SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

                                   (Mark One)

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

                         SECURITIES EXCHANGE ACT OF 1934

                    For Fiscal Year Ended: December 31, 1999

                                       OR

            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

                       THE SECURITIES EXCHANGE ACT OF 1934

                        For the transition period from to

                           Commission File No. 1-8383

                          MISSION WEST PROPERTIES, INC.

             (Exact name of registrant as specified in its charter)

              Maryland                                      95-2635431
              --------                                      ----------
   (State or other jurisdiction of                       (I.R.S. Employer
    Incorporation or organization)                        Identification

   10050 Bandley Drive, Cupertino, CA                         95014
(Address of principal executive offices)                    (Zip Code)

       Registrant's telephone number, including area code: (408) 725-0700

                                 ---------------

           Securities Registered Pursuant to Section 12(b) of the Act:

                                                Name of each exchange on
        Title of each class                         which registered

Common Stock, par value $.001 per share          American Stock Exchange
                                                  Pacific Exchange, Inc.

           Securities Registered Pursuant to Section 12(g) of the Act:

                                      NONE

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

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  registrant,  based upon the closing sale price of the Common Stock on March
15, 2000, as reported on the American Stock Exchange,  was approximately  $8.50.
As of March 15, 2000 there were  17,012,315  shares of the  Registrant's  Common
Stock outstanding.


<PAGE>


                       DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated by reference into this Form 10-K:

Form 8-K,  dated March 12, 1998, to report the Company's  change in  independent
auditors. This Form 8-K is incorporated by reference into Part I, Item 9.

                          FORWARD LOOKING INFORMATION

This annual report contains forward-looking statements within the meaning of the
federal securities laws. We intend such forward-looking statements to be covered
by the safe harbor provisions for  forward-looking  statements  contained in the
Private  Securities  Litigation  Reform  Act of  1995,  and are  including  this
statement  for  purposes  of  complying  with  these  safe  harbor   provisions.
Forward-looking statements,  which are based on certain assumptions and describe
future plans,  strategies and expectations of us, are generally  identifiable by
use  of the  words  "believe,"  "expect,"  "intend,"  "anticipate,"  "estimate,"
"project" or similar  expressions.  Our ability to predict results or the actual
effect of future plans or  strategies  is  inherently  uncertain.  Factors which
could have a material  adverse effect on the operations and future  prospects of
the Company  include,  but are not limited to, changes in:  economic  conditions
generally and the real estate  market  specifically,  legislative  or regulatory
provisions  affecting us  (including  changes to laws  governing the taxation of
REITs),  availability  of capital,  interest rates,  competition,  supply of and
demand for office and industrial  properties in our current and proposed  market
areas, and general accounting principles,  policies and guidelines applicable to
REITs.  These risks and  uncertainties,  together with the other risks described
from time to time in our reports and  documents  filed with the  Securities  and
Exchange  Commission,   should  be  considered  in  evaluating   forward-looking
statements and undue reliance should not be placed on such statements.  See Part
I, Item 1, "Risk Factors."

                                     - i -

<PAGE>






                          MISSION WEST PROPERTIES, INC.
                          1999 FORM 10-K ANNUAL REPORT

<TABLE>
<CAPTION>

                                Table of Contents

                                     PART I
                                                                                                  Page No.
                                                                                                  --------
<S>            <C>                                                                                  <C>
Item 1.         Business                                                                             1
Item 2.         Properties                                                                           16
Item 3.         Legal Proceedings                                                                    21
Item 4.         Submission of Matters to a Vote of Security Holders                                  21

                                     PART II

Item 5.         Market for the Registrant's Common Equity and Related                                22
Item 6.         Selected Financial Data                                                              23
Item 7.         Management's Discussion and Analysis of Financial
                Condition and Results of Operations                                                  26
Item 8.         Financial Statements and Supplementary Data                                          38
Item 9.         Changes in and Disagreements with Accountants on
                Accounting and Financial Disclosure                                                  78

                                    PART III

Item 10.        Directors and Executive Officers of the Registrant                                   79
Item 11.        Executive Compensation                                                               79
Item 12.        Security Ownership of Certain Beneficial Owners and Management                       80
Item 13.        Certain Relationships and Related Transactions                                       80

                                     PART IV

Item 14.        Exhibits, Financial Statements, Schedules and Reports on Form 8-K                    81

                Signatures                                                                           83

</TABLE>
                                     - ii -
<PAGE>



PART I

Item 1.  Business

ORGANIZATION AND GENERAL BUSINESS DESCRIPTION

     Mission West Properties, Inc. (the "Company") acquires, markets, leases and
manages R & D properties, primarily located in the Silicon Valley portion of the
San  Francisco  Bay  Area.  As of  December  31,  1999,  we own and  managed  80
properties  totaling  approximately 5.3 million square feet of R & D properties.
This class of property is designed for research and  development and office uses
and, in some  cases,  includes  space for light  manufacturing  operations  with
loading  docks.  We believe  that we have one of the largest portfolios of R & D
properties  in the Silicon  Valley.  The four  tenants who lease the most square
footage from us are Microsoft  Corporation,  Amdahl Corporation (a subsidiary of
Fujitsu  Limited),  Apple  Computer,  Inc. and Cisco Systems,  Inc. For the year
ended  December 31, 1999, we will elect to be taxed as a real estate  investment
trust   ("REIT")  for  federal  income  tax  purposes  and  will  operate  as  a
self-managed, self-administered and fully integrated REIT.

