 2.
|- | -------------------------------------------------------------------------



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.



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



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



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



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



|                           |  |                                                            
|-------------------------- |  | -----------------------------------------------------------
|Buildings and improvements |  | 5 to 40 years                                              
|Tenant improvements        |  | Lesser of the term of the related lease or the assets life
|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 Operating Joint Ventures



The Companys investments in operating joint ventures (which are not variable interest
entities or which are variable interest entities in which the Company is not the primary beneficiary) are accounted for using the equity method. The Company does not hold a controlling interest in any operating joint venture. 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 if it becomes evident that the borrower is unable to meet its debt service obligations in a timely manner



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



and cannot satisfy its payments using sources other than the operations of the property securing the loan. If it is
concluded that such circumstances exist, then such loan will be considered to be impaired and its recorded amount will be reduced to the estimated fair value of the collateral securing it. Interest income will also cease to accrue under such
circumstances. Due to uncertainties inherent in the valuation process, it is reasonably possible that the amount ultimately realized from the Companys collection on its mortgage loans receivable will be different than the recorded amounts. See
Note 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.



Fair Value of Financial Instruments



For certain financial instruments, including cash and cash equivalents, accounts receivable (included in other assets), accounts payable and accrued liabilities (included in other liabilities), and the unsecured bank line of credit, the
recorded amounts approximate fair value due to the relatively short maturity period. Based on interest rates that the Company would be able to obtain for mortgage loans to third parties with similar terms, the carrying value of the Companys
mortgage loans receivable approximates fair value. Based on interest rates available to the Company for debt with comparable maturities and other terms, the estimated fair value of the Companys secured mortgage loans as of June 30, 2005 and
December 31, 2004, would be approximately $733,814 and $711,864 (in thousands), respectively.



Derivative Financial Instruments



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



At June 30, 2005 and December 31, 2004, the Company was not a party to any derivative
financial instruments.



Leasing and Financing Costs



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



Minority Interest



Minority interest
represents the 7.63% and 7.69% limited partner interests in the Operating Partnership not held by the Company at June 30, 2005 and December 31, 2004, 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, or if other tenants pay rent whom the Company previously estimated would not. Rental revenue also includes the
amortization of above or below market in-place leases recognized in accordance with SFAS No. 141 as discussed under the previous Rental Properties accounting policy.



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



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as revenue
in the period the applicable expenses are incurred. Generally, differences between estimated and actual amounts are recognized in the subsequent year. However, where actual expenses are significantly less than estimates, the Company will accrue the
amounts estimated to be due to tenants in the same period.



For the three and
six months ended June 30, 2005 and 2004, no one tenant represented 10% or more of rental revenue of the Company.



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



Sales of Real Estate



The Company recognizes sales of real
estate when a contract has been executed, a closing has occurred, the buyers initial and continuing investment is adequate to demonstrate a commitment to pay for the property and the Company does not have a substantial continuing involvement
in the property. Each property is deemed a separately identifiable component of the Company and is reported in discontinued operations when the operations and cash flows of the property have been (or will be) eliminated from the ongoing operations
of the Company as a result of a disposal transaction. Interest expense associated with a mortgage loan is classified as a component of discontinued operations if that loan is directly secured by a property classified as a discontinued operation.



Income Taxes



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



Reference to 2004 Audited Financial Statements



These unaudited financial statements should be read in conjunction with
the Notes to Consolidated Financial Statements included in the 2004 audited consolidated financial statements.



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



Note 4. RENTAL PROPERTIES



The cost and accumulated depreciation of rental properties, by market, as of June 30, 2005 and December 31, 2004, are as follows (in
thousands):



|                         |  |                     |         |   |                            |   |           |            |  |   |                          |   |  |                    |          |   |  |   |           |  
|------------------------ |  | ------------------- | ------- | - | -------------------------- | - | --------- | ---------- |  | - | ------------------------ | - |  | ------------------ | -------- | - |  | - | --------- | -
|                         |  | As of June 30, 2005 |        
|                         |  | Land                |         |   | Buildings & Improve- ments |   |           | Total Cost |  |   | Accumulated Depreciation |   |  | Net Recorded Value |         
|Washington D.C.          |  | $                   | 39,126  |   |                            | $ | 238,354   |            |  | $ | 277,480                  |   |  | $                  | (23,875  | ) |  | $ | 253,605   | *
|Southern California      |  |                     | 39,780  |   |                            |   | 191,936   |            |  |   | 231,716                  |   |  |                    | (30,705  | ) |  |   | 201,011   | *
|Northern New Jersey      |  |                     | 25,320  |   |                            |   | 142,935   |            |  |   | 168,255                  |   |  |                    | (34,796  | ) |  |   | 133,459   |  
|Boston                   |  |                     | 21,237  |   |                            |   | 155,083   |            |  |   | 176,320                  |   |  |                    | (30,219  | ) |  |   | 146,101   | *
|San Francisco            |  |                     | 36,051  |   |                            |   | 83,590    |            |  |   | 119,641                  |   |  |                    | (14,853  | ) |  |   | 104,788   |  
|Chicago                  |  |                     | 1,961   |   |                            |   | 74,099    |            |  |   | 76,060                   |   |  |                    | (24,579  | ) |  |   | 51,481    |  
|St. Louis                |  |                     | 7,192   |   |                            |   | 29,315    |            |  |   | 36,507                   |   |  |                    | (7,031   | ) |  |   | 29,476    |  
|Tampa/Orlando            |  |                     | 7,806   |   |                            |   | 41,432    |            |  |   | 49,238                   |   |  |                    | (9,739   | ) |  |   | 39,499    | *
|Denver                   |  |                     | 6,222   |   |                            |   | 42,546    |            |  |   | 48,768                   |   |  |                    | (6,954   | ) |  |   | 41,814    | *
|Minneapolis              |  |                     | 6,129   |   |                            |   | 28,108    |            |  |   | 34,237                   |   |  |                    | (8,344   | ) |  |   | 25,893    |  
|Las Vegas                |  |                     | 7,746   |   |                            |   | 33,875    |            |  |   | 41,621                   |   |  |                    | (9,042   | ) |  |   | 32,579    |  
|All others               |  |                     | 14,286  |   |                            |   | 85,421    |            |  |   | 99,707                   |   |  |                    | (32,526  | ) |  |   | 67,181    |  
|Properties held for sale |  |                     | (19,035 | ) |                            |   | (134,863  | )          |  |   | (153,898                 | ) |  |                    | 39,464   |   |  |   | (114,434  | )
|                         |  |                     |         |   |                            |   |           |            |  |   |                          |   |  |                    |          |   |  |   |           |  
|Total                    |  | $                   | 193,821 |   |                            | $ | 1,011,831 |            |  | $ | 1,205,652                |   |  | $                  | (193,199 | ) |  | $ | 1,012,453 |  
|                         |  |                     |         |   |                            |   |           |            |  |   |                          |   |  |                    |          |   |  |   |           |  

---

|* | Includes acquisition costs allocated to at-market and above-market rate in-place leases, net of accumulated amortization, of $10,580 in Washington D.C., $4,133 in Southern
California, $4,529 in Boston, $554 in Tampa/Orlando, and $1,098 in Denver.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                         |  |                         |         |   |                            |   |           |            |  |   |                          |   |  |                    |          |   |  |   |           |  
|------------------------ |  | ----------------------- | ------- | - | -------------------------- | - | --------- | ---------- |  | - | ------------------------ | - |  | ------------------ | -------- | - |  | - | --------- | -
|                         |  | As of December 31, 2004 |        
|                         |  | Land                    |         |   | Buildings & Improve- ments |   |           | Total Cost |  |   | Accumulated Depreciation |   |  | Net Recorded Value |         
|Washington D.C.          |  | $                       | 40,877  |   |                            | $ | 224,996   |            |  | $ | 265,873                  |   |  | $                  | (26,179  | ) |  | $ | 239,694   | *
|Southern California      |  |                         | 39,780  |   |                            |   | 189,952   |            |  |   | 229,732                  |   |  |                    | (26,020  | ) |  |   | 203,712   | *
|Northern New Jersey      |  |                         | 26,133  |   |                            |   | 145,828   |            |  |   | 171,961                  |   |  |                    | (33,051  | ) |  |   | 138,910   |  
|Boston                   |  |                         | 21,237  |   |                            |   | 154,258   |            |  |   | 175,495                  |   |  |                    | (27,654  | ) |  |   | 147,841   | *
|San Francisco            |  |                         | 36,051  |   |                            |   | 84,239    |            |  |   | 120,290                  |   |  |                    | (14,164  | ) |  |   | 106,126   |  
|Chicago                  |  |                         | 2,746   |   |                            |   | 103,456   |            |  |   | 106,202                  |   |  |                    | (27,722  | ) |  |   | 78,480    |  
|St. Louis                |  |                         | 7,192   |   |                            |   | 29,030    |            |  |   | 36,222                   |   |  |                    | (6,827   | ) |  |   | 29,395    |  
|Tampa/Orlando            |  |                         | 9,150   |   |                            |   | 47,390    |            |  |   | 56,540                   |   |  |                    | (10,938  | ) |  |   | 45,602    | *
|Denver                   |  |                         | 6,222   |   |                            |   | 45,505    |            |  |   | 51,727                   |   |  |                    | (6,090   | ) |  |   | 45,637    | *
|Minneapolis              |  |                         | 6,129   |   |                            |   | 31,686    |            |  |   | 37,815                   |   |  |                    | (8,168   | ) |  |   | 29,647    |  
|Las Vegas                |  |                         | 7,746   |   |                            |   | 33,695    |            |  |   | 41,441                   |   |  |                    | (8,387   | ) |  |   | 33,054    |  
|All others               |  |                         | 15,837  |   |                            |   | 121,597   |            |  |   | 137,434                  |   |  |                    | (32,945  | ) |  |   | 104,489   |  
|Properties held for sale |  |                         | (6,822  | ) |                            |   | (56,600   | )          |  |   | (63,422                  | ) |  |                    | 7,916    |   |  |   | (55,506   | )
|                         |  |                         |         |   |                            |   |           |            |  |   |                          |   |  |                    |          |   |  |   |           |  
|Total                    |  | $                       | 212,278 |   |                            | $ | 1,155,032 |            |  | $ | 1,367,310                |   |  | $                  | (220,229 | ) |  | $ | 1,147,081 |  
|                         |  |                         |         |   |                            |   |           |            |  |   |                          |   |  |                    |          |   |  |   |           |  

---

|* | Includes acquisition costs allocated to at-market and above-market rate in-place leases, net of accumulated amortization, of $7,287 in Washington D.C., $5,627 in Southern
California, $5,244 in Boston, $621 in Tampa/Orlando, and $1,230 in Denver.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



NOTE 5. ACQUISITION OF RENTAL PROPERTY



On February 1, 2005, the Company acquired Metro Place II in Merrifield, VA, for a purchase price of $71.7 million. The property consists of
a 234,466 square foot, ten-story Class A multi-tenant office building and a six-level parking garage. Completed in 1999, the property is 100% leased primarily to defense industry tenants, and is not subject to any lease expirations until
2009. The purchase price was funded with the 1031 tax deferred exchange proceeds from the sale of Rockwall I & II (as discussed in Note 6) and the assumption of a $39.4 million mortgage from a life insurance company (for which fair value
approximated carrying value). 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 $5.3 million. Liabilities related to below-market rate in-place leases amounted to approximately $1.0 million.



NOTE 6. DISPOSITIONS OF RENTAL PROPERTIES



During the six months ended June 30, 2005, the Company sold six rental properties. These
assets were sold for an aggregate sales price of approximately $114.6 million and generated an aggregate gain on sale of approximately $26.6 million. The six rental properties sold in 2005 were:



|                               |  |                 |  |             |  |               |  |                     |       
|------------------------------ |  | --------------- |  | ----------- |  | ------------- |  | ------------------- | ------
|Property                       |  | Market          |  | Date ofSale |  | SquareFootage |  | Sales Price($000s)
|Rockwall I and II              |  | Washington D.C. |  | 1/18/05     |  | 342,739       |  | $                   | 76,750
|Leawood Office Building        |  | Kansas City     |  | 2/9/05      |  | 92,787        |  | $                   | 7,290 
|Park 100 Industrial            |  | Indianapolis    |  | 4/26/05     |  | 102,400       |  | $                   | 2,680 
|Lake Point Business Park       |  | Tampa/Orlando   |  | 4/28/05     |  | 134,360       |  | $                   | 13,100
|Oak Brook International Center |  | Chicago         |  | 5/12/05     |  | 98,431        |  | $                   | 11,500
|Fairfield Business Quarters    |  | New Jersey      |  | 6/1/05      |  | 42,792        |  | $                   | 3,250 



During the second quarter of 2005, the
Company completed the sales of four properties for an aggregate sales price of $30.53 million. These four properties are included in the 21 properties which the Company has decided to dispose of as announced during the first quarter of 2005 (see
Note 14). The Company recognized an aggregate gain on sale of approximately $9.1 million on three of the properties, Park 100 Industrial, Lake Point Business Park and Oak Brook International Center. During the first quarter of 2005, in connection
with the Companys decision to reduce the intended holding period for the Fairfield Business Quarters property (see Note 14), the Company recognized an impairment charge of approximately $0.8 million to reduce the carrying value of this
property to its estimated fair value (calculated by discounting estimated future cash flows and sales proceeds). Upon the completion of the sale of this property during the second quarter of 2005, the Company recognized a gain on sale of
approximately $0.2 million due to an increase in actual versus estimated sales proceeds. The proceeds from these dispositions were used to payoff two mortgage loans secured by two of the properties (see Note 11) and to pay down the Companys
unsecured bank line of credit.



On February 9, 2005, the Company entered into a
contract to sell a 93,000 square foot office building in Leawood, Kansas, for a sale price of $7.29 million. On the same day, the Company recognized an impairment charge of approximately $3.8 million and the sale was completed. The proceeds from
this disposition were used to pay down the Companys unsecured bank line of credit.



On January 18, 2005, the Company completed the sale of Rockwall I and II, a 343,000 square foot office complex located in Rockville, MD, for a sale price of $76.75 million. The gain on sale recognized was
approximately $17.3 million. Approximately $3 million of additional gain on sale has been deferred pending resolution of sale contingencies which the Company anticipates will be resolved during the third quarter of 2005. In connection with the sale
of Rockwall, the Company paid off a mortgage loan of $43.3 million and recognized a loss on early extinguishment of debt of $2.4 million which primarily consisted of a prepayment penalty in connection with the loan payoff. The Company used the
proceeds of this sale to acquire Metro Place II in a 1031 tax deferred exchange (as discussed in Note 5).



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



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 these sold properties are classified as discontinued operations in the accompanying consolidated statements of operations for all periods presented. In addition, real estate properties classified as held
for sale are presented separately on the consolidated balance sheet with the related results from operations classified as discontinued operations in the accompanying consolidated statements of operations for all periods presented. As of June 30,
2005, there were ten properties classified as held for sale which were as follows:



|                              |  |             |  |              
|----------------------------- |  | ----------- |  | -------------
|Property                      |  | Market      |  | SquareFootage
|Oakbrook Terrace Corp Ctr III |  | Chicago     |  | 232,052 sf   
|Columbia Centre II            |  | Chicago     |  | 146,530 sf   
|University Club Tower         |  | St. Louis   |  | 272,443 sf   
|Woodlands Plaza               |  | St. Louis   |  | 81,853 sf    
|Woodlands Tech                |  | St. Louis   |  | 98,037 sf    
|Riverview Office Tower        |  | Minneapolis |  | 227,129 sf   
|Bryant Lake                   |  | Minneapolis |  | 171,359 sf   
|Capitol Center                |  | Des Moines  |  | 165,127 sf   
|Northglenn Business Center    |  | Denver      |  | 65,000 sf    
|Palms Bus. Center IV & North  |  | Las Vegas   |  | 129,501 sf   



In August 2005, the Woodlands Tech
property was sold. See Note 21 for further discussion.



The major classes of
assets and liabilities of the ten properties classified as held for sale at June 30, 2005, as well as the assets and liabilities of Rockwall I and II which was classified as held for sale at December 31, 2004 (and sold in January 2005 as discussed
above), are as follows (dollars in thousands):



|                                                     |  |               |         |                   |   |        |  
|---------------------------------------------------- |  | ------------- | ------- | ----------------- | - | ------ | -
|                                                     |  | June 30, 2005 |         | December 31, 2004 |  
|ASSETS                                               |  |               |         |                   |   |        |  
|Rental properties, net                               |  | $             | 114,434 |                   | $ | 55,506 |  
|Leasing and financing costs, net                     |  |               | 3,052   |                   |   | 849    |  
|Straight-line rent receivable, net                   |  |               | 2,210   |                   |   | 338    |  
|Other assets                                         |  |               | 190     |                   |   | 634    |  
|                                                     |  |               |         |                   |   |        |  
|Properties held for sale                             |  | $             | 119,886 |                   | $ | 57,327 |  
|                                                     |  |               |         |                   |   |        |  
|LIABILITIES                                          |  |               |         |                   |   |        |  
|Notes payable                                        |  | $             |        |                   | $ | 43,322 |  
|Other liabilities                                    |  |               | 2,848   |                   |   | (22    | )
|                                                     |  |               |         |                   |   |        |  
|Obligations associated with properties held for sale |  | $             | 2,848   |                   | $ | 43,300 |  
|                                                     |  |               |         |                   |   |        |  



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



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 endedJune 30, |        |   | Six months endedJune 30, |  
|                                                         |  | 2005                       |        |   | 2004                     |   |        | 2005 |  |   | 2004    |  
|OPERATING REVENUE                                        |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Rental revenue                                           |  | $                          | 6,999  |   |                          | $ | 11,675 |      |  | $ | 14,935  |   |  | $ | 22,753 |  
|                                                         |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|OPERATING EXPENSES                                       |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Property operating expenses                              |  |                            | 3,110  |   |                          |   | 4,049  |      |  |   | 6,686   |   |  |   | 8,477  |  
|General and administrative                               |  |                            |       |   |                          |   | 11     |      |  |   |        |   |  |   | 12     |  
|Depreciation and amortization                            |  |                            | 1,116  |   |                          |   | 3,559  |      |  |   | 3,768   |   |  |   | 7,105  |  
|Provision for impairment of real estate assets           |  |                            |       |   |                          |   |       |      |  |   | 28,426  |   |  |   |       |  
|                                                         |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Total operating expenses                                 |  |                            | 4,226  |   |                          |   | 7,619  |      |  |   | 38,880  |   |  |   | 15,594 |  
|                                                         |  |                            |        |  
|Interest expense                                         |  |                            | (55    | ) |                          |   | (1,176 | )    |  |   | (323    | ) |  |   | (2,404 | )
|Loss on early extinguishment of debt                     |  |                            | (135   | ) |                          |   |       |      |  |   | (2,513  | ) |  |   |       |  
|                                                         |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Income (loss) before gain on sales of real estate assets |  |                            | 2,583  |   |                          |   | 2,880  |      |  |   | (26,781 | ) |  |   | 4,755  |  
|Gain on sales of real estate assets                      |  |                            | 9,309  |   |                          |   | 12,408 |      |  |   | 26,629  |   |  |   | 12,528 |  
|                                                         |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Discontinued operations                                  |  | $                          | 11,892 |   |                          | $ | 15,288 |      |  | $ | (152    | ) |  | $ | 17,283 |  
|                                                         |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |        |  



NOTE 7. INVESTMENTS IN LAND AND
DEVELOPMENT



The Companys investments in land and development
decreased from $147,435,000 at December 31, 2004, to $134,372,000 at June 30, 2005. This decrease is primarily due to the disposition of approximately 28 acres of land held for development, known as Eden Shores located in Hayward, California. On
March 25, 2005, the Company entered into a contract to sell Eden Shores to an unaffiliated third party which owns land adjacent to this parcel for a sale price of $12 million. At that time, the Company recognized an impairment charge of
approximately $5.1 million which is included in the provision for impairment of real estate assets in the accompanying consolidated statement of operations for the six months ended June 30, 2005. On March 28, 2005, the sale was completed. The
Company received $5 million in cash and a $7 million first mortgage loan receivable, secured by the land, with a fixed interest rate of 8%, a 20-year amortization requiring monthly principal and interest payments of approximately $59,000, and a
maturity date of March 28, 2007. On June 28, 2005, this mortgage loan receivable was sold to a bank for approximately $6.98 million which was the outstanding principal balance on that date. The Company did not recognize any gain or loss on this
transaction.



In addition, on January 31, 2005, the Company sold its interest
in the Gateway Office Five development project located in Denver, Colorado, which was in the form of a mezzanine loan with a net basis of approximately $835,000 as of December 31, 2004 (see table below). In connection with this sale, the mezzanine
loan principal balance and accrued interest was paid off in full. In addition, the Company received a $430,000 fee to terminate its acquisition rights for this property. This fee in included in interest and other income on the accompanying
consolidated statement of operations for the six months ended June 30, 2005.



As of June 30, 2005 and December 31, 2004, the Company had investments in the following properties under development and land held for development. The investment descriptions are as of June 30, 2005 (dollars in thousands).



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



|                                          |  |                             |  |                                                                                                                                     |  |                        |  |                       |   |                  |      |  |                                  |         |     |                                      |   |        |    
|----------------------------------------- |  | --------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- |  | --------------------- | - | ---------------- | ---- |  | -------------------------------- | ------- | --- | ------------------------------------ | - | ------ | ---
|Market                                    |  | Properties                  |  | Description                                                                                                                         |  | City                   |  | ProposedSquareFootage |   | EconomicInterest |      |  | InvestmentBalance atJune 30,2005 |         |     | InvestmentBalance atDecember 31,2004 |  
|Denver                                    |  | Gateway Office Five         |  | Fifth office building constructed at Gateway Park (1-story)                                                                         |  | Denver                 |  |                      |   |                 | (1)  |  |                                  |        | (1) |                                      | $ | 835    |    
|                                          |  |                             |  |                                                                                                                                     |  |                        |  |                       |   |                  |      |  |                                  |         |     |                                      |   |        |    
|TOTAL PROPERTIES UNDER DEVELOPMENT        |  |                             |  |                                                                                                                                    |  |                        |  |                       |   |                 |      |  | $                                | 835     |    
|                                          |  |                             |  |                                                                                                                                     |  |                        |  |                       |   |                  |      |  |                                  |         |     |                                      |   |        |    
|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              | %    |  | $                                | 5,216   |     |                                      | $ | 5,170  |    
|                                          |  |                             |  |                                                                                                                                     |  |                        |  |                       |   |                  |      |  |                                  |         |     |                                      |   |        |    
|                                          |  | Subtotal - Boston           |  |                                                                                                                                     |  |                        |  | 235,000               |   |                  |      |  |                                  | 5,216   |     |                                      |   | 5,170  |    
|                                          |  |                             |  |                                                                                                                                     |  |                        | 
|Denver                                    |  | Gateway Park                |  | 1,200 acre mixed-use park near Denver International Airport; approximately 442 acres undeveloped                                    |  | Denver                 |  | to bedetermined       |   | 50               | %(2) |  |                                  | 35,473  | (2) |                                      |   | 34,636 | (2)
|                                          |  | Lima Street                 |  | 19.5 acres of undeveloped land in Englewood, Colorado, zoned for office use                                                         |  | Denver                 |  | 120,000               |   | 100              | %    |  |                                  | 4,750   |     |                                      |   | 4,750  |    
|                                          |  |                             |  |                                                                                                                                     |  |                        |  |                       |   |                  |      |  |                                  |         |     |                                      |   |        |    
|                                          |  | Subtotal - Denver           |  |                                                                                                                                     |  |                        |  | 120,000               |   |                  |      |  |                                  | 40,223  |     |                                      |   | 39,386 |    
|                                          |  |                             |  |                                                                                                                                     |  |                        | 
|San Francisco                             |  | Marina Shores               |  | 33.2 acre mixed-use waterfront community which could include office, retail and multifamily units; currently in entitlement process |  | RedwoodCity            |  | to bedetermined       |   | 50               | %(3) |  |                                  | 82,814  |     |                                      |   | 79,548 |    
|                                          |  | Eden Shores                 |  | 27 acres zoned for the construction of a 600,000 square foot office park                                                            |  | Hayward                |  |                      |   |                 | (4)  |  |                                  |        | (4) |                                      |   | 16,530 |    
|                                          |  |                             |  |                                                                                                                                     |  |                        |  |                       |   |                  |      |  |                                  |         |     |                                      |   |        |    
|                                          |  | Subtotal -San Francisco     |  |                                                                                                                                     |  |                        |  |                      |   |                  |      |  |                                  | 82,814  |     |                                      |   | 96,078 |    
|                                          |  |                             |  | Other land held for development                                                                                                     |  | NewJersey/SanFrancisco |  |                       |   |                  |      |  |                                  | 6,119   |     |                                      |   | 5,966  |    
|                                          |  |                             |  |                                                                                                                                     |  |                        |  |                       |   |                  |      |  |                                  |         |     |                                      |   |        |    
|TOTAL LAND HELD FOR DEVELOPMENT           |  |                             |  | 355,000                                                                                                                             |  |                        |  |                       | $ | 134,372          |      |  | $                                | 146,600 |    
|                                          |  |                             |  |                                                                                                                                     |  |                        |  |                       |   |                  |      |  |                                  |         |     |                                      |   |        |    
|TOTAL INVESTMENTS IN LAND AND DEVELOPMENT |  |                             |  | 355,000                                                                                                                             |  |                        |  |                       | $ | 134,372          |      |  | $                                | 147,435 |    
|                                          |  |                             |  |                                                                                                                                     |  |                        |  |                       |   |                  |      |  |                                  |         |     |                                      |   |        |    

---

|(1) | Interest previously held in the form of a mezzanine loan. In the first quarter of 2005, the
mezzanine loan was paid off in full. See above for further discussion.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Interest in the form of mezzanine loans and equity. In addition, the Company holds a mortgage loan receivable secured by the land with a balance of $11,073 and
$12,872 at June 30, 2005 and December 31, 2004, respectively (see Note 9 for further discussion).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Interest in the form of equity and mezzanine loans. The Company consolidated this entity on January 1, 2004, pursuant to FIN 46 Revised. See Note 16 for further
discussion.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | In the first quarter of 2005, the Company sold this property to an unaffiliated third party.
See above for further discussion.
|--- | ------------------------------------------------------------------------------------------------------------------------------



The Company has no further
contractual obligations for the future funding of these developments; however, the Company will likely be funding a portion of their working capital needs until such time as other financing is obtained. Under its development alliances, the Company
has provided an aggregate of approximately $2.5 million in debt guarantees; however, some of the loans were not fully drawn as of June 30, 2005. These guarantees will remain in place until such time as the related development financing has been
replaced or repaid, the terms of which vary from less than 1 year to up to 2 years. The Company would be required to perform under these guarantees in the event that the proceeds generated by the sale, refinance or additional capital contribution by
partners of the development project were insufficient to repay the full amount of the related debt financing. There is currently no recorded liability for any amounts that may become payable under these guarantees, nor is there a liability for the
Companys obligation to stand-ready to fund such guarantees which were all originally issued prior to 2003. In the event that the Company must make payments under one of these guarantees, its only recourse is to the limited



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



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. Performance under the guarantees would result in a contribution to the venture and an increase in the Companys effective ownership percentages.



Certain of the alliances with which the Company conducts business have been deemed to be VIEs as defined by FIN 46 Revised; however, other
than Marina Shores as discussed in Note 16, 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 $92.8 million and $53.7 million, respectively, at June 30, 2005, and $92.8 million and $54.5 million, respectively, at December 31, 2004. The Companys maximum exposure to loss is equal to its investments in these arrangements,
plus the related debt guarantees, as described above.



NOTE 8. INVESTMENTS
IN UNCONSOLIDATED OPERATING JOINT VENTURES



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



The Companys investments in
unconsolidated operating joint ventures consisted of the following as of June 30, 2005 and December 31, 2004 (dollars in thousands):



|                     |  |                   |  |                   |  |                      |  |              |  |                    |        |              |   |       
|-------------------- |  | ----------------- |  | ----------------- |  | -------------------- |  | ------------ |  | ------------------ | ------ | ------------ | - | ------
|                     |  |                   |  |                   |  |                      |  |              |  | Investment Balance
|Joint Venture        |  | OwnershipInterest |  | Property Location |  | Square Footage/Units |  | PropertyType |  | June 30,2005       |        | Dec 31, 2004
|Rincon Center I & II |  | 10%               |  | San Francisco, CA |  | 741,103 sf           |  | Mixed-Use    |  | $                  | 4,187  |              | $ | 4,158 
|2000 Corporate Ridge |  | 10%               |  | McLean, VA        |  | 255,980 sf           |  | Office       |  |                    | 3,108  |              |   | 3,018 
|Gateway Retail I     |  | 50%               |  | Denver, CO        |  | 12,000 sf            |  | Retail       |  |                    | 416    |              |   | 406   
|Lakecrest Apartments |  | 27%               |  | Aurora, CO        |  | 440 units            |  | Residential  |  |                    | 4,225  |              |   | 4,432 
|                     |  |                   |  |                   |  |                      |  |              |  |                    |        |              |   |       
|                     |  |                   |  |                   |  |                      |  |              |  | $                  | 11,936 |              | $ | 12,014
|                     |  |                   |  |                   |  |                      |  |              |  |                    |        |              |   |       



NOTE 9. MORTGAGE LOANS RECEIVABLE



The Company holds a first mortgage secured by a 50% interest in 152 acres
of land at Gateway Business Park in Aurora, Colorado. The balance of this mortgage loan receivable decreased from $12,872,000 at December 31, 2004, to $11,073,000 at June 30, 2005, due to principal payments received of $2,500,000, partially offset
by monthly interest accruals of $701,000. The loan was originally funded in June 1998, had a fixed interest rate of 6.5% and a maturity date of July 2007. In July 2004, the loan agreement was amended to increase the interest rate to 9.0%. Periodic
payments of interest and principal are received on the loan from proceeds of land parcel sales in the project. Gateway Business Park is a development project where the Company and the Pauls Corporation have an alliance and where the Company has also
acquired property. In this arrangement, the Company has rights under certain conditions and subject to certain contingencies to purchase the properties upon completion of development. No loan loss reserves have been recorded related to this loan.
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 as the borrower bears the majority of the risk of loss. The Companys maximum
exposure to loss is equal to the recorded amount of its loan, including accrued interest.



As discussed in Note 7, in connection with the Companys disposition of approximately 28 acres of land held for development, known as Eden Shores located in Hayward, California, the Company held a first mortgage
loan receivable of $7 million, secured by the land, with a fixed interest rate of 8%, a 20-year amortization requiring monthly principal and interest payments of approximately $59,000, and a maturity date of March 28, 2007. On June 28, 2005, this
mortgage loan receivable was sold to a bank for approximately $6.98 million which was the outstanding principal balance on that date. The Company did not recognize any gain or loss on this transaction.



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



NOTE 10. OTHER ASSETS



As of June 30, 2005 and December 31, 2004, other assets on the consolidated balance sheets consist of the following (in thousands):



|                                                                                                                  |  |      |        |      |   |       
|----------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                                                                                                  |  | 2005 |        | 2004
|Accounts receivable, net of allowances of $222 and $1,422 as of June 30, 2005 and December 31, 2004, respectively |  | $    | 2,484  |      | $ | 2,858 
|Prepaid expenses and deposits                                                                                     |  |      | 5,513  |      |   | 1,249 
|Impound accounts (restricted cash)                                                                                |  |      | 1,035  |      |   | 1,047 
|Notes receivable                                                                                                  |  |      | 5,082  |      |   | 3,605 
|Investment in management contracts, net of accumulated amortization                                               |  |      | 867    |      |   | 1,156 
|Other                                                                                                             |  |      | 248    |      |   | 287   
|                                                                                                                  |  |      |        |      |   |       
|Total other assets                                                                                                |  | $    | 15,229 |      | $ | 10,202
|                                                                                                                  |  |      |        |      |   |       



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 June 30, 2005 and December 31, 2004 (dollars in thousands):



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |      |         |      |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  | 2005 |         | 2004
|Loans with various lenders, bearing interest at fixed rates between 4.73% and 8.32% at June 30, 2005, and 4.99% and 8.13% at December 31,
2004, with monthly principal and interest payments ranging between $52 and $235 and maturing at various dates through December 1, 2013. These loans are collateralized by properties with an aggregate net carrying value of $609,353 and $497,782 at
June 30, 2005 and December 31, 2004, respectively. One of these loans includes an unamortized premium of $1,044 and $1,190 at June 30, 2005 and December 31, 2004, respectively.                                                                                                                              |  | $    | 418,554 |      | $ | 345,992
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |     
|Loans with various lenders, bearing interest at variable rates ranging between 5.34% and 6.59% at June 30, 2005, and between 4.15% and 5.65%
at December 31, 2004, and maturing at various dates through November 10, 2008. These loans are collateralized by properties with an aggregate net carrying value of $180,781 and $161,541 at June 30, 2005 and December 31, 2004,
respectively.                                                                                                                                                                                                                                                                                                                  |  |      | 76,619  |      |   | 116,978
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |     
|Loan with an insurance company, net of unamortized discount of $411 and $467 at June 30, 2005 and December 31, 2004, respectively. The loan
has two fixed rate components. The fixed rate component of $43,448 at June 30, 2005 bears interest at 6.13%, matures on February 11, 2009, and requires monthly principal and interest payments of $296. The fixed rate component of $139,250 at June 30,
2005 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 $231,658 and $237,406 at June
30, 2005 and December 31, 2004, respectively. |  |      | 182,698 |      |   | 184,412



continued



24



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |      |         |      |   |        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | 2005 |         | 2004
|Loan with an insurance company, net of unamortized discount of $468 and $538 at June 30, 2005 and December 31, 2004, respectively. The loan
bears a fixed interest rate at 6.13%, matures on November 10, 2008, and requires monthly principal and interest payments of $343. This loan is cross-collateralized by a pool of properties with an aggregate net carrying value of $106,322 and $108,228
at June 30, 2005 and December 31, 2004, respectively. |  |      | 50,280  |      |   | 50,688 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |      |         |      |   |        
|Total mortgage loans                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |      | 728,151 |      |   | 698,070
|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |     
|Unsecured $180,000 line of credit with a group of commercial banks, with a variable interest rate of 30-day LIBOR plus 1.750% at June 30, 2005
and December 31, 2004 (5.09% and 4.15%, respectively), monthly interest only payments and a maturity date of March 26, 2007, with one one-year extension option.                                                                                                                                             |  |      | 44,119  |      |   | 21,320 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |      |         |      |   |        
|Total mortgage loans and unsecured bank line of credit before adjustment for properties held for sale                                                                                                                                                                                                                                                                                                                                                       |  | $    | 772,270 |      | $ | 719,390
|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |      |         |      |   |        



Mortgage loans on the consolidated
balance sheets as of June 30, 2005 and December 31, 2004 are presented net of properties classified as held for sale. The following table reconciles total mortgage loans from the table above to the amounts presented on the consolidated balance
sheets (dollars in thousands):



|                                                            |  |              |         |                  |   |         |  
|----------------------------------------------------------- |  | ------------ | ------- | ---------------- | - | ------- | -
|                                                            |  | June 30,2005 |         | December 31,2004 |  
|Total mortgage loans                                        |  | $            | 728,151 |                  | $ | 698,070 |  
|Mortgage loans related to properties held for sale (Note 6) |  |              |        |                  |   | (43,322 | )
|                                                            |  |              |         |                  |   |         |  
|Total mortgage loans adjusted for properties held for sale  |  | $            | 728,151 |                  | $ | 654,748 |  
|                                                            |  |              |         |                  |   |         |  



At June 30, 2005 and December 31,
2004, the Companys indebtedness included fixed-rate debt of $651,532,000 and $581,092,000, respectively, and floating-rate debt of $120,738,000 and $138,298,000, respectively.



In accordance with FIN 46 Revised, the Company began consolidating the entity known as Marina Shores, effective January 1, 2004, as the
Company is deemed to be the primary beneficiary as defined by FIN 46 Revised. Marina Shores has total debt of $45 million consisting of two loans, with a $30 million loan bearing interest at the fixed rate of 6.32%, and a $15 million loan bearing
interest at the fixed rate of 8.32%. Both loans require monthly interest-only payments and mature on February 15, 2006. These loans are grouped with the fixed rate loans with various lenders in the above table.



In the second quarter of 2005, the Company closed a new $27 million loan which is secured by
the Gateway Park office property located in Aurora, Colorado. The loan has a maturity date of June 1, 2008, and bears interest at the fixed rate of 4.86%. In addition, the Company closed a new $13.25 million loan which is secured by the University
Center office property located in Tampa, Florida. The loan has a maturity date of June 5, 2006, with two one-year extension options, and bears interest at the fixed rate of 5.20%. The proceeds from both of these new loans were used to pay down the
Companys unsecured bank line of credit.



In the second quarter of 2005,
in connection with the disposition of Lake Point Business Park, an industrial property located in Orlando, Florida (as discussed in Note 6), the Company made a pay down of approximately $7.1 million on a floating-rate loan which was secured by a
cross-collateralized pool of five properties. This loan bears interest at the floating rate of 30-day LIBOR plus 2.00%, requires monthly interest-only payments, and has a maturity date of



25



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



December 5, 2005. The interest rate on this loan at June 30, 2005, was 5.34% and it is now secured by a
cross-collateralized pool of four properties. In connection with this pay down, the Company recognized a loss on early extinguishment of debt of approximately $25,000 which consisted of the write-off of unamortized original financing costs.



In the second quarter of 2005, in connection with the disposition of Fairfield
Business Quarters, an office property located in Fairfield, New Jersey (as discussed in Note 6), the Company paid off a mortgage loan of $1.8 million which had a fixed interest rate of 8.125% and a maturity date of June 1, 2007. In connection with
this payoff, the Company recognized a loss on early extinguishment of debt of approximately $110,000 which consisted of a prepayment penalty in connection with the loan payoff.