     Prior to July 1, 1998,  most of our properties  were under the ownership or
control  of Carl E.  Berg,  his  brother  Clyde J.  Berg,  the  members of their
respective immediate families, and certain entities in which Carl E. Berg and/or
Clyde J. Berg held controlling or other ownership  interests (the "Berg Group").
In addition,  we acquired ten properties  with  approximately  560,000  rentable
square  feet from  entities  controlled  by third  parties  in which  Berg Group
members were significant owners.

     Through  various  property  acquisition  agreements with the Berg Group, we
have the right to  purchase,  on  pre-negotiated terms, R & D and other types of
office  and light  industrial  properties  that the Berg Group  develops  in the
future. With in-house development, architectural and construction personnel, the
Berg Group continues to focus on a full range of land  acquisition,  development
and construction activities for R&D properties, often build-to-suit, to meet the
demands of Silicon Valley information  technology  companies.  As the developer,
the Berg Group takes on the risks of purchasing the land,  obtaining  regulatory
approvals and permits, financing construction and leasing the properties.  Since
September  1998,  we have acquired  approximately  733,000  additional  rentable
square feet of R&D properties from the Berg Group under these agreements.

OUR RELATIONSHIP WITH THE BERG GROUP

     Through a series of  transactions  occurring  between May 1997 and December
1998, we have become the vehicle for substantially all of the Silicon Valley R&D
property  activities of the Berg Group. We are now the general partner  pursuant
to the  partnership  agreements of the operating  partnerships  and,  along with
members of the Berg Group and other individuals, are party to an exchange rights
agreement, the pending projects acquisition agreement and the Berg land holdings
option  agreement.  Each agreement  defines the material  rights and obligations
among us, the Berg Group members,  and other parties to those agreements.  Among
other things, these agreements give us rights to:


     -    control the operating partnerships;

     -    acquire, on pre-negotiated terms, existing,  identified R&D properties
          under development by the Berg Group;

     -    acquire, on pre-negotiated  terms, all future R&D properties developed
          by the Berg Group on land  currently  owned or acquired in the future;
          and

     -    acquire R&D, office and industrial  properties  identified by the Berg
          Group in California, Oregon and Washington.

     Under these agreements,  our charter or our bylaws,  the Berg Group has the
right to:

     -    designate  two of five  nominees  for  director  to be  elected by our
          stockholders,  subject  to the Berg  Group's  maintenance  of  certain
          ownership interests;

     -    participate in our securities offerings;

     -    exchange their O.P. Units for our common stock;

                                     - 1 -
<PAGE>
     -    vote on major  transactions,  subject  to its  maintenance  of certain
          ownership interests; and

     -    prevent us from selling properties when the sale will have adverse tax
          consequences to it.

     -    prevent us from  selling  properties  when the sale will have  adverse
          consequences to the Berg Group members.

     Carl E. Berg, the Company's  President and Chief Executive  Officer and the
controlling  member of the Berg Group,  has been engaged in the  development and
long-term  ownership of Silicon Valley real estate for  approximately  30 years,
most  recently  through  Berg & Berg  Developers  ("Berg  &  Berg"),  a  general
partnership  of Carl E. Berg and Clyde J. Berg.  In 1969,  Mr. Berg  foresaw the
rising demand for efficient,  multi-purpose  facilities for the rapidly  growing
information  technology industry in the Silicon Valley.  Since 1972, in addition
to his real  estate  activities,  Mr.  Berg also has been  actively  involved in
venture  capital  investments in many  information  technology  companies in the
Silicon   Valley,   including   such  companies  as  Amdahl   Corporation,   Sun
Microsystems,  Inc., and Integrated Device  Technologies,  Inc. He serves on the
boards  of  directors  of  numerous  information  technology  companies.   These
activities  have helped Mr. Berg  develop a detailed  understanding  of the real
estate requirements of information technology companies, acquire valuable market
information  and increase his name  recognition  within the venture  capital and
entrepreneurial  communities.  These  activities also manifest his commitment to
the growth and success of Silicon Valley  companies.  We believe that Mr. Berg's
substantial  knowledge of and contacts in the  information  technology  industry
provide a significant benefit to the Company.

BUSINESS STRATEGY

     Our acquisition and growth strategy incorporates the following elements:

     -    working with the Berg Group to take  advantage of their  abilities and
          resources to pursue development  opportunities which we have an option
          to acquire, on pre-negotiated terms, upon completion and leasing;

     -    capitalizing  on  opportunistic  acquisitions  from  third  parties of
          high-quality R&D properties that provide attractive initial yields and
          significant potential for growth in cash-flow;

     -    focusing  on  general  purpose,   single-tenant   Silicon  Valley  R&D
          properties for information  technology  companies in order to maintain
          low  operating  costs,  reduce tenant  turnover and  capitalize on our
          relationships  with these  companies  and our  extensive  knowledge of
          their real estate needs; and

     -    maintaining  prudent  financial  management  principles that emphasize
          current cash flow while building  long-term  value, the acquisition of
          pre-leased  properties to reduce development and leasing risks and the
          maintenance of sufficient  liquidity to acquire and finance properties
          on desirable terms.