In the first quarter of 2005, in connection with the acquisition of Metro Place II, an office property located in Merrifield, Virginia (as
discussed in Note 5), the Company assumed a $39.4 million mortgage loan with an insurance company. The loan bears interest at the fixed rate of 5.06% and matures on May 1, 2010.



In the first quarter of 2005, the Company refinanced a floating-rate loan which was secured by 1100 17thStreet, an office property located in Washington, D.C. The new loan is a $29 million, 4.73% fixed-rate loan with a maturity date of March 1, 2010 and
is secured by the same property. The previous loan had a balance of approximately $20.3 million at the time of the refinance, had a floating interest rate of 30-day LIBOR plus 1.75% with a 3.5% floor, and a maturity date of July 1, 2007. The excess
loan proceeds were used to pay down the Companys unsecured bank line of credit. In connection with this transaction, the Company recognized a loss on early extinguishment of debt of approximately $0.5 million which consisted of a prepayment
penalty and the write-off of unamortized original financing costs.



In the
first quarter of 2005, in connection with the disposition of Rockwall I & II, an office complex located in Rockville, Maryland (as discussed in Note 6), the Company paid off a mortgage loan of $43.3 million which had a fixed interest rate of
6.77% and a maturity date of October 1, 2006. In connection with this payoff, the Company recognized a loss on early extinguishment of debt of approximately $2.4 million which primarily consisted of a prepayment penalty in connection with the loan
payoff, as well as the write-off of unamortized original financing costs.



In
the first quarter of 2005, the Company refinanced a floating-rate construction loan secured by an office property located in Bridgewater, New Jersey. The previous loan had a balance of approximately $12.8 million at the time of the refinance, had a
floating interest rate of 30-date LIBOR plus 2.45% and a maturity date of January 5, 2005. The outstanding balance was reduced to $10.8 million with a fixed interest rate of 5.19% and a maturity date of January 5, 2006.



At June 30, 2005 and December 31, 2004, the Company was not a party to any open interest rate
protection agreements. Some of the Companys properties are held in limited partnerships and limited liability companies in order to facilitate financing. All such entities are owned 100% directly or indirectly by the Company.



The required principal payments on the Companys debt for the next five years and
thereafter, as of June 30, 2005, are as follows (in thousands). Included in the year ending December 31, 2007, is the unsecured bank line of credit balance of $44,119 which has an initial maturity of March 26, 2007.



|                         |  |   |        
|------------------------ |  | - | -------
|Year Ending December 31, |  |  
|2005                     |  | $ | 51,168 
|2006                     |  |   | 148,051
|2007                     |  |   | 53,665 
|2008                     |  |   | 169,870
|2009                     |  |   | 202,250
|Thereafter               |  |   | 147,266
|                         |  |   |        
|Total                    |  | $ | 772,270
|                         |  |   |        



26



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



NOTE 12. OTHER LIABILITIES



As of June 30, 2005 and December 31, 2004, other liabilities on the consolidated balance sheets consist of the following (in thousands):



|                                                                       |  |      |        |                          |   |       
|---------------------------------------------------------------------- |  | ---- | ------ | ------------------------ | - | ------
|                                                                       |  | 2005 |        | 2004                    
|                                                                       |  |      |        | (As restated,see Note 2)
|Accounts payable and accrued liabilities                               |  | $    | 3,416  |                          | $ | 3,869 
|SFAS No. 141 below market rate leases, net of accumulated amortization |  |      | 4,862  |                          |   | 4,952 
|Unsecured note payable                                                 |  |      | 2,778  |                          |   | 2,710 
|Accrued retirement benefits                                            |  |      | 5,413  |                          |   | 5,292 
|Accrued dividends                                                      |  |      | 14,489 |                          |   | 15,931
|Interest payable                                                       |  |      | 2,000  |                          |   | 1,953 
|Security deposits                                                      |  |      | 5,634  |                          |   | 6,487 
|Property taxes payable                                                 |  |      | 1,175  |                          |   | 1,474 
|Prepaid rents                                                          |  |      | 2,743  |                          |   | 4,295 
|Deferred gain on sale (see Note 6)                                     |  |      | 2,960  |                          |   |      
|Deferred income                                                        |  |      | 72     |                          |   | 250   
|                                                                       |  |      |        |                          |   |       
|Total other liabilities                                                |  | $    | 45,542 |                          | $ | 47,213
|                                                                       |  |      |        |                          |   |       



NOTE 13. RELATED PARTY TRANSACTIONS



Fee and reimbursement income earned by the Company from related parties
totaled approximately $292,000 and $1,032,000 for the three months ended June 30, 2005 and 2004, respectively, and $415,000 and $1,861,000 for the six months ended June 30, 2005 and 2004, respectively, and consisted of property management, asset
management and other fee income.



NOTE 14. PROVISION FOR IMPAIRMENT OF REAL
ESTATE ASSETS



In connection with the Companys decision in March
2005 to dispose of assets in its non-core markets and certain non-core assets in core markets, the Company reduced the intended holding period of 21 assets to two years or less. Based on the Companys analysis of the discounted cash flows 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 discounting estimated future cash flows and 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 (as discussed in Notes 6 and 7), the total impairment charge recognized during the six months ended June 30,
2005, was approximately $58.2 million ($28.4 million of which is included in discontinued operations). The remaining twelve assets are expected to generate gains on sale. Following is a list of the 11 assets for which an impairment charge was
recorded during the first quarter of 2005:



|                                         |  |              |  |               
|---------------------------------------- |  | ------------ |  | --------------
|Property                                 |  | Market       |  | Square Footage
|Oakbrook Terrace Corp Center III         |  | Chicago      |  | 232,052       
|Columbia Centre II                       |  | Chicago      |  | 150,133       
|Embassy Plaza                            |  | Chicago      |  | 140,744       
|Riverview Office Tower                   |  | Minneapolis  |  | 227,129       
|Osram Building                           |  | Indianapolis |  | 45,265        
|Capitol Center                           |  | Des Moines   |  | 165,127       
|Thousand Oaks                            |  | Memphis      |  | 420,177       
|Northglenn Business Center               |  | Denver       |  | 65,000        
|Fairfield Business Quarters (see Note 6) |  | New Jersey   |  | 42,792        
|Leawood Office Building (see Note 6)     |  | Kansas City  |  | 92,787        
|Eden Shores (see Note 7)                 |  | Hayward      |  | 27.94 acres   



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



NOTE 15. LOSS ON EARLY EXTINGUISHMENT OF DEBT



In connection with various loan payoffs (as discussed in Note 11), including those related to properties classified as discontinued
operations, the Company recorded aggregate losses on early extinguishment of debt of $135,000 and $0 during the three months ended June 30, 2005 and 2004, respectively, and $3,074,000 and $85,000 during the six months ended June 30, 2005 and 2004,
respectively, consisting of prepayment penalties and write-offs of unamortized original financing costs. Of these total losses, $135,000 and $2,513,000 has been included in discontinued operations for the three and six months ended June 30, 2005, as
they were related to loan payoffs in connection with property sales.



NOTE
16. CONSOLIDATION UNDER FIN 46 REVISED



In accordance with FIN 46 Revised,
the Company began consolidating the entity known as Marina Shores, effective January 1, 2004, as the Company is deemed to be the primary beneficiary as defined by FIN 46 Revised. The implementation of this change was accounted for as a change in
accounting principle and applied cumulatively as of January 1, 2004. The effect of this change on the Companys consolidated balance sheet as of June 30, 2005 and December 31, 2004, and the Companys consolidated statements of operations
for the three and six months ended June 30, 2005 and 2004, is detailed in the tables below. All intercompany transactions, receivables and payables have been eliminated in consolidation.



|                                           |  |                              |        |   |                                    |   |        |  
|------------------------------------------ |  | ---------------------------- | ------ | - | ---------------------------------- | - | ------ | -
|                                           |  | As ofJune 30, 2005(in 000s) |        |   | As of December 31, 2004 (in 000s) |  
|Consolidated Balance Sheets                |  |                              |        |   |                                    |   |        |  
|Investments in land and development        |  | $                            | 46,060 |   |                                    | $ | 46,087 |  
|Cash and cash equivalents                  |  |                              | 833    |   |                                    |   | 570    |  
|Other assets                               |  |                              | 92     |   |                                    |   | 105    |  
|                                           |  |                              |        |   |                                    |   |        |  
|Total assets                               |  | $                            | 46,985 |   |                                    | $ | 46,762 |  
|                                           |  |                              |        |   |                                    |   |        |  
|Mortgage loans(1)                          |  | $                            | 45,000 |   |                                    | $ | 45,000 |  
|Other liabilities                          |  |                              | 184    |   |                                    |   | 151    |  
|                                           |  |                              |        |   |                                    |   |        |  
|Total liabilities                          |  |                              | 45,184 |   |                                    |   | 45,151 |  
|                                           |  |                             
|Minority interest                          |  |                              | 2,571  |   |                                    |   | 2,451  |  
|Retained earnings                          |  |                              | (770   | ) |                                    |   | (840   | )
|                                           |  |                              |        |   |                                    |   |        |  
|Total liabilities and stockholders equity |  | $                            | 46,985 |   |                                    | $ | 46,762 |  
|                                           |  |                              |        |   |                                    |   |        |  

---

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



|                                                    |  |                            |     |   |                          |   |     |      |  |   |      |   |  |   |      |  
|--------------------------------------------------- |  | -------------------------- | --- | - | ------------------------ | - | --- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                    |  | Three months endedJune 30, |     |   | Six months endedJune 30, |  
|                                                    |  | 2005                       |     |   | 2004                     |   |     | 2005 |  |   | 2004 |  
|Consolidated Statements of Operations               |  |                            |     |   |                          |   |     |      |  |   |      |   |  |   |      |  
|Elimination of fees and reimbursements              |  | $                          |    |   |                          | $ | (20 | )    |  | $ | (20  | ) |  | $ | (40  | )
|                                                    |  |                            |     |   |                          |   |     |      |  |   |      |   |  |   |      |  
|Capitalization of interest expense                  |  |                            | (45 | ) |                          |   | (38 | )    |  |   | (90  | ) |  |   | (73  | )
|Cumulative effect of change in accounting principle |  |                            |    |   |                          |   |    |      |  |   |     |   |  |   | 912  |  
|                                                    |  |                            |     |   |                          |   |     |      |  |   |      |   |  |   |      |  
|Total expenses                                      |  |                            | (45 | ) |                          |   | (38 | )    |  |   | (90  | ) |  |   | 839  |  
|                                                    |  |                            |     |   |                          |   |     |      |  |   |      |   |  |   |      |  
|Net income (loss)                                   |  | $                          | 45  |   |                          | $ | 18  |      |  | $ | 70   |   |  | $ | (879 | )
|                                                    |  |                            |     |   |                          |   |     |      |  |   |      |   |  |   |      |  



28



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



The cumulative effect of the change in accounting principle resulted in a one-time non-cash reduction to the
Companys net income of $912,000, or approximately $0.03 per share, during the six months ended June 30, 2004, which represented the elimination of intercompany fee income recognized, partially offset by additions to capitalized interest on
this development project as if Marina Shores had been consolidated at the inception of the Companys investment.



NOTE 17. EARNINGS PER SHARE



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



|                                                             |  |                             |            |                           |   |            |  |   |                          |   |  |   |           
|------------------------------------------------------------ |  | --------------------------- | ---------- | ------------------------- | - | ---------- |  | - | ------------------------ | - |  | - | ----------
|                                                             |  | Three months ended June 30, |            | Six months ended June 30,
|                                                             |  | 2005                        |            | 2004                      |   | 2005       |  |   | 2004                    
|                                                             |  |                             |            | (As restated,see Note 2)  |   |            |  |   | (As restated,see Note 2)
|Net income (loss) available to Common Stockholders  Basic   |  | $                           | 11,841     |                           | $ | 8,079      |  | $ | (32,838                  | ) |  | $ | 7,956     
|Minority interest                                            |  |                             | 994        |                           |   |           |  |   |                         |   |  |   |          
|                                                             |  |                             |            |                           |   |            |  |   |                          |   |  |   |           
|Net income (loss) available to Common Stockholders  Diluted |  | $                           | 12,835     |                           | $ | 8,079      |  | $ | (32,838                  | ) |  | $ | 7,956     
|                                                             |  |                             |            |                           |   |            |  |   |                          |   |  |   |           
|Weighted average shares:                                     |  |                             |            |                           |   |            |  |   |                          |   |  |   |           
|Basic                                                        |  |                             | 35,921,157 |                           |   | 31,662,622 |  |   | 35,870,534               |   |  |   | 30,114,060
|Stock options and restricted stock                           |  |                             | 243,961    |                           |   |           |  |   |                         |   |  |   |          
|Convertible Operating Partnership Units                      |  |                             | 2,993,969  |                           |   |           |  |   |                         |   |  |   |          
|                                                             |  |                             |            |                           |   |            |  |   |                          |   |  |   |           
|Diluted                                                      |  |                             | 39,159,087 |                           |   | 31,662,622 |  |   | 35,870,534               |   |  |   | 30,114,060
|                                                             |  |                             |            |                           |   |            |  |   |                          |   |  |   |           
|Basic earnings (loss) per share                              |  | $                           | 0.33       |                           | $ | 0.26       |  | $ | (0.92                    | ) |  | $ | 0.26      
|Diluted earnings (loss) per share                            |  | $                           | 0.33       |                           | $ | 0.26       |  | $ | (0.92                    | ) |  | $ | 0.26      



For the three months ended June 30
2005, 2,368,239 options to purchase shares of the Companys common stock have been excluded from the computation of diluted earnings per share as their exercise prices were greater than the average market price of the Companys common
stock of $20.31 for the three months ended June 30, 2005. For the three months ended June 30, 2004, 2,923,700 options to purchase shares of the Companys common stock and 3,001,957 convertible operating partnership units have been excluded from
the computation of diluted earnings per share as they are anti-dilutive. For the six months ended June 30, 2005 and 2004, options to purchase shares of the Companys common stock of 2,601,700 and 2,923,700, respectively, and convertible
operating partnership units of 2,997,941 and 3,001,957, respectively, have been excluded from the computation of diluted earnings per share as they are anti-dilutive. The preferred stock has been excluded from the computation of diluted earnings per
share as it is anti-dilutive in all periods presented.



NOTE 18. SEGMENT
INFORMATION



The Company owns and operates primarily office properties
throughout the United States and manages its business by geographic markets. The Companys office properties consist primarily of multi-tenant office buildings. The remainder of the Companys portfolio consists primarily of industrial
properties designed for warehouse, distribution and light manufacturing for single-tenant or multi-tenant use. The Companys geographic markets are managed separately as each market requires different operating, pricing and leasing strategies.
Each represents a reportable segment. As of June 30, 2005, the Companys largest markets are Washington D.C., Southern California, Northern New Jersey, Boston and San Francisco.



29



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



The accounting policies of the segments are the same as those described in the summary of significant accounting
policies. The Company evaluates performance based upon net operating income of the combined properties which represents rental revenue less property operating expenses in each segment. Significant information used by the Company for its reportable
segments (including discontinued operations) as of and for the three and six months ended June 30, 2005 and 2004, is as follows (in thousands):



|                                               |  |                    |       |                  |   |              |  |              |        |  |   |       
|---------------------------------------------- |  | ------------------ | ----- | ---------------- | - | ------------ |  | ------------ | ------ |  | - | ------
|                                               |  | Three Months Ended |       | Six Months Ended
|                                               |  | June 30,2005       |       | June 30,2004     |   | June 30,2005 |  | June 30,2004
|Washington D.C.                                |  |                    |       |                  |   |              |  |              |        |  |   |       
|Rental revenue                                 |  | $                  | 9,112 |                  | $ | 10,297       |  | $            | 17,116 |  | $ | 18,798
|Property operating expenses                    |  |                    | 2,269 |                  |   | 2,536        |  |              | 4,563  |  |   | 4,894 
|                                               |  |                    |       |                  |   |              |  |              |        |  |   |       
|Net operating income                           |  | $                  | 6,843 |                  | $ | 7,761        |  | $            | 12,553 |  | $ | 13,904
|                                               |  |                    |       |                  |   |              |  |              |        |  |   |       
|Southern California                            |  |                    |       |                  |   |              |  |              |        |  |   |       
|Rental revenue                                 |  | $                  | 8,685 |                  | $ | 8,383        |  | $            | 17,379 |  | $ | 16,578
|Property operating expenses                    |  |                    | 2,683 |                  |   | 2,661        |  |              | 5,435  |  |   | 5,282 
|                                               |  |                    |       |                  |   |              |  |              |        |  |   |       
|Net operating income                           |  | $                  | 6,002 |                  | $ | 5,722        |  | $            | 11,944 |  | $ | 11,296
|                                               |  |                    |       |                  |   |              |  |              |        |  |   |       
|Northern New Jersey                            |  |                    |       |                  |   |              |  |              |        |  |   |       
|Rental revenue                                 |  | $                  | 6,271 |                  | $ | 6,672        |  | $            | 12,152 |  | $ | 12,846
|Property operating expenses                    |  |                    | 2,063 |                  |   | 2,001        |  |              | 4,527  |  |   | 4,331 
|                                               |  |                    |       |                  |   |              |  |              |        |  |   |       
|Net operating income                           |  | $                  | 4,208 |                  | $ | 4,671        |  | $            | 7,625  |  | $ | 8,515 
|                                               |  |                    |       |                  |   |              |  |              |        |  |   |       
|Provision for impairment of real estate assets |  | $                  |      |                  | $ |             |  | $            | 836    |  | $ |      
|                                               |  |                    |       |                  |   |              |  |              |        |  |   |       
|Boston                                         |  |                    |       |                  |   |              |  |              |        |  |   |       
|Rental revenue                                 |  | $                  | 6,357 |                  | $ | 7,460        |  | $            | 12,836 |  | $ | 15,235
|Property operating expenses                    |  |                    | 2,713 |                  |   | 2,861        |  |              | 5,871  |  |   | 5,887 
|                                               |  |                    |       |                  |   |              |  |              |        |  |   |       
|Net operating income                           |  | $                  | 3,644 |                  | $ | 4,599        |  | $            | 6,965  |  | $ | 9,348 
|                                               |  |                    |       |                  |   |              |  |              |        |  |   |       
|San Francisco                                  |  |                    |       |                  |   |              |  |              |        |  |   |       
|Rental revenue                                 |  | $                  | 2,301 |                  | $ | 2,477        |  | $            | 4,777  |  | $ | 5,099 
|Property operating expenses                    |  |                    | 701   |                  |   | 654          |  |              | 1,430  |  |   | 1,596 
|                                               |  |                    |       |                  |   |              |  |              |        |  |   |       
|Net operating income                           |  | $                  | 1,600 |                  | $ | 1,823        |  | $            | 3,347  |  | $ | 3,503 
|                                               |  |                    |       |                  |   |              |  |              |        |  |   |       
|Chicago                                        |  |                    |       |                  |   |              |  |              |        |  |   |       
|Rental revenue                                 |  | $                  | 3,012 |                  | $ | 3,181        |  | $            | 6,104  |  | $ | 6,285 
|Property operating expenses                    |  |                    | 1,474 |                  |   | 1,373        |  |              | 3,059  |  |   | 2,858 
|                                               |  |                    |       |                  |   |              |  |              |        |  |   |       
|Net operating income                           |  | $                  | 1,538 |                  | $ | 1,808        |  | $            | 3,045  |  | $ | 3,427 
|                                               |  |                    |       |                  |   |              |  |              |        |  |   |       
|Provision for impairment of real estate assets |  | $                  |      |                  | $ |             |  | $            | 15,988 |  | $ |      
|                                               |  |                    |       |                  |   |              |  |              |        |  |   |       
|St. Louis                                      |  |                    |       |                  |   |              |  |              |        |  |   |       
|Rental revenue                                 |  | $                  | 1,956 |                  | $ | 2,098        |  | $            | 3,957  |  | $ | 4,115 
|Property operating expenses                    |  |                    | 774   |                  |   | 745          |  |              | 1,612  |  |   | 1,526 
|                                               |  |                    |       |                  |   |              |  |              |        |  |   |       
|Net operating income                           |  | $                  | 1,182 |                  | $ | 1,353        |  | $            | 2,345  |  | $ | 2,589 
|                                               |  |                    |       |                  |   |              |  |              |        |  |   |       
|Tampa/Orlando                                  |  |                    |       |                  |   |              |  |              |        |  |   |       
|Rental revenue                                 |  | $                  | 2,049 |                  | $ | 1,876        |  | $            | 4,401  |  | $ | 3,753 
|Property operating expenses                    |  |                    | 603   |                  |   | 620          |  |              | 1,359  |  |   | 1,294 
|                                               |  |                    |       |                  |   |              |  |              |        |  |   |       
|Net operating income                           |  | $                  | 1,446 |                  | $ | 1,256        |  | $            | 3,042  |  | $ | 2,459 
|                                               |  |                    |       |                  |   |              |  |              |        |  |   |       



continued



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



|                                               |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|---------------------------------------------- |  | ------------------ | ------ | - | ---------------- | - | ------- | ------------- |  | - | ------------- | - |  | - | ------- | -
|                                               |  | Three Months Ended |        |   | Six Months Ended |  
|                                               |  | June 30, 2005      |        |   | June 30, 2004    |   |         | June 30, 2005 |  |   | June 30, 2004 |  
|Denver                                         |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Rental revenue                                 |  | $                  | 1,688  |   |                  | $ | 1,304   |               |  | $ | 3,380         |   |  | $ | 2,487   |  
|Property operating expenses                    |  |                    | 644    |   |                  |   | 494     |               |  |   | 1,282         |   |  |   | 986     |  
|                                               |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Net operating income                           |  | $                  | 1,044  |   |                  | $ | 810     |               |  | $ | 2,098         |   |  | $ | 1,501   |  
|                                               |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Provision for impairment of real estate assets |  | $                  |       |   |                  | $ |        |               |  | $ | 3,136         |   |  | $ |        |  
|                                               |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Minneapolis                                    |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Rental revenue                                 |  | $                  | 1,503  |   |                  | $ | 1,374   |               |  | $ | 3,124         |   |  | $ | 2,821   |  
|Property operating expenses                    |  |                    | 725    |   |                  |   | 611     |               |  |   | 1,412         |   |  |   | 1,248   |  
|                                               |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Net operating income                           |  | $                  | 778    |   |                  | $ | 763     |               |  | $ | 1,712         |   |  | $ | 1,573   |  
|                                               |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Provision for impairment of real estate assets |  | $                  |       |   |                  | $ |        |               |  | $ | 3,597         |   |  | $ |        |  
|                                               |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Las Vegas                                      |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Rental revenue                                 |  | $                  | 1,249  |   |                  | $ | 1,218   |               |  | $ | 2,533         |   |  | $ | 2,292   |  
|Property operating expenses                    |  |                    | 291    |   |                  |   | 269     |               |  |   | 595           |   |  |   | 517     |  
|                                               |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Net operating income                           |  | $                  | 958    |   |                  | $ | 949     |               |  | $ | 1,938         |   |  | $ | 1,775   |  
|                                               |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|All Others                                     |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Rental revenue                                 |  | $                  | 3,372  |   |                  | $ | 3,637   |               |  | $ | 7,145         |   |  | $ | 7,172   |  
|Property operating expenses                    |  |                    | 1,475  |   |                  |   | 1,717   |               |  |   | 3,111         |   |  |   | 3,435   |  
|                                               |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Net operating income                           |  | $                  | 1,897  |   |                  | $ | 1,920   |               |  | $ | 4,034         |   |  | $ | 3,737   |  
|                                               |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Provision for impairment of real estate assets |  | $                  |       |   |                  | $ |        |               |  | $ | 34,679        |   |  | $ |        |  
|                                               |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Discontinued Operations                        |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Rental revenue                                 |  | $                  | (6,999 | ) |                  | $ | (11,675 | )             |  | $ | (14,935       | ) |  | $ | (22,753 | )
|Property operating expenses                    |  |                    | (3,110 | ) |                  |   | (4,049  | )             |  |   | (6,686        | ) |  |   | (8,477  | )
|                                               |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Net operating income                           |  | $                  | (3,889 | ) |                  | $ | (7,626  | )             |  | $ | (8,249        | ) |  | $ | (14,276 | )
|                                               |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Provision for impairment of real estate assets |  | $                  |       |   |                  | $ |        |               |  | $ | (28,426       | ) |  | $ |        |  
|                                               |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Total                                          |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Rental revenue                                 |  | $                  | 40,556 |   |                  | $ | 38,302  |               |  | $ | 79,969        |   |  | $ | 74,728  |  
|Property operating expenses                    |  |                    | 13,305 |   |                  |   | 12,493  |               |  |   | 27,570        |   |  |   | 25,377  |  
|                                               |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Net operating income                           |  | $                  | 27,251 |   |                  | $ | 25,809  |               |  | $ | 52,399        |   |  | $ | 49,351  |  
|                                               |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Provision for impairment of real estate assets |  | $                  |       |   |                  | $ |        |               |  | $ | 29,810        |   |  | $ |        |  
|                                               |  |                    |        |   |                  |   |         |               |  |   |               |   |  |   |         |  



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



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



|                                                                                                                        |  |                    |         |   |                  |   |         |               |  |   |               |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------- | ------------- |  | - | ------------- | - |  | - | ------- | -
|                                                                                                                        |  | Three Months Ended |         |   | Six Months Ended |  
|                                                                                                                        |  | June 30, 2005      |         |   | June 30, 2004    |   |         | June 30, 2005 |  |   | June 30, 2004 |  
|Revenues                                                                                                                |  |                    |         |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Rental revenue for reportable segments                                                                                  |  | $                  | 40,556  |   |                  | $ | 38,302  |               |  | $ | 79,969        |   |  | $ | 74,728  |  
|Fees and reimbursements, including from related parties                                                                 |  |                    | 1,359   |   |                  |   | 1,032   |               |  |   | 2,454         |   |  |   | 1,861   |  
|                                                                                                                        |  |                    |         |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Total operating revenue                                                                                                 |  | $                  | 41,915  |   |                  | $ | 39,334  |               |  | $ | 82,423        |   |  | $ | 76,589  |  
|                                                                                                                        |  |                    |         |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Net Operating Income                                                                                                    |  |                    |         |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Net operating income for reportable segments                                                                            |  | $                  | 27,251  |   |                  | $ | 25,809  |               |  | $ | 52,399        |   |  | $ | 49,351  |  
|Provision for impairment of real estate assets for reportable segments                                                  |  |                    |        |   |                  |   |        |               |  |   | (29,810       | ) |  |   |        |  
|Unallocated amounts:                                                                                                    |  |                    |         |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Fees and reimbursements, including from related parties                                                                 |  |                    | 1,359   |   |                  |   | 1,032   |               |  |   | 2,454         |   |  |   | 1,861   |  
|Interest and other income                                                                                               |  |                    | 615     |   |                  |   | 638     |               |  |   | 1,645         |   |  |   | 1,469   |  
|Equity in earnings of unconsolidated operating joint ventures                                                           |  |                    | 169     |   |                  |   | 249     |               |  |   | 302           |   |  |   | 437     |  
|General and administrative                                                                                              |  |                    | (3,925  | ) |                  |   | (3,999  | )             |  |   | (7,210        | ) |  |   | (6,170  | )
|Depreciation and amortization                                                                                           |  |                    | (12,990 | ) |                  |   | (12,240 | )             |  |   | (26,181       | ) |  |   | (23,751 | )
|Interest expense                                                                                                        |  |                    | (9,724  | ) |                  |   | (8,104  | )             |  |   | (18,922       | ) |  |   | (16,122 | )
|Loss on early extinguishment of debt                                                                                    |  |                    |        |   |                  |   |        |               |  |   | (561          | ) |  |   | (85     | )
|                                                                                                                        |  |                    |         |   |                  |   |         |               |  |   |               |   |  |   |         |  
|Income (loss) before minority interest, discontinued operations and cumulative effect of change in accounting principle |  | $                  | 2,755   |   |                  | $ | 3,385   |               |  | $ | (25,884       | ) |  | $ | 6,990   |  
|                                                                                                                        |  |                    |         |   |                  |   |         |               |  |   |               |   |  |   |         |  



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



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



|                                                       |  |                     |           |   |                         |   |           |  
|------------------------------------------------------ |  | ------------------- | --------- | - | ----------------------- | - | --------- | -
|                                                       |  | As of June 30, 2005 |           |   | As of December 31, 2004 |  
|Washington D.C.                                        |  | $                   | 253,605   |   |                         | $ | 239,694   |  
|Southern California                                    |  |                     | 201,011   |   |                         |   | 203,712   |  
|Northern New Jersey                                    |  |                     | 133,459   |   |                         |   | 138,910   |  
|Boston                                                 |  |                     | 146,101   |   |                         |   | 147,841   |  
|San Francisco                                          |  |                     | 104,788   |   |                         |   | 106,126   |  
|Chicago                                                |  |                     | 51,481    |   |                         |   | 78,480    |  
|St. Louis                                              |  |                     | 29,476    |   |                         |   | 29,395    |  
|Tampa/Orlando                                          |  |                     | 39,499    |   |                         |   | 45,602    |  
|Denver                                                 |  |                     | 41,814    |   |                         |   | 45,637    |  
|Minneapolis                                            |  |                     | 25,893    |   |                         |   | 29,647    |  
|Las Vegas                                              |  |                     | 32,579    |   |                         |   | 33,054    |  
|All others                                             |  |                     | 67,181    |   |                         |   | 104,489   |  
|Properties held for sale                               |  |                     | (114,434  | ) |                         |   | (55,506   | )
|                                                       |  |                     |           |   |                         |   |           |  
|Total rental properties, net, for reportable segments  |  |                     | 1,012,453 |   |                         |   | 1,147,081 |  
|                                                       |  |                    
|Unallocated amounts:                                   |  |                     |           |   |                         |   |           |  
|Properties held for sale, net                          |  |                     | 119,886   |   |                         |   | 57,327    |  
|Investments in land and development                    |  |                     | 134,372   |   |                         |   | 147,435   |  
|Investments in unconsolidated operating joint ventures |  |                     | 11,936    |   |                         |   | 12,014    |  
|Mortgage loans receivable                              |  |                     | 11,073    |   |                         |   | 12,872    |  
|Leasing and financing costs, net                       |  |                     | 26,659    |   |                         |   | 24,403    |  
|Straight-line rent receivable, net                     |  |                     | 16,344    |   |                         |   | 15,764    |  
|Cash and cash equivalents                              |  |                     | 4,832     |   |                         |   | 6,003     |  
|Other assets                                           |  |                     | 15,229    |   |                         |   | 10,202    |  
|                                                       |  |                     |           |   |                         |   |           |  
|Total Assets                                           |  | $                   | 1,352,784 |   |                         | $ | 1,433,101 |  
|                                                       |  |                     |           |   |                         |   |           |  



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.



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GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



Tax indemnifications



Twenty-two of the properties in the Companys portfolio were acquired on terms and conditions under which they can be disposed of only in a like-kind
exchange or other non-taxable transaction for limited periods of time. The agreed upon time periods for these restrictions on dispositions vary from transaction to transaction. In the event the Company was to dispose of one of these properties
through a taxable transaction during the restriction period, the Company would be required to indemnify the contributor of such property for all direct and indirect adverse tax consequences. The tax indemnifications granted to the contributors will
not affect the way the Company conducts their business, including when and under what circumstances the Company may sell such restricted properties or interests in them during the restriction period. The Company has no intentions to sell or
otherwise dispose of the properties or interests therein in taxable transactions during the restriction period.



Litigation



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



NOTE 20. EQUITY TRANSACTIONS



Common Stock Offerings



On December 16, 2004, the Company completed the sale of 4,000,000 shares
of common stock in an offering underwritten by Goldman, Sachs & Co. The 4,000,000 shares were sold at a per share price of $20.80, resulting in proceeds, net of offering costs, of approximately $81.8 million. Approximately $158,000 of offering
costs were paid during the six months ended June 30, 2005. The Company used the net proceeds to redeem a portion of the outstanding shares of its Preferred Stock on January 28, 2005 (as discussed below). In the interim, prior to the redemption, the
proceeds were used to repay a portion of the amounts outstanding under the Companys unsecured bank line of credit.



On March 19, 2004, the Company completed the sale of 3,910,000 shares of common stock (including the exercise of the over allotment of 510,000 shares) in an offering
underwritten by Goldman, Sachs & Co. The 3,910,000 shares were sold at a per share price of $21.20, resulting in proceeds, net of offering costs, of approximately $81.3 million. The Company used the net proceeds to redeem a portion of the
outstanding shares of its Preferred Stock in April 2004 (as discussed below). In the interim, prior to the redemption, the proceeds were used to repay a portion of the amounts outstanding under the Companys unsecured bank line of credit.



Preferred Stock 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 as discussed above.



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



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##### Table of Contents

GLENBOROUGH REALTY TRUST INCORPORATED



Notes to Consolidated Financial Statements

June 30, 2005 and 2004

(unaudited)



NOTE 21. SUBSEQUENT EVENTS



Disposition



On August 1, 2005, the Company completed the sale of Woodlands Tech, a 98,037 square foot office property located in St. Louis, Missouri, for a sale price of $8.4
million. The Company expects to recognize a gain on sale in this transaction of approximately $3.9 million. The proceeds from this disposition were used to pay down a floating rate loan which was secured by a cross-collateralized pool of five
properties, including this property, and to pay down the Companys unsecured bank line of credit. This property was included in the 21 assets which the Company had decided to dispose of over the next two years as discussed in Note 14 and was
classified as held for sale as of June 30, 2005 (see Note 6).



Acquisition



On August 11, 2005, the Company acquired 33 New Montgomery, a 20-story,
Class A office tower located in the San Francisco Financial District, for a purchase price of $75 million. The building, totaling 241,794 rentable square feet, is located at the corner of Market and New Montgomery streets adjacent to the
Montgomery Street BART Station. The property is 92% leased to a diversified roster of 31 tenants with no single tenant leasing more than 10% of the net rentable area (the average tenant size is 7,000 SF). The tenant base consists primarily of
prominent professional service-oriented companies in the insurance, government, finance and legal sectors.



Pending Acquisition



The Company
announces the pending acquisition of Capitol Place III in Washington DC. Capitol Place III consists of a 12-story, Class A- office building totaling 212,779 square feet and located in Washington, D.C.s Capitol Hill district. The
building is three blocks from the U. S. Capitol building; one block from Union Station, and is part of Capitol Place, one of the largest projects in the District of Columbia. Capitol Place is a one million square foot mixed-use project located on
nearly an entire city block bounded by New Jersey Avenue, F Street, and First Street, N.W. The Capitol Place project is composed of four buildings  three office buildings and a full service, 264-room Washington Court Hotel-situated around a
central atrium. The project is 100% leased to eight tenants. The purchase price is approximately $70 million. This acquisition is subject to a number of contingencies, including approval of the assumption of a mortgage loan and customary closing
conditions. As a result, there can be no assurance that this acquisition will be completed.



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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 57 primarily office properties, including four operating joint ventures and ten
properties held for sale, as of June 30, 2005. 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 10 million square feet with the largest concentrations in the following markets: Washington D.C., Southern California, Northern New Jersey, Boston and San Francisco.



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



Availability of Reports on Website



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



Results of Operations



Overview



Net Income (Loss) Available to Common Stockholders



For the three months ended June 30, 2005, we had net income available to common stockholders of $11,841,000, or $0.33 per diluted share, as
compared with $8,079,000, or $0.26 per diluted share for the three months ended June 30, 2004. The three months ended June 30, 2005 included gains on sales of $9,309,000, or $0.24 per diluted share, as compared with gains on sales of $12,408,000, or
$0.39 per diluted share, for the same period in 2004. Additionally, included in the three months ended June 20, 2004, were charges of $6,477,000, or $0.20 per diluted share associated with our 2004 redemption of preferred stock. The charges were
$3,448,000 for the non-cash write-off of original issuance costs, $2,461,000 for the premium and other miscellaneous costs paid to redeem the preferred stock and $568,000 for the stub period dividends paid to the redeemed preferred stockholders.



Portfolio Performance



Overall portfolio occupancy increased from 87.6% at March 31, 2005 to 88.3% at June 30,
2005. Net operating income (adjusted for discontinued operations and defined as rental revenue less property operating expenses) decreased 6.9% from $33,435,000 for the three months ended June 30, 2004, to $31,140,000 for the three months ended June
30, 2005. This decrease primarily resulted from property dispositions and the bankruptcy of a large tenant in the Boston market as discussed further below under Rental Revenue. This decrease was partially offset by property acquisitions and
increases in occupancy and rental rates.



Leasing Summary



During the three months ended June 30, 2005, we had approximately 212,000 square feet of new
office leases at an average rent of $15.87 per square foot. We also renewed approximately 137,000 square feet of office leases at an average rent per square foot of $23.45. This represented an increase in effective rents from renewals (annualized
rents net of concessions) of 6.2% during the second quarter of 2005.



Non-Core Asset Dispositions



In March 2005, after an in-depth
review of our portfolio on an asset by asset basis, we decided to dispose of assets in our non-core markets, as well as certain non-core assets in core markets. Accordingly, we reduced the intended holding period of 21 assets to two years or less.
Based on our analysis of the discounted cash flows of each asset over the next two years, we determined that nine of the assets were impaired due primarily to higher vacancy and lower rental rates in the respective markets. The difference between
the estimated fair value (calculated by discounting estimated future cash flows and sales



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proceeds) and the net book value was $49,312,000. When combined with impairment charges of $8,924,000 recognized on two
additional assets sold during the first quarter of 2005, the total impairment charge recognized during the six months ended June 30, 2005, was $58,236,000. The remaining twelve assets were expected to generate gains on sale. As of June 30, 2005,
four of the 21 assets have been sold, as well as one other office property, for an aggregate gain on sale of $26,629,000.