ACQUIRING PROPERTIES DEVELOPED BY THE BERG GROUP

     We anticipate that most of our growth in the  foreseeable  future will come
from the  acquisition  of new R&D  properties  that are either  currently  under
development  or  developed in the future by the Berg Group.  These  acquisitions
will be completed on pre-negotiated terms under the pending projects acquisition
agreement, as amended by the supplemental agreement,  and the Berg land holdings
option  agreement.  During 2000,  we expect to acquire a total of  approximately
735,000 additional rentable square feet currently under development. In addition
to projects currently under development, the Berg Land Holdings Option Agreement
gives us the right to acquire future developments by the Berg Group on up to 137
additional  acres of land  currently  controlled by the Berg Group,  which could
support  approximately  2.24 million square feet of new developments.  Under the
Berg Land Holdings Option Agreement, we also have an option to purchase all land
acquired,  directly or indirectly, by Carl E. Berg or Clyde J. Berg that has not
been approved with completed  buildings and which is zoned for,  intended for or
appropriate for research and development,  office and/or industrial  development
or use in the states of California,  Oregon and Washington.  In January 2000 the
Berg  Group  purchased  a 50%  interest  in  TBI-Mission  West,  LLC  which  has
approximately  62 net  acres  in  Morgan  Hill,  California  which  may  support
development of approximately 961,000 rentable square feet. In addition,  Carl E.
Berg has agreed  not to  directly  or  indirectly  acquire  or develop  any real
property  zoned for office,  industrial  or R&D use in the state of  California,
Oregon and  Washington  without  first  disclosing  and  making the  acquisition
opportunity  available to us. Our  Independent  Directors  committee will decide
whether  we will  assume  the  opportunity  presented  to us by Mr.  Berg.  This
restriction  will  expire  when there is no Berg  Group  nominee on our board of
directors  and the Berg Group's  fully diluted  ownership  percentage,  which is
calculated  based on all  outstanding  shares of common  stock and all shares of
common stock that could be acquired upon the exercise of all outstanding options
to acquire our voting stock, as well as all shares of common stock issuable upon
exchange of all O.P. Units, falls below 25%.

                                     - 2 -
<PAGE>

     PENDING PROJECTS ACQUISITION  AGREEMENT.  In December 1998, we entered into
the Pending Projects Acquisition Agreement with members of the Berg Group, under
which we will acquire  approximately 1.0 million additional rentable square feet
upon the  completion  and  leasing of a number of pending  development  projects
owned by them. To date, we have acquired  approximately  843,000 rentable square
feet of such properties.  Based upon the agreement,  when we acquire  properties
from the Berg group, the Berg Group members may obtain cash or, at their option,
O.P. Units for their equity interests in the properties.  We have reserved,  and
our stockholders  have approved,  the issuance of up to 33,919,072 shares of our
common stock upon  exchange of O.P.  Units  issuable in exchange for the pending
development  projects.  To date,  17,656,520 O.P. Units have been issued for new
property acquired under this agreement.

     We will acquire the pending projects upon the following terms:

     -    The acquisition price is payable in cash or, at the option of the Berg
          Group,  in O.P.  Units  valued at $4.50 per O.P.  Unit,  which was the
          price per share of our common stock in May 1998, when we agreed to the
          terms of the Pending Projects Acquisition Agreement.

     -    The Berg Group will build and deliver each completed and  fully-leased
          R&D  property in the  pending  development  projects to the  operating
          partnerships  at an  acquisition  price equal to the  average  monthly
          rental rate per square  foot over the term of the lease  divided by an
          agreed upon  capitalization  rate,  which is 14%,  minus the amount of
          debt encumbering the property.

     -    The closing for the acquisition of an individual R&D property within a
          project  will  occur only when the  building  has been  completed  and
          leased, unless otherwise agreed by the parties.

     -    Leases will be on commercially reasonable terms and conditions.

     -    The Berg Group may, at its option, offer projects under this agreement
          to  the   Company   at  any   acquisition   price  with  less  than  a
          capitalization rate of 14%.

     -    All  action  taken  by  us  under  the  Pending  Projects  Acquisition
          Agreement  must  be  approved  by a  majority  of the  members  of the
          independent directors committee of our board of directors.

     For a discussion of risks associated with the Pending Projects  Acquisition
Agreement and related transactions,  see "Risk Factors -Our contractual business
relationships  with the Berg Group  present  additional  conflicts  of interests
which may result in the realization of economic  benefits or the deferral of tax
liabilities by the Berg Group without equivalent benefits to our stockholders."

     The time  required to  complete  the  leasing of  developments  varies from
project to project.  Generally,  we will not  acquire any of the above  projects
until  they are  fully  completed  and  leased.  We cannot  assure  you that the
acquisition  date and final  cost to us as  indicated  above  will be  realized.
Although the capitalization rates have been agreed upon and will not change, the
sellers of the pending  development  projects  may elect to receive cash or O.P.
Units at the  value of $4.50 per  unit,  which was set in May 1998  based on the
selling price for our shares in private  placement  transactions  with unrelated
purchasers.  This valuation  represents a substantial  discount from the current
price of our common stock and may be  substantially  lower than the value of our
common stock at the future  issuance dates of the O.P.  Units.  Under  generally
accepted accounting  principles,  the acquisition cost in the form of O.P. Units
issued  will be  calculated  based upon the current  market  value of our common
stock on the date the acquisition closes. Consequently, our actual cost of these
future  acquisitions  as well as the actual  capitalization  rate for accounting
rather than cash  purposes  will depend in large part on the  percentage  of the
fixed  acquisition value paid for by the issuance of O.P. Units and the price of
the common stock on the closing of the acquisition.