Restatement



We have determined that a correction is required in the accounting for common and preferred stock dividends in accordance with generally accepted accounting principles. Our historical accounting has been to record
dividends in the period in which they were paid, rather than the period in which they were declared. The correction of this accounting error will require a restatement of our consolidated financial statements as of and for the years ended December
31, 2003 and 2004 (including all interim periods for 2003 and 2004) and the consolidated financial statements as of and for the quarter ended March 31, 2005. The restatement does not have an adverse impact on any covenants associated with our
unsecured bank line of credit. The consolidated financial statements and accompanying footnotes presented herein reflect this restatement. We will file an amended Form 10-K for 2004 and an amended Form 10-Q for the first quarter of 2005 reflecting
this restatement as soon as is practicable. Until these filings have occurred, the previous independent registered public accounting firm will not have completed its review of the restatement.



The impact of the restatement on our consolidated financial statements for the affected
periods is summarized below (dollars in thousands):



Consolidated Balance Sheets:



|                                                |  |                      |          |   |                         |   |          |                         |  |   |             |   |  |                     |          |   |             |   |          |   |  |   |          |  
|----------------------------------------------- |  | -------------------- | -------- | - | ----------------------- | - | -------- | ----------------------- |  | - | ----------- | - |  | ------------------- | -------- | - | ----------- | - | -------- | - |  | - | -------- | -
|                                                |  | As of March 31, 2005 |          |   | As of December 31, 2004 |   |          | As of December 31, 2003 | 
|                                                |  | Previously Reported  |          |   | As Restated             |   |          | Previously Reported     |  |   | As Restated |   |  | Previously Reported |          |   | As Restated |  
|Other liabilities                               |  | $                    | 34,353   |   |                         | $ | 48,782   |                         |  | $ | 31,282      |   |  | $                   | 47,213   |   |             | $ | 37,221   |   |  | $ | 51,790   |  
|Total liabilities                               |  | $                    | 835,203  |   |                         | $ | 849,632  |                         |  | $ | 750,650     |   |  | $                   | 766,581  |   |             | $ | 776,425  |   |  | $ | 790,994  |  
|Minority interest                               |  | $                    | 34,501   |   |                         | $ | 34,616   |                         |  | $ | 39,124      |   |  | $                   | 39,336   |   |             | $ | 36,969   |   |  | $ | 37,048   |  
|Distributions in excess of accumulated earnings |  | $                    | (281,964 | ) |                         | $ | (296,508 | )                       |  | $ | (223,282    | ) |  | $                   | (239,425 | ) |             | $ | (184,843 | ) |  | $ | (199,491 | )
|Total stockholders equity                      |  | $                    | 510,340  |   |                         | $ | 495,796  |                         |  | $ | 643,327     |   |  | $                   | 627,184  |   |             | $ | 591,845  |   |  | $ | 577,197  |  



Consolidated Statements of Operations:



|                                                   |  |                                   |         |   |                                  |   |         |                     |  |             |       |  |   |      
|-------------------------------------------------- |  | --------------------------------- | ------- | - | -------------------------------- | - | ------- | ------------------- |  | ----------- | ----- |  | - | -----
|                                                   |  | Three months ended March 31, 2005 |         |   | Three months ended June 30, 2004
|                                                   |  | Previously Reported               |         |   | As Restated                      |   |         | Previously Reported |  | As Restated
|Minority interest                                  |  | $                                 | (3,836  | ) |                                  | $ | (3,721  | )                   |  | $           | 667   |  | $ | 799  
|Dividends paid on redeemed preferred stock         |  | $                                 | 2,102   |   |                                  | $ | 596     |                     |  | $           | 2,073 |  | $ | 568  
|Net income (loss) available to Common Stockholders |  | $                                 | (46,069 | ) |                                  | $ | (44,678 | )                   |  | $           | 6,706 |  | $ | 8,079
|Basic earnings (loss) per share                    |  | $                                 | (1.28   | ) |                                  | $ | (1.24   | )                   |  | $           | 0.21  |  | $ | 0.26 
|Diluted earnings (loss) per share                  |  | $                                 | (1.28   | ) |                                  | $ | (1.24   | )                   |  | $           | 0.21  |  | $ | 0.26 



continued



37



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Consolidated Statements of Operations:



|                                            |  |                                |        |                                      |   |                     |  |             |        |  |   |       
|------------------------------------------- |  | ------------------------------ | ------ | ------------------------------------ | - | ------------------- |  | ----------- | ------ |  | - | ------
|                                            |  | Six months ended June 30, 2004 |        | Nine months ended September 30, 2004
|                                            |  | Previously Reported            |        | As Restated                          |   | Previously Reported |  | As Restated
|Minority interest                           |  | $                              | 655    |                                      | $ | 787                 |  | $           | 684    |  | $ | 816   
|Preferred dividends                         |  | $                              | 8,141  |                                      | $ | 6,636               |  | $           | 11,459 |  | $ | 9,954 
|Net income available to Common Stockholders |  | $                              | 6,583  |                                      | $ | 7,956               |  | $           | 6,993  |  | $ | 8,366 
|Basic earnings per share                    |  | $                              | 0.22   |                                      | $ | 0.26                |  | $           | 0.22   |  | $ | 0.27  
|Diluted earnings per share                  |  | $                              | 0.22   |                                      | $ | 0.26                |  | $           | 0.22   |  | $ | 0.27  
|                                            |  |                               
|                                            |  | Year ended December 31, 2004   |        | Year ended December 31, 2003        
|                                            |  | Previously Reported            |        | As Restated                          |   | Previously Reported |  | As Restated
|Minority interest                           |  | $                              | 465    |                                      | $ | 597                 |  | $           | 1,101  |  | $ | 1,108 
|Preferred dividends                         |  | $                              | 14,777 |                                      | $ | 13,272              |  | $           | 19,491 |  | $ | 19,422
|Net income available to Common Stockholders |  | $                              | 4,825  |                                      | $ | 6,198               |  | $           | 10,417 |  | $ | 10,479
|Basic earnings per share                    |  | $                              | 0.15   |                                      | $ | 0.20                |  | $           | 0.38   |  | $ | 0.38  
|Diluted earnings per share                  |  | $                              | 0.15   |                                      | $ | 0.20                |  | $           | 0.38   |  | $ | 0.38  



Consolidated Statements of Stockholders Equity:



|                                                |  |                         |          |   |                         |   |          |                    |  |   |             |   |  |   |          |  
|----------------------------------------------- |  | ----------------------- | -------- | - | ----------------------- | - | -------- | ------------------ |  | - | ----------- | - |  | - | -------- | -
|                                                |  | As of December 31, 2004 |          |   | As of December 31, 2003 |  
|                                                |  | PreviouslyReported      |          |   | As Restated             |   |          | PreviouslyReported |  |   | As Restated |  
|Distributions in excess of accumulated earnings |  | $                       | (223,282 | ) |                         | $ | (239,425 | )                  |  | $ | (184,843    | ) |  | $ | (199,491 | )
|Total stockholders equity                      |  | $                       | 643,327  |   |                         | $ | 627,184  |                    |  | $ | 591,845     |   |  | $ | 577,197  |  



For the three months ended March 31,
2003, and the three months ended September 30, 2003, the impact of the restatement on the statements of operations was a decrease in preferred dividends and an increase in net income available to common stockholders of $2,000 and $66,000,
respectively. There was no impact on earnings per share. There was no impact for any period in the year ended December 31, 2002.



Funds from Operations (FFO):



|                                     |  |                    |         |   |             |   |         |  
|------------------------------------ |  | ------------------ | ------- | - | ----------- | - | ------- | -
|                                     |  | PreviouslyReported |         |   | As Restated |  
|Three months ended March 31, 2005    |  | $                  | (51,531 | ) |             | $ | (50,025 | )
|Three months ended June 30, 2004     |  | $                  | 10,599  |   |             | $ | 12,104  |  
|Six months ended June 30, 2004       |  | $                  | 26,136  |   |             | $ | 27,641  |  
|Nine months ended September 30, 2004 |  | $                  | 41,655  |   |             | $ | 43,160  |  
|Year ended December 31, 2004         |  | $                  | 53,781  |   |             | $ | 55,286  |  
|Year ended December 31, 2003         |  | $                  | 54,964  |   |             | $ | 55,033  |  



See our definition of FFO and our
reconciliation of net income (loss) to FFO beginning on page 50.



Comparison of the three months ended June 30, 2005 to the three months ended June 30, 2004.



In accordance with SFAS 144 Accounting for the Impairment or Disposal of Long Lived Assets, net income (loss) and gains on sales of real estate for properties
sold or classified as held for sale are reflected in the consolidated statements of operations



38



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as Discontinued Operations for all periods presented. As we generally reinvest the proceeds from property
dispositions into the acquisition of new properties, we believe that it is necessary to discuss our results of operations after discontinued operations have been added back to the respective revenue and expense line items to provide a representation
of the balances that management uses to evaluate the results of operations as it provides greater comparability given the change in volume of dispositions for the periods presented.



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



|                                                                                                 |  |                                  |        |   |                                  |   |         |          |  |   |                              |   |  |                         |        |   |              |   |         |   |  |   |        |  
|------------------------------------------------------------------------------------------------ |  | -------------------------------- | ------ | - | -------------------------------- | - | ------- | -------- |  | - | ---------------------------- | - |  | ----------------------- | ------ | - | ------------ | - | ------- | - |  | - | ------ | -
|                                                                                                 |  | Three Months Ended June 30, 2005 |        |   | Three Months Ended June 30, 2004 |  
|                                                                                                 |  | Per Financial Statements         |        |   | Discontinued Operations          |   |         | Adjusted |  |   | Per Financial Statements (2) |   |  | Discontinued Operations |        |   | Adjusted (2) |  
|OPERATING REVENUE                                                                                |  |                                  |        |   |                                  |   |         |          |  |   |                              |   |  |                         |        |   |              |   |         |   |  |   |        |  
|Rental revenue                                                                                   |  | $                                | 40,556 |   |                                  | $ | 6,999   |          |  | $ | 47,555                       |   |  | $                       | 38,302 |   |              | $ | 11,675  |   |  | $ | 49,977 |  
|Fees and reimbursements, including from related parties                                          |  |                                  | 1,359  |   |                                  |   |        |          |  |   | 1,359                        |   |  |                         | 1,032  |   |              |   |        |   |  |   | 1,032  |  
|                                                                                                 |  |                                  |        |   |                                  |   |         |          |  |   |                              |   |  |                         |        |   |              |   |         |   |  |   |        |  
|Total operating revenue                                                                          |  |                                  | 41,915 |   |                                  |   | 6,999   |          |  |   | 48,914                       |   |  |                         | 39,334 |   |              |   | 11,675  |   |  |   | 51,009 |  
|                                                                                                 |  |                                  |        |   |                                  |   |         |          |  |   |                              |   |  |                         |        |   |              |   |         |   |  |   |        |  
|OPERATING EXPENSES                                                                               |  |                                  |        |   |                                  |   |         |          |  |   |                              |   |  |                         |        |   |              |   |         |   |  |   |        |  
|Property operating expenses                                                                      |  |                                  | 13,305 |   |                                  |   | 3,110   |          |  |   | 16,415                       |   |  |                         | 12,493 |   |              |   | 4,049   |   |  |   | 16,542 |  
|General and administrative                                                                       |  |                                  | 3,925  |   |                                  |   |        |          |  |   | 3,925                        |   |  |                         | 3,999  |   |              |   | 11      |   |  |   | 4,010  |  
|Depreciation and amortization                                                                    |  |                                  | 12,990 |   |                                  |   | 1,116   |          |  |   | 14,106                       |   |  |                         | 12,240 |   |              |   | 3,559   |   |  |   | 15,799 |  
|                                                                                                 |  |                                  |        |   |                                  |   |         |          |  |   |                              |   |  |                         |        |   |              |   |         |   |  |   |        |  
|Total operating expenses                                                                         |  |                                  | 30,220 |   |                                  |   | 4,226   |          |  |   | 34,446                       |   |  |                         | 28,732 |   |              |   | 7,619   |   |  |   | 36,351 |  
|                                                                                                 |  |                                  |        |   |                                  |   |         |          |  |   |                              |   |  |                         |        |   |              |   |         |   |  |   |        |  
|Interest and other income                                                                        |  |                                  | 615    |   |                                  |   |        |          |  |   | 615                          |   |  |                         | 638    |   |              |   |        |   |  |   | 638    |  
|Equity in earnings of unconsolidated operating JVs                                              |  |                                  | 169    |   |                                  |   |        |          |  |   | 169                          |   |  |                         | 249    |   |              |   |        |   |  |   | 249    |  
|Interest expense                                                                                 |  |                                  | (9,724 | ) |                                  |   | (55     | )        |  |   | (9,779                       | ) |  |                         | (8,104 | ) |              |   | (1,176  | ) |  |   | (9,280 | )
|Loss on early extinguishment of debt                                                             |  |                                  |       |   |                                  |   | (135    | )        |  |   | (135                         | ) |  |                         |       |   |              |   |        |   |  |   |       |  
|                                                                                                 |  |                                  |        |   |                                  |   |         |          |  |   |                              |   |  |                         |        |   |              |   |         |   |  |   |        |  
|Income before gain on sales of real estate assets, minority interest and discontinued operations |  |                                  | 2,755  |   |                                  |   | 2,583   |          |  |   | 5,338                        |   |  |                         | 3,385  |   |              |   | 2,880   |   |  |   | 6,265  |  
|Gain on sales of real estate assets                                                              |  |                                  |       |   |                                  |   | 9,309   |          |  |   | 9,309                        |   |  |                         |       |   |              |   | 12,408  |   |  |   | 12,408 |  
|                                                                                                 |  |                                  |        |   |                                  |   |         |          |  |   |                              |   |  |                         |        |   |              |   |         |   |  |   |        |  
|Income before minority interest and discontinued operations                                      |  |                                  | 2,755  |   |                                  |   | 11,892  |          |  |   | 14,647                       |   |  |                         | 3,385  |   |              |   | 15,288  |   |  |   | 18,673 |  
|Minority interest(1)                                                                             |  |                                  | (994   | ) |                                  |   |        |          |  |   | (994                         | ) |  |                         | (799   | ) |              |   |        |   |  |   | (799   | )
|                                                                                                 |  |                                  |        |   |                                  |   |         |          |  |   |                              |   |  |                         |        |   |              |   |         |   |  |   |        |  
|Income before discontinued operations                                                            |  |                                  | 1,761  |   |                                  |   | 11,892  |          |  |   | 13,653                       |   |  |                         | 2,586  |   |              |   | 15,288  |   |  |   | 17,874 |  
|Discontinued operations                                                                          |  |                                  | 11,892 |   |                                  |   | (11,892 | )        |  |   |                             |   |  |                         | 15,288 |   |              |   | (15,288 | ) |  |   |       |  
|                                                                                                 |  |                                  |        |   |                                  |   |         |          |  |   |                              |   |  |                         |        |   |              |   |         |   |  |   |        |  
|Net income                                                                                       |  |                                  | 13,653 |   |                                  |   |        |          |  |   | 13,653                       |   |  |                         | 17,874 |   |              |   |        |   |  |   | 17,874 |  
|Preferred dividends                                                                              |  |                                  | (1,812 | ) |                                  |   |        |          |  |   | (1,812                       | ) |  |                         | (3,318 | ) |              |   |        |   |  |   | (3,318 | )
|Dividends paid on redeemed preferred stock                                                       |  |                                  |       |   |                                  |   |        |          |  |   |                             |   |  |                         | (568   | ) |              |   |        |   |  |   | (568   | )
|Premium and write-off of original issuance costs on preferred stock redemption                   |  |                                  |       |   |                                  |   |        |          |  |   |                             |   |  |                         | (5,909 | ) |              |   |        |   |  |   | (5,909 | )
|                                                                                                 |  |                                  |        |   |                                  |   |         |          |  |   |                              |   |  |                         |        |   |              |   |         |   |  |   |        |  
|Net income available to Common Stockholders                                                      |  | $                                | 11,841 |   |                                  | $ |        |          |  | $ | 11,841                       |   |  | $                       | 8,079  |   |              | $ |        |   |  | $ | 8,079  |  
|                                                                                                 |  |                                  |        |   |                                  |   |         |          |  |   |                              |   |  |                         |        |   |              |   |         |   |  |   |        |  

---

|(1) | Includes minority interests share of discontinued operations, preferred dividends and premium and write-off of original issuance costs on preferred stock
redemptions.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | As restated. See discussion above under Restatement.
|--- | ----------------------------------------------------



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Net Operating Income. Following is a table of net operating income by market, for comparative purposes, presenting
the results for the three months ended June 30, 2005 and 2004 (dollars in thousands). The data set forth below should be read in conjunction with Note 18. Segment Information in our consolidated financial statements included in Item 1.



|                           |  |      |        |            |       |   |      |   |            |  |       |  
|-------------------------- |  | ---- | ------ | ---------- | ----- | - | ---- | - | ---------- |  | ----- | -
|                           |  | 2005 |        | % of Total |       |   | 2004 |   | % of Total | 
|Washington D.C.            |  | $    | 6,843  |            | 22.0  | % |      | $ | 7,761      |  | 23.2  | %
|Southern California        |  |      | 6,002  |            | 19.3  | % |      |   | 5,722      |  | 17.1  | %
|Northern New Jersey        |  |      | 4,208  |            | 13.5  | % |      |   | 4,671      |  | 14.0  | %
|Boston                     |  |      | 3,644  |            | 11.7  | % |      |   | 4,599      |  | 13.8  | %
|San Francisco              |  |      | 1,600  |            | 5.1   | % |      |   | 1,823      |  | 5.5   | %
|Chicago                    |  |      | 1,538  |            | 4.9   | % |      |   | 1,808      |  | 5.4   | %
|St. Louis                  |  |      | 1,182  |            | 3.8   | % |      |   | 1,353      |  | 4.0   | %
|Tampa/Orlando              |  |      | 1,446  |            | 4.6   | % |      |   | 1,256      |  | 3.8   | %
|Denver                     |  |      | 1,044  |            | 3.4   | % |      |   | 810        |  | 2.4   | %
|Minneapolis                |  |      | 778    |            | 2.5   | % |      |   | 763        |  | 2.3   | %
|Las Vegas                  |  |      | 958    |            | 3.1   | % |      |   | 949        |  | 2.8   | %
|All others                 |  |      | 1,897  |            | 6.1   | % |      |   | 1,920      |  | 5.7   | %
|                           |  |      |        |            |       |   |      |   |            |  |       |  
|Total Net Operating Income |  | $    | 31,140 |            | 100.0 | % |      | $ | 33,435     |  | 100.0 | %
|                           |  |      |        |            |       |   |      |   |            |  |       |  



Rental Revenue. Rental revenue
decreased $2,422,000, or 4.8%, to $47,555,000 for the three months ended June 30, 2005, from $49,977,000 for the three months ended June 30, 2004. This change primarily resulted from property dispositions and the bankruptcy of Axiowave Networks,
Inc., a tenant at Marlborough Corporate Place, an office property located in Marlborough, Massachusetts, which defaulted on its lease obligation in December 2004. Axiowaves lease encompassed approximately 100,000 square feet at Marlborough
Corporate Place and accounted for approximately $2.9 million of annual revenues. This decrease was partially offset by property acquisitions and increases in occupancy and rental rates. Following is a table of rental revenue by market, for
comparative purposes, presenting the results for the three months ended June 30, 2005 and 2004 (dollars in thousands):



|                     |  |      |        |      |   |       
|-------------------- |  | ---- | ------ | ---- | - | ------
|                     |  | 2005 |        | 2004
|Washington D.C.      |  | $    | 9,112  |      | $ | 10,297
|Southern California  |  |      | 8,685  |      |   | 8,383 
|Northern New Jersey  |  |      | 6,271  |      |   | 6,672 
|Boston               |  |      | 6,357  |      |   | 7,460 
|San Francisco        |  |      | 2,301  |      |   | 2,477 
|Chicago              |  |      | 3,012  |      |   | 3,181 
|St. Louis            |  |      | 1,956  |      |   | 2,098 
|Tampa/Orlando        |  |      | 2,049  |      |   | 1,876 
|Denver               |  |      | 1,688  |      |   | 1,304 
|Minneapolis          |  |      | 1,503  |      |   | 1,374 
|Las Vegas            |  |      | 1,249  |      |   | 1,218 
|All others           |  |      | 3,372  |      |   | 3,637 
|                     |  |      |        |      |   |       
|Total Rental Revenue |  | $    | 47,555 |      | $ | 49,977
|                     |  |      |        |      |   |       



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 operating joint
ventures and the Rancon Partnerships. This revenue increased $327,000 to $1,359,000 for the three months ended June 30, 2005, from $1,032,000 for the three months ended June 30, 2004, primarily due to increased development, disposition, lease
consulting and other fees.