     BERG LAND  HOLDINGS  OPTION  AGREEMENT.  We  believe  that  control of high
quality, developable land is an important strategic factor for continued success
in the Silicon  Valley  market.  In December 1998, we entered into the Berg Land
Holdings  Option  Agreement under which we have the option to acquire any future
R&D,  office  and  industrial  property  developed  by the  Berg  Group  on land
currently  owned,  optioned,  or  acquired  for these  purposes  in the  future,
directly or indirectly,  by Carl E. Berg or Clyde J. Berg. As of March 15, 2000,
we have  acquired  two  leased R&D  properties  totaling  approximately  187,000
rentable  square  feet under this  agreement  at a cost of  approximately  $16.7
million,   for  which  we  issued   673,256  O.P.  Units  and  assumed  debt  of
approximately  $10.5 million.  The principal terms of the agreement  include the
following:

     -    So long as the Berg Group members and their affiliates own or have the
          right to acquire shares  representing at least 65% of our common stock
          on a fully  diluted  basis,  we will have the  option to  acquire  any
          building

                                     - 3 -
<PAGE>
          developed by any member of the Berg Group on the land subject
          to the  agreement at such time as the  building has been leased.  Upon
          our exercise of the option, the option price will equal the sum of:

          1.   the full  construction  cost of the building;  plus
          2.   10% of the full construction cost of the building; plus
          3.   interest  at  LIBOR  plus  1.65%,  on  the  amount  of  the  full
               construction  cost of the  building  for the period from the date
               funds were  disbursed  by the  developer  to the close of escrow;
               plus
          4.   the  original  acquisition  cost  of  the  parcel  on  which  the
               improvements  will be  constructed,  which  range  from  $8.50 to
               $20.00 per square foot for land currently  owned; plus
          5.   10% per annum of the amount of the original  acquisition  cost of
               the parcel  from the later of  January  1, 1998 and the  seller's
               acquisition date, to the close of escrow; minus
          6.   the  aggregate  principal  amount  of all  debt  encumbering  the
               acquired property.

     -    The  acquisition  cost, net of any debt, will be payable in O.P. Units
          valued at the  average  closing  price of our  common  stock  over the
          30-trading-day  period  preceding the  acquisition  or in cash, at the
          option of the Berg Group.

     -    We also must assume all tax assessments.

     -    If we elect not to exercise the option with  respect to any  property,
          the Berg Group may hold and lease the property for its own account, or
          may sell it to a third party.

     -    All action taken by us under the Berg Land Holdings  Option  Agreement
          must be  approved  by a majority  of the  members  of the  Independent
          Directors committee of our board of directors.

     The following  table  presents  certain  information  concerning  currently
identified  land or  projects  that we have the right to acquire  under the Berg
Land Holdings Option Agreement.
<TABLE>
<CAPTION>



                                                     Approximate       Anticipated
                                                    Rentable Area      Acquisition       Total Estimated
Property                        Net Acres           (Square Feet)          Date          Acquisition Cost
----------------------      -------------------- ------------------- ---------------- ----------------------
                                                                                      (dollars in  thousands)
<S>                                <C>             <C>                     <C>             <C>
Under Development

Hellyer IV(1)                        10               160,000               Q2              $11,600 (50%)
Hellyer View                          6                77,184               Q3                9,300
Hellyer III (Phase I)                 7               117,740               Q4               14,800
Candescent (Phase I)                 24               255,000               Q1               25,000
Hellyer Vista (Phase I)               6               125,000               Q4               15,000
                            -------------------- -------------------                  ----------------------
               Subtotal              53               734,924                                $75,700
                            -------------------- -------------------

Available Land:

Morgan Hill(2)                       62               961,000 (1)
King Ranch                           56               889,000
Hellyer & Piercy                     47               763,000
Fremont & Cushing(3)                 24               387,000
Caspian Way                          10               200,000
              Subtotal              199             3,200,000
                            -------------------- -------------------

      TOTAL                         252             3,934,924
                            ==================== ===================
</TABLE>


(1)  This  property  will be operated and managed by the  Company and owned by a
     partnership in which the Company will own a approximate 50% interest.

(2)  The Company expects to own a approximate 50% interest in the partnership to
     be formed to  develop the property.  That partnership will be operated and
     managed by the other partner in the entity.

                                     - 4 -
<PAGE>

(3)  The Berg Group purchased this property in January 2000.

     The time  required to  complete  the  leasing of  developments  varies from
property to property.  Generally,  the Company will not acquire any of the above
projects  until they are fully  completed and leased.  There can be no assurance
that the acquisition  date and final cost to the Company as indicated above will
be  realized.  No  estimate  can be given at this time as to our  total  cost to
acquire  projects under the Berg Land Holdings Option  Agreement,  nor can we be
certain of the period in which we will acquire any of the projects.

     Although we expect to acquire the new properties  available to us under the
terms of the Pending Projects  Acquisition  Agreement and the Berg Land Holdings
Option Agreement, there can be no assurance that we actually will consummate any
of  the  intended   transactions,   including  all  of  those  discussed  above.
Furthermore,  we have not yet determined the means by which we would acquire and
pay for any such  properties  or the  impact of any of the  acquisitions  on our
business,  results of  operations,  financial  condition or  available  cash for
distribution. See "Risk Factors -Our contractual business relationships with the
Berg Group  present  additional  conflicts  of interest  which may result in the
realization of economic  benefits or the deferral of tax liabilities by the Berg
Group without equivalent benefits to our stockholders."

OPPORTUNISTIC ACQUISITIONS

     In  addition to our  principal  opportunities  under the  Pending  Projects
Acquisition  Agreement and the Berg Land Holdings Option  Agreement,  we believe
our acquisitions experience,  established network of real estate and information
technology  professionals  and  overall  financial  condition  will  continue to
provide   opportunities   for  external  growth.   In  general,   we  will  seek
opportunistic  acquisitions  of high quality,  well located  Silicon  Valley R&D
properties in situations where illiquidity or inadequate management permit their
acquisition at favorable  prices,  and where our management skills and knowledge
of Silicon Valley  submarkets  may  facilitate  increases in cash flow and asset
value.  Furthermore,  our  use  of the  operating  partnership  structure  gives
prospective  sellers the opportunity to contribute  properties on a tax-deferred
basis in  exchange  for O.P.  Units.  This  capacity  to  complete  tax-deferred
transactions  with sellers of real property will further  enhance our ability to
acquire additional properties.

FOCUS ON SINGLE TENANT SILICON VALLEY R&D PROPERTIES

     We intend to continue to emphasize the acquisition of single-tenant  rather
than multi-tenant  properties, a practice that has contributed to the relatively
low turnover and high  occupancy  rates on our  properties.  We believe that the
relatively  small number of tenants (88)  occupying  our 80  properties,  mostly
under the  triple-net  lease  structure,  allows us to  efficiently  manage  the
properties and to serve our tenants' needs without  extensive  in-house staff or
the assistance of a third-party property management  organization.  In addition,
this  emphasis  allows us to incur  less  expense  for tenant  improvements  and
leasing  commissions than  multi-tenant,  high turnover  property  owners.  This
strategy also reduces the time and expense  associated  with obtaining  building
permits and other governmental approvals. We believe that the relatively stable,
extended  relationships that we have developed with our key tenants are valuable
in the expansion of our business.

OPERATIONS

     We operate as a self-administered,  self-advised and self-managed REIT with
our own  employees.  Generally,  as the sole  general  partner of the  operating
partnerships,  we control the business and assets of the operating  partnerships
and have full and complete authority, discretion and responsibility with respect
to the operating partnerships' operations and transactions,  including,  without
limitation,  acquiring  additional  properties,  borrowing  funds,  raising  new
capital,  leasing  buildings  and selecting  and  supervising  all agents of the
operating partnerships.

     Although  most of our leases are triple net and  building  maintenance  and
tenant improvements are the responsibility of the tenants,  from time to time we
may be required to undertake construction and repair work at our properties.  We
will bid all major work  competitively  to  subcontractors.  Members of the Berg
Group may participate in the competitive bidding for the work.

     We generally will market the  properties and negotiate  leases with tenants
ourselves.  We make the  availability  of our properties  known to the brokerage
community to garner  their  assistance  in locating  prospective  tenants.  As a
result,  we expect to retain our policy of paying fixed  commissions to tenants'
brokers.

                                     - 5 -
<PAGE>
     We believe that our business practices, including the following, provide us
with competitive advantages:

     -    EXTERNAL DEVELOPMENT AFFILIATE.  The  Berg  Group  operates  as  our
          development  entity.  We  have  the  obligation  to  acquire  projects
          developed  by the Berg Group  under the Pending  Projects  Acquisition
          Agreement. We also have the option to purchase all future R&D, office,
          industrial  property  developments of the Berg Group on land currently
          held or acquired  directly or  indirectly  by Carl E. Berg or Clyde J.
          Berg that is zoned for  those  purposes  and  located  in  California,
          Oregon  and  Washington  following  completion  and  lease-up  of  the
          property.  Our option will terminate  when the Berg Group's  ownership
          percentage  falls  below  65%  of our  common  stock  calculated  on a
          fully-diluted  basis.  Carl E. Berg has agreed to refer to us, and not
          acquire through the Berg Group, all  opportunities to acquire the same
          kinds of real  property  in these  states  that he  identifies  in the
          future,  until the Berg  Group's  fully-diluted  ownership  percentage
          falls  below 25% and there is no Berg  Group  nominee  on our board of
          directors.  The acquisition  terms and conditions for the existing and
          identified  projects have been pre-negotiated and are documented under
          the Pending Project Acquisition Agreement,  and the Berg Land Holdings
          Option  Agreement.  This  relationship  provides us with the  economic
          benefits of  development  while  eliminating  development  and initial
          lease-up  risks.  It also  provides  us with access to one of the most
          experienced  development  teams  in the  Silicon  Valley  without  the
          expense of maintaining development personnel.

     -    LEAN, EXPERIENCED ORGANIZATION.  In part because of its primary focus
          on  Silicon  Valley,  its  experience  with the  special  real  estate
          requirements  of  information  technology  tenants  and the  long-term
          triple-net structure of its leases, the Company is able to conduct and
          expand its business with a small  management  team comprised of highly
          qualified and  experienced  professionals  working within a relatively
          flat  organizational  structure.  We believe that the leanness and our
          experience  will enable the  Company to rapidly  assess and respond to
          market  opportunities and tenant needs, control operating expenses and
          develop and maintain excellent  relationships with tenants. We further
          believe that these advantages translate into significantly lower costs
          for operations and give us the ability,  along with the Berg Group, to
          compete  favorably  with  other R&D  property  developers  in  Silicon
          Valley,  especially for build-to-suit  projects subject to competitive
          bidding.  Furthermore,  a lower  cost  structure  should  allow  us to
          generate better returns from  properties  whose value can be increased
          through appropriate remodeling and efficient property management.