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Property Operating Expenses. Property operating expenses were basically flat with a slight decrease of $127,000,
or 0.8%, to $16,415,000 for the three months ended June 30, 2005, from $16,542,000 for the three months ended June 30, 2004. Following is a table of property operating expenses by market, for comparative purposes, presenting the results for the
three months ended June 30, 2005 and 2004 (dollars in thousands):



|                                  |  |      |        |      |   |       
|--------------------------------- |  | ---- | ------ | ---- | - | ------
|                                  |  | 2005 |        | 2004
|Washington D.C.                   |  | $    | 2,269  |      | $ | 2,536 
|Southern California               |  |      | 2,683  |      |   | 2,661 
|Northern New Jersey               |  |      | 2,063  |      |   | 2,001 
|Boston                            |  |      | 2,713  |      |   | 2,861 
|San Francisco                     |  |      | 701    |      |   | 654   
|Chicago                           |  |      | 1,474  |      |   | 1,373 
|St. Louis                         |  |      | 774    |      |   | 745   
|Tampa/Orlando                     |  |      | 603    |      |   | 620   
|Denver                            |  |      | 644    |      |   | 494   
|Minneapolis                       |  |      | 725    |      |   | 611   
|Las Vegas                         |  |      | 291    |      |   | 269   
|All others                        |  |      | 1,475  |      |   | 1,717 
|                                  |  |      |        |      |   |       
|Total Property Operating Expenses |  | $    | 16,415 |      | $ | 16,542
|                                  |  |      |        |      |   |       



Depreciation and Amortization.
Depreciation and amortization decreased $1,693,000, or 10.7%, to $14,106,000 for the three months ended June 30, 2005, from $15,799,000 for the three months ended June 30, 2004. This decrease is primarily due to property dispositions and ceasing
depreciation of assets held for sale.



Interest Expense. Interest
expense increased $499,000, or 5.4%, to $9,779,000 for the three months ended June 30, 2005, from $9,280,000 for the three months ended June 30, 2004. This increase is primarily due to increases in outstanding debt, conversion of floating-rate debt
to fixed-rate debt and increases in variable interest rates.



Loss on Early
Extinguishment of Debt. During the three months ended June 30, 2005, we recorded losses on early extinguishment of debt of $135,000 which consisted of prepayment penalties and the write-off of unamortized original financing costs in connection
with loan payoffs related to property dispositions.



Gain on sales of real
estate assets.The gain on sales of real estate assets of $9,309,000 during the three months ended June 30, 2005, resulted from the sale of four properties, including two office and two industrial, which are part of our plan to dispose of
certain assets in our non-core markets and certain non-core assets in core markets. The gain on sales of real estate assets of $12,408,000 during the three months ended June 30, 2004, resulted from the sale of one office property, which generated a
gain of approximately $12,443,000, offset by payments of approximately $35,000 in cash related to the settlement of contingencies from prior period dispositions.



Charges associated with the redemption of preferred stock. In April 2004, we redeemed approximately 3.1 million shares of our
outstanding 73⁄4% Series A Convertible Preferred Stock. In connection with this redemption, we incurred charges of $568,000 for the stub period dividends paid to the redeemed preferred shareholders, as well as a charge of $5,909,000, which
consisted of $3,448,000 for the non-cash write-off of original issuance costs of the preferred shares, $2,407,000 for the premium paid to redeem the preferred shares and $54,000 in other miscellaneous costs.



Comparison of the six months ended June 30, 2005 to the six months ended June 30, 2004.



In accordance with SFAS 144 Accounting for the Impairment or
Disposal of Long Lived Assets, net income (loss) and gains on sales of real estate for properties sold or classified as held for sale are reflected in the consolidated statements of operations as Discontinued Operations for all
periods presented. As we generally reinvest the proceeds from property dispositions into the acquisition of new properties, we believe that it is necessary to discuss our results of operations after discontinued operations have been added back to
the respective revenue and expense line items to provide a representation of the balances that management uses to evaluate the results of operations as it provides greater comparability given the change in volume of dispositions for the periods
presented.



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



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|                                                                                                                                                             |  |                                |         |   |                                |   |         |          |  |   |                            |   |  |                        |         |   |              |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------ | ------- | - | ------------------------------ | - | ------- | -------- |  | - | -------------------------- | - |  | ---------------------- | ------- | - | ------------ | - | ------- | - |  | - | ------- | -
|                                                                                                                                                             |  | Six Months Ended June 30, 2005 |         |   | Six Months Ended June 30, 2004 |  
|                                                                                                                                                             |  | PerFinancialStatements         |         |   | DiscontinuedOperations         |   |         | Adjusted |  |   | PerFinancialStatements (2) |   |  | DiscontinuedOperations |         |   | Adjusted (2) |  
|OPERATING REVENUE                                                                                                                                            |  |                                |         |   |                                |   |         |          |  |   |                            |   |  |                        |         |   |              |   |         |   |  |   |         |  
|Rental revenue                                                                                                                                               |  | $                              | 79,969  |   |                                | $ | 14,935  |          |  | $ | 94,904                     |   |  | $                      | 74,728  |   |              | $ | 22,753  |   |  | $ | 97,481  |  
|Fees and reimbursements, including from related parties                                                                                                      |  |                                | 2,454   |   |                                |   |        |          |  |   | 2,454                      |   |  |                        | 1,861   |   |              |   |        |   |  |   | 1,861   |  
|                                                                                                                                                             |  |                                |         |   |                                |   |         |          |  |   |                            |   |  |                        |         |   |              |   |         |   |  |   |         |  
|Total operating revenue                                                                                                                                      |  |                                | 82,423  |   |                                |   | 14,935  |          |  |   | 97,358                     |   |  |                        | 76,589  |   |              |   | 22,753  |   |  |   | 99,342  |  
|                                                                                                                                                             |  |                                |         |   |                                |   |         |          |  |   |                            |   |  |                        |         |   |              |   |         |   |  |   |         |  
|OPERATING EXPENSES                                                                                                                                           |  |                                |         |   |                                |   |         |          |  |   |                            |   |  |                        |         |   |              |   |         |   |  |   |         |  
|Property operating expenses                                                                                                                                  |  |                                | 27,570  |   |                                |   | 6,686   |          |  |   | 34,256                     |   |  |                        | 25,377  |   |              |   | 8,477   |   |  |   | 33,854  |  
|General and administrative                                                                                                                                   |  |                                | 7,210   |   |                                |   |        |          |  |   | 7,210                      |   |  |                        | 6,170   |   |              |   | 12      |   |  |   | 6,182   |  
|Depreciation and amortization                                                                                                                                |  |                                | 26,181  |   |                                |   | 3,768   |          |  |   | 29,949                     |   |  |                        | 23,751  |   |              |   | 7,105   |   |  |   | 30,856  |  
|Provision for impairment of real estate assets                                                                                                               |  |                                | 29,810  |   |                                |   | 28,426  |          |  |   | 58,236                     |   |  |                        |        |   |              |   |        |   |  |   |        |  
|                                                                                                                                                             |  |                                |         |   |                                |   |         |          |  |   |                            |   |  |                        |         |   |              |   |         |   |  |   |         |  
|Total operating expenses                                                                                                                                     |  |                                | 90,771  |   |                                |   | 38,880  |          |  |   | 129,651                    |   |  |                        | 55,298  |   |              |   | 15,594  |   |  |   | 70,892  |  
|                                                                                                                                                             |  |                                |         |   |                                |   |         |          |  |   |                            |   |  |                        |         |   |              |   |         |   |  |   |         |  
|Interest and other income                                                                                                                                    |  |                                | 1,645   |   |                                |   |        |          |  |   | 1,645                      |   |  |                        | 1,469   |   |              |   |        |   |  |   | 1,469   |  
|Equity in earnings of unconsolidated operating JVs                                                                                                          |  |                                | 302     |   |                                |   |        |          |  |   | 302                        |   |  |                        | 437     |   |              |   |        |   |  |   | 437     |  
|Interest expense                                                                                                                                             |  |                                | (18,922 | ) |                                |   | (323    | )        |  |   | (19,245                    | ) |  |                        | (16,122 | ) |              |   | (2,404  | ) |  |   | (18,526 | )
|Loss on early extinguishment of debt                                                                                                                         |  |                                | (561    | ) |                                |   | (2,513  | )        |  |   | (3,074                     | ) |  |                        | (85     | ) |              |   |        |   |  |   | (85     | )
|                                                                                                                                                             |  |                                |         |   |                                |   |         |          |  |   |                            |   |  |                        |         |   |              |   |         |   |  |   |         |  
|Income (loss) before gain on sales of real estate assets, minority interest, discontinued operations and cumulative effect of change in
accounting principle |  |                                | (25,884 | ) |                                |   | (26,781 | )        |  |   | (52,665                    | ) |  |                        | 6,990   |   |              |   | 4,755   |   |  |   | 11,745  |  
|Gain on sales of real estate assets                                                                                                                          |  |                                |        |   |                                |   | 26,629  |          |  |   | 26,629                     |   |  |                        |        |   |              |   | 12,528  |   |  |   | 12,528  |  
|                                                                                                                                                             |  |                                |         |   |                                |   |         |          |  |   |                            |   |  |                        |         |   |              |   |         |   |  |   |         |  
|Income (loss) before minority interest, discontinued operations and cumulative effect of change in accounting principle                                      |  |                                | (25,884 | ) |                                |   | (152    | )        |  |   | (26,036                    | ) |  |                        | 6,990   |   |              |   | 17,283  |   |  |   | 24,273  |  
|Minority interest(1)                                                                                                                                         |  |                                | 2,727   |   |                                |   |        |          |  |   | 2,727                      |   |  |                        | (787    | ) |              |   |        |   |  |   | (787    | )
|                                                                                                                                                             |  |                                |         |   |                                |   |         |          |  |   |                            |   |  |                        |         |   |              |   |         |   |  |   |         |  
|Income (loss) before discontinued operations and cumulative effect of change in accounting principle                                                         |  |                                | (23,157 | ) |                                |   | (152    | )        |  |   | (23,309                    | ) |  |                        | 6,203   |   |              |   | 17,283  |   |  |   | 23,486  |  
|Discontinued operations                                                                                                                                      |  |                                | (152    | ) |                                |   | 152     |          |  |   |                           |   |  |                        | 17,283  |   |              |   | (17,283 | ) |  |   |        |  
|                                                                                                                                                             |  |                                |         |   |                                |   |         |          |  |   |                            |   |  |                        |         |   |              |   |         |   |  |   |         |  
|Income (loss) before cumulative effect of change in accounting principle                                                                                     |  |                                | (23,309 | ) |                                |   |        |          |  |   | (23,309                    | ) |  |                        | 23,486  |   |              |   |        |   |  |   | 23,486  |  
|Cumulative effect of change in accounting principle                                                                                                          |  |                                |        |   |                                |   |        |          |  |   |                           |   |  |                        | (912    | ) |              |   |        |   |  |   | (912    | )
|                                                                                                                                                             |  |                                |         |   |                                |   |         |          |  |   |                            |   |  |                        |         |   |              |   |         |   |  |   |         |  
|Net income (loss)                                                                                                                                            |  |                                | (23,309 | ) |                                |   |        |          |  |   | (23,309                    | ) |  |                        | 22,574  |   |              |   |        |   |  |   | 22,574  |  
|Preferred dividends                                                                                                                                          |  |                                | (3,624  | ) |                                |   |        |          |  |   | (3,624                     | ) |  |                        | (6,636  | ) |              |   |        |   |  |   | (6,636  | )
|Dividends paid on redeemed preferred stock                                                                                                                   |  |                                | (596    | ) |                                |   |        |          |  |   | (596                       | ) |  |                        | (2,073  | ) |              |   |        |   |  |   | (2,073  | )
|Premium and write-off of original issuance costs on preferred stock redemption                                                                               |  |                                | (5,309  | ) |                                |   |        |          |  |   | (5,309                     | ) |  |                        | (5,909  | ) |              |   |        |   |  |   | (5,909  | )
|                                                                                                                                                             |  |                                |         |   |                                |   |         |          |  |   |                            |   |  |                        |         |   |              |   |         |   |  |   |         |  
|Net income (loss) available to Common Stockholders                                                                                                           |  | $                              | (32,838 | ) |                                | $ |        |          |  | $ | (32,838                    | ) |  | $                      | 7,956   |   |              | $ |        |   |  | $ | 7,956   |  
|                                                                                                                                                             |  |                                |         |   |                                |   |         |          |  |   |                            |   |  |                        |         |   |              |   |         |   |  |   |         |  

---

|(1) | Includes minority interests share of discontinued operations, preferred dividends and premium and write-off of original issuance costs on preferred stock
redemptions.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | As restated. See discussion above under Restatement.
|--- | ----------------------------------------------------



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Net Operating Income. Following is a table of net operating income by market, for comparative purposes, presenting
the results for the six months ended June 30, 2005 and 2004 (dollars in thousands). The data set forth below should be read in conjunction with Note 18. Segment Information in our consolidated financial statements included in Item 1.



|                           |  |      |        |           |       |   |      |   |           |  |       |  
|-------------------------- |  | ---- | ------ | --------- | ----- | - | ---- | - | --------- |  | ----- | -
|                           |  | 2005 |        | % ofTotal |       |   | 2004 |   | % ofTotal | 
|Washington D.C.            |  | $    | 12,553 |           | 20.7  | % |      | $ | 13,904    |  | 21.9  | %
|Southern California        |  |      | 11,944 |           | 19.7  | % |      |   | 11,296    |  | 17.8  | %
|Northern New Jersey        |  |      | 7,625  |           | 12.6  | % |      |   | 8,515     |  | 13.4  | %
|Boston                     |  |      | 6,965  |           | 11.5  | % |      |   | 9,348     |  | 14.7  | %
|San Francisco              |  |      | 3,347  |           | 5.5   | % |      |   | 3,503     |  | 5.5   | %
|Chicago                    |  |      | 3,045  |           | 5.0   | % |      |   | 3,427     |  | 5.4   | %
|St. Louis                  |  |      | 2,345  |           | 3.9   | % |      |   | 2,589     |  | 4.0   | %
|Tampa/Orlando              |  |      | 3,042  |           | 5.0   | % |      |   | 2,459     |  | 3.9   | %
|Denver                     |  |      | 2,098  |           | 3.5   | % |      |   | 1,501     |  | 2.3   | %
|Minneapolis                |  |      | 1,712  |           | 2.8   | % |      |   | 1,573     |  | 2.5   | %
|Las Vegas                  |  |      | 1,938  |           | 3.2   | % |      |   | 1,775     |  | 2.8   | %
|All others                 |  |      | 4,034  |           | 6.6   | % |      |   | 3,737     |  | 5.8   | %
|                           |  |      |        |           |       |   |      |   |           |  |       |  
|Total Net Operating Income |  | $    | 60,648 |           | 100.0 | % |      | $ | 63,627    |  | 100.0 | %
|                           |  |      |        |           |       |   |      |   |           |  |       |  



Rental Revenue. Rental revenue
decreased $2,577,000, or 2.6%, to $94,904,000 for the six months ended June 30, 2005, from $97,481,000 for the six months ended June 30, 2004. This change primarily resulted from property dispositions and the bankruptcy of Axiowave Networks, Inc., a
tenant at Marlborough Corporate Place, an office property located in Marlborough, Massachusetts, which defaulted on its lease obligation in December 2004. Axiowaves lease encompassed approximately 100,000 square feet at Marlborough Corporate
Place and accounted for approximately $2.9 million of annual revenues. This decrease was partially offset by property acquisitions and increases in occupancy and rental rates. Following is a table of rental revenue by market, for comparative
purposes, presenting the results for the six months ended June 30, 2005 and 2004 (dollars in thousands):



|                     |  |      |        |      |   |       
|-------------------- |  | ---- | ------ | ---- | - | ------
|                     |  | 2005 |        | 2004
|Washington D.C.      |  | $    | 17,116 |      | $ | 18,798
|Southern California  |  |      | 17,379 |      |   | 16,578
|Northern New Jersey  |  |      | 12,152 |      |   | 12,846
|Boston               |  |      | 12,836 |      |   | 15,235
|San Francisco        |  |      | 4,777  |      |   | 5,099 
|Chicago              |  |      | 6,104  |      |   | 6,285 
|St. Louis            |  |      | 3,957  |      |   | 4,115 
|Tampa/Orlando        |  |      | 4,401  |      |   | 3,753 
|Denver               |  |      | 3,380  |      |   | 2,487 
|Minneapolis          |  |      | 3,124  |      |   | 2,821 
|Las Vegas            |  |      | 2,533  |      |   | 2,292 
|All others           |  |      | 7,145  |      |   | 7,172 
|                     |  |      |        |      |   |       
|Total Rental Revenue |  | $    | 94,904 |      | $ | 97,481
|                     |  |      |        |      |   |       



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 operating joint
ventures and the Rancon Partnerships. This revenue increased $593,000 to $2,454,000 for the six months ended June 30, 2005, from $1,861,000 for the six months ended June 30, 2004, primarily due to increased development, disposition, lease consulting
and other fees.