     -    SOUND PROPERTY MANAGEMENT PRACTICES. For each property, the management
          team,  along with the Berg Group staff,  develop a specific  marketing
          and property  management program. We select vendors and subcontractors
          on a  competitive  bid basis from a select  group of highly  qualified
          firms  with  whom we  maintain  ongoing  relationships  and  carefully
          supervise their work.

OPERATING PARTNERSHIP AGREEMENTS

     Management

     The  operating  partnerships  consist  of four  separate  Delaware  limited
partnerships  engaged in the combined operation and ownership of our properties,
the operating partnership  agreements are identical in all material respects for
all four of the  limited  partnerships.  Generally,  pursuant  to the  operating
partnership  agreement,  we act as the sole  general  partner  of the  operating
partnerships,  in which capacity we have  exclusive  control of the business and
assets of the operating partnerships and full and complete authority, discretion
and responsibility  with respect to the operating  partnerships'  operations and
transactions,   including,   without  limitation,   acquisitions  of  additional
properties,  borrowing funds, raising new capital, leasing buildings, as well as
selecting   and   supervising   all   employees  and  agents  of  the  operating
partnerships.  Through our  authority to manage our  business  and affairs,  our
board of directors will direct the business of the operating partnerships.

     Notwithstanding  our effective control of the operating  partnerships,  the
consent of the limited partners holding a majority of the outstanding O.P. Units
is  required  with  respect  to  certain  extraordinary  actions  involving  the
operating partnerships, including:

     -    the   amendment,   modification   or   termination  of  the  operating
          partnership agreements;

     -    a general  assignment for the benefit of creditors or the  appointment
          of a  custodian,  receiver  or  trustee  for any of the  assets of the
          operating partnerships;

     -    the  institution  of any  proceeding  for  bankruptcy of the operating
          partnerships;

     -    the transfer of any general  partnership  interests  in the  operating
          partnerships,  including, with certain exceptions, transfers attendant
          to any merger, consolidation or liquidation of our corporation;

                                     - 6 -
<PAGE>
     -    the admission of any additional or substitute  general  partner in the
          operating partnerships; and

     -    a change of control of the operating partnerships.

     The Berg Group holds a substantial  majority of the outstanding O.P. Units.
In addition,  until the ownership  interest of the Berg Group and its affiliates
is less  than  15% of the  common  stock  on a fully  diluted  basis,  which  is
calculated  based on all  outstanding  shares of common  stock and all shares of
common stock that could be acquired upon the exercise of all outstanding options
to acquire our voting stock, as well as all shares of common stock issuable upon
exchange  of all O.P.  Units,  the  consent of the  limited  partners  holding a
majority of the outstanding O.P. Units is also required with respect to:

     -    the liquidation of the operating partnerships;

     -    the sale or other transfer of all or  substantially  all of the assets
          of  the  operating  partnerships  and  certain  mergers  and  business
          combinations  resulting in the complete disposition of all O.P. Units;
          and

     -    the issuance of limited  partnership  interests having seniority as to
          distributions, assets and voting over the O.P. Units.

     TRANSFERABILITY OF O.P. UNITS

     The operating  partnership agreement provides that the limited partners may
transfer their O.P. Units,  subject to certain  limitations.  Except for certain
transfers  by the  limited  partners  to or from  certain  of their  affiliates,
however,  all transfers  may be made only with our prior written  consent as the
sole general partner of the operating partnerships.

     In addition,  no transfer of O.P. Units by the limited partners may be made
in  violation  of certain  regulatory  and other  restrictions  set forth in the
operating  partnership  agreement.  Except  in the  case  of  certain  permitted
transfers to or from certain  affiliates of the limited  partners,  the exchange
rights,  the put rights,  rights to participate in future equity  financings and
provisions  requiring  the  approval  of certain  limited  partners  for certain
matters  will no longer be  applicable  to O.P.  Units so  transferred,  and the
transferee  will  not  have any  rights  to  nominate  persons  to our  board of
directors.

     ADDITIONAL CAPITAL CONTRIBUTIONS AND LOANS

     Each  operating  partnership  agreement  provides  that,  if the  operating
partnership  requires additional funds to pursue its investment  objectives,  we
may fund such  investments  by raising  additional  equity  capital and making a
capital  contribution  to the operating  partnerships or by borrowing such funds
and lending the net proceeds of such loans to the operating partnerships.  If we
intend to  provide  additional  funds  through a  contribution  to  capital  and
purchase of units of general  partnership  interest,  the limited  partners will
have the right to  participate  in such funding on a pro rata,  pari passu basis
and to acquire additional O.P. Units. If the limited partners do not participate
in such  financing,  we will  acquire  additional  units of general  partnership
interest.

     In either case, the number of additional units of partnership interest will
be increased based upon the amount of the additional  capital  contributions and
the value of the operating  partnerships as of the date such  contributions  are
made.

     In addition, as general partner of the operating partnerships,  we have the
ability to cause the operating  partnerships to issue  additional O.P. Units. In
the event that the operating  partnerships issue new O.P. Units for cash but not
property, the limited partners will have the right to purchase new O.P. Units at
the price we offer in the transaction giving rise to such participation right in
order,  and to the extent  necessary,  to maintain their  respective  percentage
interests in the operating partnerships.

     EXCHANGE RIGHTS, PUT RIGHTS AND REGISTRATION RIGHTS

     Under the  Exchange  Rights  Agreement  between the Company and the limited
partners,  the limited  partners have exchange  rights,  that  generally  became
exercisable on December 29, 1999. The Exchange  Rights  Agreement  permits every
limited  partner to tender O.P.  Units to us, and, at our  election,  to receive
common stock on a one-for-one basis at then-current  market value, an equivalent
amount of cash,  or a  combination  of cash and common stock in exchange for the
O.P. Units tendered, subject to the ownership limit, or the Berg Group ownership
limit, as the case may be. In addition,  once in each 12-month period  beginning
on December 29,  1999,  the limited  partners,  other than Mr. Berg and Clyde J.
Berg,  have the right to exchange  their O.P.  Units for shares of common stock,
subject to the  ownership  limit in our charter,  and to exercise a put right to
sell their O.P.  Units to the  operating  partnerships  at a price  equal to the
average  market  price  of the  common  stock  for  the  10-trading  day  period
immediately  preceding the date of tender.  Upon any exercise of the put rights,
we will  have  the

                                     - 7 -
<PAGE>
opportunity  for a period of 15 days to elect to fund the  purchase  of the O.P.
Units  and  purchase  additional  general  partner  interests  in the  operating
partnerships  for cash,  unless  the  purchase  price  exceeds $1 million in the
aggregate  for all  tendering  limited  partners,  in which case,  the operating
partnerships or we shall be entitled to reduce proportionally the number of O.P.
Units to be  acquired  from each  tendering  limited  partner  so that the total
purchase price is not more than $1 million.

     The Exchange Rights  Agreement gives the holders of O.P. Units the right to
participate in any registered  public  offering of the common stock initiated by
us to the extent of 25% of the total shares sold in the offering upon converting
O.P. Units to shares of common stock, but subject to the underwriters' unlimited
right to reduce the  participation of all selling  stockholders.  The holders of
O.P.  Units will be able to  request  resale  registrations  of shares of common
stock acquired on exchange of O.P.  Units on a Form S-3, or any equivalent  form
of  registration  statement.  We are  obligated  to effect no more than two such
registrations in any 12-month  period.  We are obligated to assist the O.P. Unit
holders in obtaining a firm  commitment  underwriting  agreement for such resale
from a qualified  investment  banking firm. If  registration  on Form S-3, or an
equivalent form, is not available for any reason, we will be obligated to effect
a registration  of the shares to be acquired on exercise of the exchange  rights
on Form S-11, or an equivalent form, in an underwritten  public  offering,  upon
demand by the holders of no fewer than 500,000 O.P.  Units.  All holders of O.P.
Units will be entitled to  participate  in such  registration.  We will bear all
costs of such registrations other than selling expenses,  including  commissions
and separate counsels' fees of the O.P. Unit holders. We will not be required to
effect any  registration  for resale on Form S-3, or  equivalent  form of common
stock  shares  issuable  to the holder of O.P.  Units if the request is for less
than 250,000 shares.

     OTHER MATTERS

     The   operating   partnership   agreements   require  that  the   operating
partnerships  be  operated  in a manner  that  will  enable  us to  satisfy  the
requirements  for being  classified as a REIT and to avoid any federal income or
excise tax liability.

     The  operating  partnership   agreements  provide  that  the  combined  net
operating cash flow from all of the operating partnerships, as well as net sales
and refinancing proceeds, will be distributed from time to time as determined by
our board of directors,  but not less  frequently  than  quarterly,  pro rata in
accordance   with  the   partners'   percentage   interests  in  the   operating
partnerships, taken as a whole. This provision is intended to cause the periodic
distributions  per O.P. Unit and per share of our common stock to be equal. As a
consequence of this provision,  the capital interest of a partner in each of the
operating partnerships,  including our capital interests,  might at times differ
significantly from the partner's  percentage interest in the net income and cash
flow of that  operating  partnership.  We do not believe  that such  differences
would have a material impact our business, financial condition or FAD, however.

     Pursuant  to  the   operating   partnership   agreements,   the   operating
partnerships  will also assume and pay when due, or reimburse us for payment of,
certain  costs  and  expenses  relating  to  our  continuity  of  existence  and
operations.

     The operating partnership  agreements provide that, upon the exercise of an
outstanding  option  under the 1997  option  plan,  we may  purchase  additional
general partner  interests in the operating  partnerships  by  contributing  the
exercise proceeds to the operating partnerships. Our increased interest shall be
equal to the percentage of outstanding  shares of common stock and O.P. Units on
an  as-converted  basis  represented by the shares acquired upon exercise of the
option.

TERM

     The  operating  partnerships  will  continue in full force and effect until
December  31,  2048 or  until  sooner  dissolved  pursuant  to the  terms of the
operating partnership agreement.

EMPLOYEES

     As of March  15,  2000,  we  employed  5  people,  all of whom  work at our
executive offices at 10050 Bandley Drive, Cupertino, California, 95014.