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Property Operating Expenses. Property operating expenses had a slight increase of $402,000, or 1.2%, to
$34,256,000 for the six months ended June 30, 2005, from $33,854,000 for the six months ended June 30, 2004. This increase is primarily due to increased snow removal costs, partially offset by property dispositions. Following is a table of property
operating expenses by market, for comparative purposes, presenting the results for the six months ended June 30, 2005 and 2004 (dollars in thousands):



|                                  |  |      |        |      |   |       
|--------------------------------- |  | ---- | ------ | ---- | - | ------
|                                  |  | 2005 |        | 2004
|Washington D.C.                   |  | $    | 4,563  |      | $ | 4,894 
|Southern California               |  |      | 5,435  |      |   | 5,282 
|Northern New Jersey               |  |      | 4,527  |      |   | 4,331 
|Boston                            |  |      | 5,871  |      |   | 5,887 
|San Francisco                     |  |      | 1,430  |      |   | 1,596 
|Chicago                           |  |      | 3,059  |      |   | 2,858 
|St. Louis                         |  |      | 1,612  |      |   | 1,526 
|Tampa/Orlando                     |  |      | 1,359  |      |   | 1,294 
|Denver                            |  |      | 1,282  |      |   | 986   
|Minneapolis                       |  |      | 1,412  |      |   | 1,248 
|Las Vegas                         |  |      | 595    |      |   | 517   
|All others                        |  |      | 3,111  |      |   | 3,435 
|                                  |  |      |        |      |   |       
|Total Property Operating Expenses |  | $    | 34,256 |      | $ | 33,854
|                                  |  |      |        |      |   |       



General and Administrative
Expenses. General and administrative expenses increased $1,028,000, or 16.6%, to $7,210,000 for the six months ended June 30, 2005, from $6,182,000 for the six months ended June 30, 2004. This increase is primarily due to increases in incentive
compensation costs, higher professional fees related to Sarbanes-Oxley 404 compliance and increases in state franchise taxes.



Depreciation and Amortization. Depreciation and amortization decreased $907,000, or 2.9%, to $29,949,000 for the six months ended June 30, 2005, from $30,856,000
for the six months ended June 30, 2004. This decrease is primarily due to property dispositions and ceasing depreciation of assets held for sale.



Provision for impairment of real estate assets.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 future undiscounted cash flows of each asset over the next two years, we determined that nine of the assets were impaired.
The difference between the estimated fair value (calculated by discounting estimated future cash flows and sales proceeds) and the net book value was $49,312,000. When combined with impairment charges of $8,924,000 recognized on two additional
assets sold during the first quarter of 2005, the total impairment charge recognized during the six months ended June 30, 2005 was $58,236,000.



Interest and Other Income. Interest and other income increased $176,000 to $1,645,000 for the six months ended June 30, 2005, from $1,469,000 for the six months
ended June 30, 2004, primarily due to a fee we received to terminate our acquisition rights to the Gateway Office Five development project in the first quarter of 2005 (see below under Investments in Land and Development), partially offset by
reduced interest income resulting from principal payments received in 2004 on our mortgage loan receivable secured by land at Gateway Business Park in Colorado.



Interest Expense. Interest expense increased $719,000, or 3.9%, to $19,245,000 for the six months ended June 30, 2005, from $18,526,000 for the six months ended
June 30, 2004. This increase is primarily due to increases in outstanding debt, conversion of floating-rate debt to fixed-rate debt and increases in variable interest rates.



Loss on Early Extinguishment of Debt. During the six months ended June 30, 2005, we recorded losses on early extinguishment of debt
of $3,074,000 which consisted primarily of prepayment penalties and the write-off of unamortized original financing costs in connection with loan payoffs related to the sale of Rockwall I and II, Lake Point Business Park and Fairfield Business
Quarters, as discussed below, as well as a loan refinance. During the six months ended June 30, 2004, in connection with a loan payoff, we recorded a loss on early extinguishment of debt of $85,000 which consisted of the write-off of unamortized
original financing costs in connection with a loan payoff.



Gain on sales of
real estate assets.The gain on sales of real estate assets of $26,629,000 during the six months ended June 30, 2005, resulted from the sale of Rockwall I and II, an office complex located in Rockville, Maryland, as well as four other



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properties, including two office and two industrial, which are part of our plan to dispose of assets in our non-core
markets and certain non-core assets in core markets. The gain on sales of real estate assets of $12,528,000 during the six months ended June 30, 2004, resulted from the sale of two office properties.



Cumulative Effect of Change in Accounting Principle.In accordance with FIN 46
Revised, we began consolidating the entity known as Marina Shores, effective January 1, 2004, as we are deemed to be the primary beneficiary as defined by FIN 46 Revised. The implementation of this change was accounted for as a change in accounting
principle and applied cumulatively as of January 1, 2004. The cumulative effect of the change in accounting principle resulted in a one-time non-cash reduction to our net income of $912,000 for the six months ended June 30, 2004, which represented
the elimination of intercompany fee income recognized, slightly offset by additions to capitalized interest on this development project as if Marina Shores had been consolidated at the inception of our investment.



Charges associated with the redemption of preferred stock. In 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 six months ended June 30, 2005, we incurred $596,000 for the stub period dividends paid to 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. In April 2004, we redeemed approximately 3.1 million shares of our outstanding 73⁄4% Series A Convertible Preferred Stock. In connection with this redemption, during the six months ended June 30, 2004, we
incurred charges of $2,073,000 for the stub period and final dividends paid to the redeemed preferred shareholders, as well as a charge of $5,909,000, which consisted of $3,448,000 for the non-cash write-off of original issuance costs of the
preferred shares, $2,407,000 for the premium paid to redeem the preferred shares and $54,000 in other miscellaneous costs.



Liquidity and Capital Resources



Cash Flows



For the six months ended June 30, 2005, cash provided by operating activities was $26,483,000 as compared to $35,058,000 for the same period in 2004. This change is primarily due to an increase in cash paid for lease
commissions, a decrease in net operating income from the rental properties (as discussed above) and increases in general and administrative expenses (as discussed above). Cash provided by investing activities was $73,647,000 for the six months ended
June 30, 2005, as compared to cash used for investing activities of $21,401,000 for the same period in 2004. This change is primarily due to higher proceeds from property sales, offset by funds used for acquisition of properties during the six
months ended June 30, 2005, as compared to higher investments in land and development, offset by higher principal payments on mortgage loans receivable received during the six months ended June 30, 2004. Cash used for financing activities was
$101,301,000 for the six months ended June 30, 2005, as compared to $25,965,000 for the same period in 2004. This change is due primarily to cash received from the issuance of common stock in 2004, partially offset by an increase in borrowings, net
of repayments, in 2005.



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



Investments in Land and Development



Our investments in land and development decreased from $147,435,000 at December 31, 2004, to
$134,372,000 at June 30, 2005. This decrease is primarily due to the disposition of approximately 28 acres of land held for development, known as Eden Shores located in Hayward, California. On March 25, 2005, we entered into a contract to sell Eden
Shores to an unaffiliated third party which owns land adjacent to this parcel for a sale price of $12 million. At that time, we recognized an impairment charge of approximately $5.1 million which is included in the provision for impairment of real
estate assets in our consolidated statement of operations for the six months ended June 30, 2005. On March 28, 2005, the sale was completed. We received $5 million in cash and a $7 million first mortgage loan receivable, secured by the land, with a
fixed interest rate of 8%, a 20-year



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amortization requiring monthly principal and interest payments of approximately $59,000, and a maturity date of March 28,
2007. On June 28, 2005, this mortgage loan receivable was sold to a bank for approximately $6.98 million which was the outstanding principal balance on that date. We did not recognize any gain or loss on this transaction.



In addition, on January 31, 2005, we sold our interest in the Gateway Office Five development
project located in Denver, Colorado, which was in the form of a mezzanine loan with a net basis of approximately $835,000 as of December 31, 2004 (see table below). In connection with this sale, the mezzanine loan principal balance and accrued
interest was paid off in full. In addition, we received a $430,000 fee to terminate our acquisition rights for this property. This fee in included in interest and other income on our consolidated statement of operations for the six months ended June
30, 2005.



As of June 30, 2005 and December 31, 2004, we had investments in the
following properties under development and land held for development. The investment descriptions are as of June 30, 2005 (dollars in thousands).



|                                          |  |                             |  |                                                                                                                                     |  |                        |  |                       |   |                  |      |  |                                  |         |     |                                      |   |        |    
|----------------------------------------- |  | --------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- |  | --------------------- | - | ---------------- | ---- |  | -------------------------------- | ------- | --- | ------------------------------------ | - | ------ | ---
|Market                                    |  | Properties                  |  | Description                                                                                                                         |  | City                   |  | ProposedSquareFootage |   | EconomicInterest |      |  | InvestmentBalance atJune 30,2005 |         |     | InvestmentBalance atDecember 31,2004 |  
|Denver                                    |  | Gateway Office Five         |  | Fifth office building constructed at Gateway Park (1-story)                                                                         |  | Denver                 |  |                      |   |                 | (1)  |  |                                  |        | (1) |                                      | $ | 835    |    
|                                          |  |                             |  |                                                                                                                                     |  |                        |  |                       |   |                  |      |  |                                  |         |     |                                      |   |        |    
|TOTAL PROPERTIES UNDER DEVELOPMENT        |  |                             |  |                                                                                                                                    |  |                        |  |                       |   |                 |      |  | $                                | 835     |    
|                                          |  |                             |  |                                                                                                                                     |  |                        |  |                       |   |                  |      |  |                                  |         |     |                                      |   |        |    
|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              | %    |  | $                                | 5,216   |     |                                      | $ | 5,170  |    
|                                          |  |                             |  |                                                                                                                                     |  |                        |  |                       |   |                  |      |  |                                  |         |     |                                      |   |        |    
|                                          |  | Subtotal  Boston           |  |                                                                                                                                     |  |                        |  | 235,000               |   |                  |      |  |                                  | 5,216   |     |                                      |   | 5,170  |    
|                                          |  |                             |  |                                                                                                                                     |  |                        | 
|Denver                                    |  | Gateway Park                |  | 1,200 acre mixed-use park near Denver International Airport; approximately 442 acres undeveloped                                    |  | Denver                 |  | to bedetermined       |   | 50               | %(2) |  |                                  | 35,473  | (2) |                                      |   | 34,636 | (2)
|                                          |  |                             |  |                                                                                                                                     |  |                        | 
|                                          |  | Lima Street                 |  | 19.5 acres of undeveloped land in Englewood, Colorado, zoned for office use                                                         |  | Denver                 |  | 120,000               |   | 100              | %    |  |                                  | 4,750   |     |                                      |   | 4,750  |    
|                                          |  |                             |  |                                                                                                                                     |  |                        |  |                       |   |                  |      |  |                                  |         |     |                                      |   |        |    
|                                          |  | Subtotal  Denver           |  |                                                                                                                                     |  |                        |  | 120,000               |   |                  |      |  |                                  | 40,223  |     |                                      |   | 39,386 |    
|                                          |  |                             |  |                                                                                                                                     |  |                        | 
|San Francisco                             |  | Marina Shores               |  | 33.2 acre mixed-use waterfront community which could include office, retail and multifamily units; currently in entitlement process |  | RedwoodCity            |  | to bedetermined       |   | 50               | %(3) |  |                                  | 82,814  |     |                                      |   | 79,548 |    
|                                          |  |                             |  |                                                                                                                                     |  |                        | 
|                                          |  | Eden Shores                 |  | 27 acres zoned for the construction of a 600,000 square foot office park                                                            |  | Hayward                |  |                      |   |                 | (4)  |  |                                  |        | (4) |                                      |   | 16,530 |    
|                                          |  |                             |  |                                                                                                                                     |  |                        |  |                       |   |                  |      |  |                                  |         |     |                                      |   |        |    
|                                          |  | Subtotal - San Francisco    |  |                                                                                                                                     |  |                        |  |                      |   |                  |      |  |                                  | 82,814  |     |                                      |   | 96,078 |    
|                                          |  |                             |  | Other land held for development                                                                                                     |  | NewJersey/SanFrancisco |  |                       |   |                  |      |  |                                  | 6,119   |     |                                      |   | 5,966  |    
|                                          |  |                             |  |                                                                                                                                     |  |                        |  |                       |   |                  |      |  |                                  |         |     |                                      |   |        |    
|TOTAL LAND HELD FOR DEVELOPMENT           |  |                             |  | 355,000                                                                                                                             |  |                        |  |                       | $ | 134,372          |      |  | $                                | 146,600 |    
|                                          |  |                             |  |                                                                                                                                     |  |                        |  |                       |   |                  |      |  |                                  |         |     |                                      |   |        |    
|TOTAL INVESTMENTS IN LAND AND DEVELOPMENT |  |                             |  | 355,000                                                                                                                             |  |                        |  |                       | $ | 134,372          |      |  | $                                | 147,435 |    
|                                          |  |                             |  |                                                                                                                                     |  |                        |  |                       |   |                  |      |  |                                  |         |     |                                      |   |        |    

---

|(1) | Interest previously held in the form of a mezzanine loan. In the first quarter of 2005, the
mezzanine loan was paid off in full. See above for further discussion.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Interest in the form of mezzanine loans and equity. In addition, we hold a mortgage loan receivable secured by the land with a balance of $11,073 and $12,872 at June
30, 2005 and December 31, 2004, respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(4) | In the first quarter of 2005, we sold this property to an unaffiliated third party. See above
for further discussion.
|--- | ---------------------------------------------------------------------------------------------------------------------



We have no further contractual
obligations for the future funding of these developments; however, we will likely be funding a portion of their working capital needs until such time as other financing is obtained. Under our development alliances, we have provided an aggregate of
approximately $2.5 million in debt guarantees; however, some of the loans were not fully drawn as of June 30, 2005. These guarantees will remain in place until such time as the related development financing has been replaced or



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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. Performance under
the guarantees would result in a contribution to the venture and an increase in our effective ownership percentages.



Certain of the alliances with which we conduct business have been deemed to be VIEs as defined by FIN 46 Revised, however, other than Marina Shores, 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 $92.8 million and $53.7 million, respectively, at June 30, 2005,
and $92.8 million and $54.5 million, respectively, at December 31, 2004. Our maximum exposure to loss is equal to our investments in these arrangements, plus the related debt guarantees, as described above.



Investments in Unconsolidated Operating Joint Ventures



Investments in unconsolidated operating joint ventures decreased from $12,014,000 at
December 31, 2004 to $11,936,000 at June 30, 2005. This decrease was primarily due to cash distributions received from the joint ventures in excess of our equity interests in the joint ventures earnings.



Mortgage Loans Receivable



Mortgage loans receivable decreased from $12,872,000 at December 31, 2004, to $11,073,000 at
June 30, 2005. We hold a first mortgage of $11,073,000, including accrued interest, at June 30, 2005, secured by a 50% interest in 152 acres of land at Gateway Business Park in Aurora, Colorado. Periodic payments of interest and principal are
received on the loan from proceeds of land parcel sales in the project. During the six months ended June 30, 2005, the balance of this mortgage loan receivable decreased due to principal payments received of $2,500,000, partially offset by monthly
interest accruals of $701,000. 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.



As
discussed in Investments in Land and Development, in connection with the Companys disposition of approximately 28 acres of land held for development, known as Eden Shores located in Hayward, California, the Company received a first
mortgage loan receivable of $7 million, secured by the land, with a fixed interest rate of 8%, a 20-year amortization requiring monthly principal and interest payments of approximately $59,000, and a maturity date of March 28, 2007. On June 28,
2005, this mortgage loan receivable was sold to a bank for approximately $6.98 million which was the outstanding principal balance on that date. We did not recognize any gain or loss on this transaction.



Mortgage Loans and Unsecured Bank Line of Credit



At June 30, 2005 and December 31, 2004, our indebtedness included fixed-rate debt of
$651,532,000 and $581,092,000, respectively, and floating-rate debt of $120,738,000 and $138,298,000, respectively.



During the six months ended June 30, 2005, mortgage loans payable increased from $698,070,000 to $728,151,000. This increase resulted from new mortgage loans obtained
totaling $69,250,000 and a mortgage loan assumed in connection with an acquisition of $39,391,000, offset by $3,990,000 of scheduled principal amortization, $52,240,000 paid off in connection with property sales, and $22,330,000 of loan payoffs in
connection with new financings.



Outstanding borrowings under our unsecured
bank line of credit increased from $21,320,000 at December 31, 2004, to $44,119,000 at June 30, 2005. The increase was due to draws totaling $119,487,000 for the January 2005 preferred stock redemption, new financings and development advances,
offset by pay downs totaling $96,688,000 generated from the proceeds from property sales, new financings, the sale of the Eden Shores mortgage loan receivable and cash flow from operations. 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 remain in compliance at June 30, 2005.



At June 30, 2005 and December 31, 2004, we were not a party to any open interest rate protection agreements. Some of our properties are held
in limited partnerships and limited liability companies in order to facilitate financing. All such entities are owned 100% directly or indirectly by us.



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The required principal payments on our debt for the next five years and thereafter, as of June 30, 2005, are as follows
(in thousands). Included in the year ending December 31, 2007, is the unsecured bank line of credit balance of $44,119 which has an initial maturity of March 26, 2007.



|                         |  |   |        
|------------------------ |  | - | -------
|Year Ending December 31, |  |  
|2005                     |  | $ | 51,168 
|2006                     |  |   | 148,051
|2007                     |  |   | 53,665 
|2008                     |  |   | 169,870
|2009                     |  |   | 202,250
|Thereafter               |  |   | 147,266
|                         |  |   |        
|Total                    |  | $ | 772,270
|                         |  |   |        



Registration Statement



In November 1997, we filed a shelf registration statement with the SEC
(the 1997 Registration Statement) which registered the issuance of up to $1.0 billion of our equity securities. The 1997 Registration Statement was declared effective on December 18, 1997. There is currently $635.1 million of capacity in
equity securities remaining on the 1997 Registration Statement.



Common
Stock Offerings



On December 16, 2004, we completed the sale of 4,000,000
shares of common stock in an offering underwritten by Goldman, Sachs & Co. The 4,000,000 shares were sold at a per share price of $20.80, resulting in proceeds, net of offering costs, of approximately $81.8 million. Approximately $158,000 of
offering costs were paid during the six months ended June 30, 2005. We used the net proceeds to redeem a portion of the outstanding shares of our Preferred Stock on January 28, 2005 (as discussed below). In the interim, prior to the redemption, the
proceeds were used to repay a portion of the amounts outstanding under our unsecured bank line of credit.



On March 19, 2004, we completed the sale of 3,910,000 shares of common stock (including the exercise of the over allotment of 510,000 shares) in an offering underwritten by Goldman, Sachs & Co. The 3,910,000
shares were sold at a per share price of $21.20, resulting in proceeds, net of offering costs, of approximately $81.3 million. We used the net proceeds to redeem a portion of the outstanding shares of our Preferred Stock in April 2004 (as discussed
below). In the interim, prior to the redemption, the proceeds were used to repay a portion of the amounts outstanding under our unsecured bank line of credit.



Preferred Stock Redemptions



On January 28, 2005, we 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 our unsecured bank line of credit as discussed above.



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



Stock Repurchases



In 1999, our Board of Directors authorized the repurchase of up to 6.2 million shares of our outstanding Common Stock. This represented approximately 20% of our total outstanding Common Stock. In December 2000, the
repurchase authorization was increased to approximately 8.2 million shares, representing approximately 26% of Common Stock outstanding when the repurchase program began. As of June 30, 2005, 6,394,816 common shares have been repurchased at an
average price per share of $16.60 and a total cost of approximately $106.8 million; this represents approximately 78% of the expanded repurchase authorization and approximately 20% of Common Stock outstanding when the repurchase program began. In
addition, during 1999, we announced that our Board of Directors had approved the repurchase of up to 15% of its Preferred Stock, or 1,725,000 shares. In May 2000, the Preferred Stock repurchase authorization was increased to 3,450,000 shares,
representing approximately 30% of Preferred Stock outstanding when the repurchase program began. As of June 30, 2005, 1,543,700 preferred shares have been repurchased at an average price per share of $15.69 and a total cost of approximately $24.2
million;



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this represents approximately 45% of the expanded repurchase authorization and approximately 13% of Preferred Stock
outstanding when the repurchase program began. We made no repurchases of our Common Stock or Preferred Stock during the three months ended June 30, 2005. We intend to make future stock repurchases from time to time in the open market or otherwise
and the timing will depend on market conditions and other factors.



Critical
Accounting Policies



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.



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



The actual value of our portfolio of properties, investments in development and other investments could be significantly different than their carrying amounts.



Our status as a real estate investment trust



We have elected to be taxed as a REIT under Sections 856 to 860 of the Internal Revenue
Code. A real estate investment trust generally is not subject to federal income tax on that portion of its real estate investment trust taxable income that is distributed to its stockholders, provided that at least 90% of real estate investment
trust taxable income is distributed and other requirements are met. We believe that we have complied with all requirements to qualify as a REIT for the six months ended June 30, 2005, and for the year ended December 31, 2004. 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. 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.



Accounting Pronouncements Issued But Not
Yet Adopted



In April 2005, the FASB issued FASB Interpretation 47,
Accounting for Conditional Asset Retirement Obligations which states that companies must recognize a liability for the fair value of a legal obligation to perform asset-retirement activities that are conditional on a future event
if the amount can be reasonably estimated. This Interpretation clarifies that conditional obligations meet the definition of an asset-retirement obligation in SFAS No. 143, Accounting for Asset Retirement Obligations, and
therefore, should be recognized if their fair value is reasonably estimable. The Interpretation provides additional guidance to evaluate whether fair value is reasonably estimable. Companies must adopt this Interpretation no later than the end of
the fiscal year ending after December 15, 2005. We anticipate that the adoption of Interpretation 47 will not have a material impact on our financial position, net earnings or cash flows.



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In December 2004, the FASB issued SFAS No. 123 revised 2004, Share-Based Payment (SFAS 123R). This
Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB No. 25, Accounting for Stock Issued to Employees. The Statement requires companies to recognize in the income
statement the grant-date fair value of stock options and other equity based compensation issued to employees. This Statement is effective as of the beginning of the first annual period that commences after June 15, 2005. We anticipate that the
adoption of SFAS No. 123R will not have a material impact on our financial position, net earnings or cash flows.



In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-Monetary Assets an amendment of APB No. 29. This Statement amends APB Opinion No. 29,
Accounting for Non-Monetary Transactions to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial
substance. That exception required that some non-monetary exchanges be recorded on a carryover basis versus this Statement, which requires that an entity record a non-monetary exchange at fair value and recognize any gain or loss if the transaction
has commercial substance. This Statement is effective for fiscal years beginning after June 15, 2005. We anticipate that the adoption of SFAS No. 153 will not have a material impact on our financial position, net earnings or cash flows.



In November 2004, the Emerging Issues Task Force (EITF) issued EITF 03-13,
Applying the Conditions in Paragraph 42 of FASB Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, in Determining Whether to Report Discontinued Operations. This issue assists in the development of a
model for evaluating (a) which cash flows are to be considered in determining whether cash flows have been or will be eliminated and (b) what types of continuing involvement constitute significant continuing involvement. The guidance in this issue
should be applied to a component of an enterprise that is either disposed of or classified as held for sale in fiscal periods beginning after December 15, 2004. Previously reported operating results related to disposal transactions initiated within
an enterprises fiscal year that includes the date that this consensus was ratified (November 30, 2004) may be reclassified. The adoption of EITF 03-13 on January 1, 2005, had no impact on our financial position, net earnings or cash flows.



In June 2005, the Emerging Issues Task Force (EITF) issued EITF
04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. Under this consensus, a sole general partner is
presumed to control a limited partnership (or similar entity) and should consolidate that entity unless the limited partners possess kick-out rights or other substantive participating rights as described in EITF 96-16, Investors
Accounting for an Investee When the Investor has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain approval or Veto Rights. As of June 29, 2005, this consensus was effective immediately for all new
or modified agreements, and effective beginning in the first reporting period that ends after December 15, 2005 for all existing agreements. We do not believe that there will be a material impact on our financial position, results of operations or
cash flows as a result of adopting this pronouncement.



Inflation



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



Funds from Operations



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



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



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



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



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



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



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



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



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



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



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



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The following table sets forth our reconciliation of net income (loss) to funds from operations (FFO) for the three and
six months ended June 30, 2005 and 2004 (in thousands, except weighted average shares and per share amounts):



|                                                                                     |  |                    |            |   |                   |   |            |               |  |   |                   |   |  |   |            |  
|------------------------------------------------------------------------------------ |  | ------------------ | ---------- | - | ----------------- | - | ---------- | ------------- |  | - | ----------------- | - |  | - | ---------- | -
|                                                                                     |  | Three Months Ended |            |   | Six Months Ended  |  
|                                                                                     |  | June 30, 2005      |            |   | June 30, 2004 (5) |   |            | June 30, 2005 |  |   | June 30, 2004 (5) |  
|Net income (loss)                                                                    |  | $                  | 13,653     |   |                   | $ | 17,874     |               |  | $ | (23,309           | ) |  | $ | 22,574     |  
|Cumulative effect of change in accounting principle                                  |  |                    |           |   |                   |   |           |               |  |   |                  |   |  |   | 912        |  
|Real estate depreciation and amortization, net of minority interest(1)               |  |                    | 12,724     |   |                   |   | 14,082     |               |  |   | 27,047            |   |  |   | 27,476     |  
|Preferred dividends                                                                  |  |                    | (1,812     | ) |                   |   | (3,318     | )             |  |   | (3,624            | ) |  |   | (6,636     | )
|Dividends paid on redeemed preferred stock                                           |  |                    |           |   |                   |   | (568       | )             |  |   | (596              | ) |  |   | (2,073     | )
|Premium and write-off of original issuance costs on preferred stock redemption       |  |                    |           |   |                   |   | (5,909     | )             |  |   | (5,309            | ) |  |   | (5,909     | )
|Gain on sale from discontinued operations, net of minority interest                  |  |                    | (8,598     | ) |                   |   | (11,305    | )             |  |   | (24,587           | ) |  |   | (11,414    | )
|Adjustment to reflect FFO of unconsolidated operating joint ventures(2)              |  |                    | 178        |   |                   |   | 178        |               |  |   | 357               |   |  |   | 357        |  
|Adjustment to reflect FFO of minority interest(3)                                    |  |                    | 1,337      |   |                   |   | 1,070      |               |  |   | (2,522            | ) |  |   | 2,354      |  
|                                                                                     |  |                    |            |   |                   |   |            |               |  |   |                   |   |  |   |            |  
|FFO available to Common Stockholders                                                 |  | $                  | 17,482     |   |                   | $ | 12,104     |               |  | $ | (32,543           | ) |  | $ | 27,641     |  
|                                                                                     |  |                    |            |   |                   |   |            |               |  |   |                   |   |  |   |            |  
|Diluted Per Share Data:                                                              |  |                    |            |   |                   |   |            |               |  |   |                   |   |  |   |            |  
|FFO available to Common Stockholders                                                 |  | $                  | 0.45       |   |                   | $ | 0.35       |               |  | $ | (0.83             | ) |  | $ | 0.83       |  
|                                                                                     |  |                    |            |   |                   |   |            |               |  |   |                   |   |  |   |            |  
|Reconciliation of diluted weighted average shares:                                   |  |                    |            |   |                   |   |            |               |  |   |                   |   |  |   |            |  
|Diluted weighted average shares outstanding for calculation of EPS                   |  |                    | 39,159,087 |   |                   |   | 31,662,622 |               |  |   | 35,870,534        |   |  |   | 30,114,060 |  
|Stock options and restricted stock(4)                                                |  |                    |           |   |                   |   | 232,428    |               |  |   | 227,690           |   |  |   | 283,155    |  
|Convertible Operating Partnership Units(4)                                           |  |                    |           |   |                   |   | 3,001,957  |               |  |   | 2,997,941         |   |  |   | 3,001,957  |  
|                                                                                     |  |                    |            |   |                   |   |            |               |  |   |                   |   |  |   |            |  
|Diluted weighted average shares outstanding for calculation of FFO per diluted share |  |                    | 39,159,087 |   |                   |   | 34,897,007 |               |  |   | 39,096,165        |   |  |   | 33,399,172 |  
|                                                                                     |  |                    |            |   |                   |   |            |               |  |   |                   |   |  |   |            |  

---

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

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

|(3) | Represents the minority interest holders share of real estate depreciation and amortization and gain on sales from discontinued operations.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------

|(4) | For the three months ended June 30, 2004, and for the six months ended June 30, 2005 and 2004, options to purchase shares of our common stock and convertible
operating partnership units were anti-dilutive for the purpose of calculating diluted earnings per share and were excluded from the computation of diluted earnings per share.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | As restated. See discussion under Restatement beginning on page 37.
|--- | -------------------------------------------------------------------



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 Exchange Act of 1934, including statements regarding our expectations, hopes, intentions, beliefs and strategies regarding the future. These forward
looking statements include statements relating to:



| |  | Our expectation to receive approximately $3 million of deferred gain on sale of Rockwall I and II in the third quarter of 2005;
|- |  | -------------------------------------------------------------------------------------------------------------------------------



| |  | Our expectation that the remaining assets for which the intended holding period was reduced will generate gains on sale;
|- |  | ------------------------------------------------------------------------------------------------------------------------



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



| |  | Our anticipated acquisition of the Capitol Place III building in Washington, D.C.;
|- |  | ----------------------------------------------------------------------------------



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



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



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



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



| |  | Our anticipation that the adoption of FASB Interpretation 47 will not have a material impact on our financial position, net earnings or cash flows;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our anticipation that the adoption of SFAS No. 123R will not have a material impact on our financial position, net earnings or cash flows;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our anticipation that the adoption of SFAS No. 153 will not have a material impact on our financial position, net earnings or cash flows;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | Our belief that the adoption of EITF 04-5 will not have a material impact on our financial position, results of operations or cash flows;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | 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; and
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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:



| |  | our inability to resolve sale contingencies related to Rockwall I and II promptly and in accordance with our expectations;
|- |  | --------------------------------------------------------------------------------------------------------------------------



| |  | our inability to locate suitable buyers for the listed assets who are ready, willing and able to close transactions at the sales prices we anticipate;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  | the inability to achieve and/or solve sale contingencies related to the Capitol Place III acquisition;
|- |  | ------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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



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



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



| |  | the impact of FASB Interpretation 47 differs from the impact we anticipate;
|- |  | ---------------------------------------------------------------------------



| |  | the adoption of SFAS No. 123R has an unanticipated, negative impact on our financial position;
|- |  | ----------------------------------------------------------------------------------------------



| |  | an interpretation of fair value differing from ours prevails in the application of SFAS No. 153;
|- |  | ------------------------------------------------------------------------------------------------



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



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



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



The forward-looking statements in this quarterly report on Form 10-Q are subject to additional risks and uncertainties further discussed under Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations  Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2004. We assume no obligation to update or supplement any forward
looking-statement.



Risk Factors



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



Item 3. Quantitative and Qualitative Disclosures about Market Risk



Interest Rates



We are exposed to
changes in interest rates obtainable on our secured and unsecured borrowings. 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 16% at June 30, 2005 and 19% at December 31, 2004 of our outstanding debt, including amounts borrowed under our unsecured bank line of
credit, were subject to variable rates. The average interest rate on our debt increased from 5.55% at December 31, 2004 to 5.61% at June 30, 2005. We review interest rate exposure in the portfolio continually in an effort to minimize the risk of
interest rate fluctuations. We do not have any other material market-sensitive financial instruments. It is not our policy to engage in hedging activities for speculative or trading purposes.



We may enter into forward interest rate, or similar, agreements to hedge specific anticipated
debt issuances where we believe the risk of adverse changes in market rates is significant. Under a forward interest rate agreement, if the referenced interest rate increases, we are entitled to a receipt in settlement of the agreement that
economically would offset the higher financing cost of the debt issued. If the referenced interest rate decreases, we make payment in settlement of the agreement, creating an expense that economically would offset the reduced financing cost of the
debt issued. At June 30, 2005, we were not a party to any forward interest rate or similar agreements.



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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 |        |   |      |   |         |     
|                      |  | 2005                   |        |   | 2006 |   |         | 2007 |  |   | 2008   |   |  | 2009 |         |   | Thereafter |   |         | Total |  |   | Fair Value
|                      |  | (in thousands)         |        |   |      |   |         |     
|Secured Fixed         |  | $                      | 26,549 |   |      | $ | 113,051 |      |  | $ | 9,546  |   |  | $    | 152,870 |   |            | $ | 202,250 |       |  | $ | 147,266    |   |  | $ | 651,532 |   |  | $ | 657,195
|Average interest rate |  |                        | 5.11   | % |      |   | 6.45    | %    |  |   | 5.57   | % |  |      | 5.37    | % |            |   | 5.78    | %     |  |   | 5.22       | % |  |   | 5.64    | % |  |   |        
|                      |  |                        |        |   |      |   |         |     
|Secured Variable      |  | $                      | 24,619 |   |      | $ | 35,000  |      |  | $ |       |   |  | $    | 17,000  |   |            | $ |        |       |  | $ |           |   |  | $ | 76,619  |   |  | $ | 76,619 
|Average interest rate |  |                        | 5.34   | % |      |   | 5.34    | %    |  |   |       |   |  |      | 6.59    | % |            |   |        |       |  |   |           |   |  |   | 5.62    | % |  |   |        
|                      |  |                        |        |   |      |   |         |     
|Unsecured Variable    |  | $                      |       |   |      | $ |        |      |  | $ | 44,119 |   |  | $    |        |   |            | $ |        |       |  | $ |           |   |  | $ | 44,119  |   |  | $ | 44,119 
|Average interest rate |  |                        |       |   |      |   |        |      |  |   | 5.09   | % |  |      |        |   |            |   |        |       |  |   |           |   |  |   | 5.09    | % |  |   |        



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 $151,000, based upon the balances outstanding on variable rate instruments at June 30, 2005.



Item 4. Controls and Procedures



Restatement
of Previously Issued Financial Statements



As more fully described in Note
2 to the unaudited consolidated financial statements, in connection with the preparation of this quarterly report on Form 10-Q as of and for the period ended June 30, 2005, we determined that a correction was required to account for preferred and
common stock dividends in accordance with generally accepted accounting principles (GAAP). Our historical accounting was to record dividends in the period in which they were paid, rather than the period in which they were declared. The correction of
this accounting error will require a restatement of our consolidated financial statements as of and for the years ended December 31, 2003 and 2004 (including all interim periods for 2003 and 2004) and the consolidated financial statements as of and
for the quarter ended March 31, 2005. The restatement does not have an adverse impact on any covenants associated with our unsecured bank line of credit. We will file an amended Form 10-K for 2004 and an amended Form 10-Q for the first quarter of
2005 reflecting this restatement as soon as is practicable.



Disclosure
Controls and Procedures



We maintain disclosure controls and procedures
that are designed to ensure that information required to be disclosed in our SEC filings is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated
and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of disclosure controls and
procedures in Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply judgment in evaluating our controls and procedures.



Management, under the supervision and with the participation of our principal executive officer and principal financial officer, conducted
an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation and because of the material weakness described below, the principal
executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of June 30, 2005.



A material weakness is a control deficiency, or combination of control deficiencies, that results in a more than remote likelihood that a
material misstatement of the annual or interim financial statements will not be prevented or detected. As of December 31, 2004, and continuing as of June 30, 2005, we did not maintain effective controls related to the determination of dividends
declared in accordance with GAAP. Specifically, we did not maintain a formalized process to quantify and document the impact of accounting for dividends using the cash method of accounting rather than the accrual method as required by GAAP to ensure
that the difference had no material effect on the consolidated financial statements. This control deficiency resulted in the restatement of our consolidated financial statements for the years ended December 31, 2003 and 2004 (including all interim
periods for 2003 and 2004), as well as the first quarter of 2005, and adjustments in the second quarter of 2005. Additionally, this control deficiency would result in a misstatement of accrued dividends, preferred dividends and common dividends
which would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this



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condition constitutes a material weakness. As a result, we will also restate our managements report on internal control over financial reporting, to be
included in our amended Annual Report on Form 10-K/A for the year ended December 31, 2004, to report that our internal control over financial reporting was not effective as of December 31, 2004. We expect our prior independent registered public
accounting firm to also revise its previously issued opinion on the effectiveness of our internal controls over financial reporting as of December 31, 2004.



Changes in Internal Control over Financial Reporting



As a result of our adoption of the accrual method to account for preferred and common stock dividends described above, we are no longer required to have a control in
place to monitor the difference between accounting for dividends using the cash method and the accrual method. Accordingly, the material weakness described above has been remediated as of August 15, 2005.



There were no changes in internal control over financial reporting during the most recently
completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION



Item 1. Legal Proceedings



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



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



None.



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



At our annual meeting, held on May 4, 2005, in Redwood City, California, the following persons were duly elected by majority vote of the holders of our common stock to serve as Class I directors:



|                    |  |            |  |               
|------------------- |  | ---------- |  | --------------
|                    |  | Votes For  |  | Votes Withheld
|Richard C. Blum     |  | 19,085,589 |  | 12,731,592    
|Richard A. Magnuson |  | 29,799,238 |  | 2,017,943     



Item 6. Exhibits



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



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SIGNATURES



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



|                      |  |                                       |  |                                       
|--------------------- |  | ------------------------------------- |  | --------------------------------------
|                      |  | GLENBOROUGH REALTY TRUST INCORPORATED
|                      |  |                                      
|                      |  | By:                                   |  | Glenborough Realty Trust Incorporated,
|                      |  |                                      
|Date: August 15, 2005 |  |                                       |  | /s/ Andrew Batinovich                 
|                      |  |                                       |  | Andrew Batinovich                     
|                      |  |                                       |  | Director, President and               
|                      |  |                                       |  | Chief Executive Officer               
|                      |  |                                      
|Date: August 15, 2005 |  |                                       |  | /s/ Stephen Saul                      
|                      |  |                                       |  | Stephen Saul                          
|                      |  |                                       |  | Executive Vice President and          
|                      |  |                                       |  | Chief Financial Officer               
|                      |  |                                      
|Date: August 15, 2005 |  |                                       |  | /s/ Terri Garnick                     
|                      |  |                                       |  | Terri Garnick                         
|                      |  |                                       |  | Chief Accounting Officer              



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EXHIBIT INDEX



|            |  |                                                                                                                  
|----------- |  | -----------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Title                                                                                                    
|12.01       |  | Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Dividends.
|            | 
|31.01       |  | Section 302 Certification of Andrew Batinovich, Chief Executive Officer.                                         
|            | 
|31.02       |  | Section 302 Certification of Stephen R. Saul, Chief Financial Officer.                                           
|            | 
|32.01       |  | Section 906 Certification of Andrew Batinovich, Chief Executive Officer.                                         
|            | 
|32.02       |  | Section 906 Certification of Stephen R. Saul, Chief Financial Officer.                                           



59