FACILITIES

     We sublease  office  space from the Berg Group at 10050  Bandley  Drive and
share clerical staff and other overhead on what we consider to be very favorable
terms. The total monthly rent payable by us to the Berg Group is $6,720.

                                     - 8 -

<PAGE>

RISK FACTORS

YOU SHOULD  CAREFULLY  CONSIDER THE  FOLLOWING  RISKS,  TOGETHER  WITH THE OTHER
INFORMATION  CONTAINED IN ANNUAL REPORT ON FORM 10-K. THE FOLLOWING RISKS RELATE
PRINCIPALLY TO OUR BUSINESS AND THE INDUSTRY IN WHICH WE OPERATE.  THE RISKS AND
UNCERTAINTIES CLASSIFIED BELOW ARE NOT THE ONLY ONES WE FACE.

WE ARE  DEPENDENT ON CARL E. BERG,  AND IF WE LOSE HIS SERVICES OUR BUSINESS MAY
   BE HARMED AND OUR STOCK PRICE COULD FAll.

     We are  substantially  dependent  upon the  leadership of Carl E. Berg, our
Chairman, President and Chief Executive Officer. Losing Mr. Berg's knowledge and
abilities could have a material  adverse effect on our business and the value of
our common  stock.  Mr. Berg  manages our  day-to-day  operations  and devotes a
significant  portion  of his time to our  affairs,  but he has a number of other
business  interests as well. These other activities  reduce Mr. Berg's attention
to our business.

MR.  BERG  AND  HIS  AFFILIATES  EFFECTIVELY  CONTROL  OUR  CORPORATION  AND THE
   OPERATING  PARTNERSHIPS  AND MAY  ACT IN  WAYS  THAT ARE  DISADVANTAGEOUS  TO
   OTHER STOCKHOLDERS.

     SPECIAL BOARD VOTING PROVISIONS.  Our governing corporate documents,  which
are our  articles of  amendment  and  restatement,  or charter,  and our bylaws,
provide  substantial control rights for the Berg Group. The Berg Group's control
of our  corporation  means that the value and returns from an  investment in the
Company's  common stock are subject to the Berg Group's  exercise of its rights.
These  rights  include a  requirement  that Mr. Berg or his designee as director
approve  certain  fundamental  corporate  actions,  including  amendments to our
charter and bylaws and any merger, consolidation or sale of all or substantially
all of our assets.  In addition,  our bylaws provide that a quorum  necessary to
hold a valid  meeting of the board of  directors  must  include  Mr. Berg or his
designee. The rights described in the two preceding sentences apply only as long
as the Berg Group members and their affiliates,  other than us and the operating
partnerships,   beneficially  own,  in  the  aggregate,  at  least  15%  of  our
outstanding shares of common stock on a fully diluted basis, which is calculated
based on all  outstanding  shares of common stock and all shares of common stock
that could be acquired upon the exercise of all  outstanding  options to acquire
our voting stock,  as well as all shares of common stock  issuable upon exchange
of all O.P.  Units.  Also,  directors  representing  more than 75% of the entire
board  of  directors  must  approve  other  significant  transactions,  such  as
incurring debt above certain amounts and conducting  business other than through
the  operating  partnerships.  Without the approval of Mr. Berg or his designee,
board of directors  approval that we may need for actions that might result in a
sale of your stock at a premium or raising  additional capital when needed could
be difficult or impossible to obtain.

     BOARD OF DIRECTORS REPRESENTATION. The Berg Group members have the right to
designate  two of the director  nominees  submitted by our board of directors to
stockholders  for  election,  as  long  as the  Berg  Group  members  and  their
affiliates,  other than us and the operating partnerships,  beneficially own, in
the aggregate, at least 15% of our outstanding shares of common stock on a fully
diluted basis,  which is calculated  based on all  outstanding  shares of common
stock and all shares of common stock that could be acquired upon the exercise of
all  outstanding  options to acquire our voting stock,  as well as all shares of
common stock  issuable  upon  exchange of all O.P.  Units.  If the fully diluted
ownership of the Berg Group members and their affiliates,  other than us and the
operating  partnerships,  is less  than  15% but is at least  10% of the  common
stock,  the Berg Group  members have the right to designate  one of the director
nominees  submitted by our board of directors to stockholders for election.  Its
right to designate director nominees affords the Berg Group substantial  control
and influence  over the management  and direction of our  corporation.  The Berg
Group's  interests  could conflict with the interests of our  stockholders,  and
could adversely affect the price of our common stock.

     SUBSTANTIAL  OWNERSHIP  INTEREST.  The Berg Group currently owns O.P. Units
representing  approximately  77.4%  of the  equity  interests  in the  operating
partnerships and approximately  77.5% of our equity interests on a fully diluted
basis,  which is calculated based on all outstanding  shares of common stock and
all shares of common  stock  that could be  acquired  upon the  exercise  of all
outstanding options to acquire our voting stock, as well as all shares of common
stock issuable upon exchange of all O.P. Units.  The O.P. Units may be converted
into shares of common stock, subject to limitations set forth in our charter and
other agreements with the Berg Group, and upon conversion would represent voting
control of our corporation.  The Berg Group's ability to exchange its O.P. Units
for common stock permits it to exert  substantial  influence over the management
and direction of our corporation. This influence increases our dependence on the
Berg Group.

     LIMITED  PARTNER  APPROVAL  RIGHTS.  Mr. Berg and other  limited  partners,
including  other  members of the Berg Group,  may  restrict our  operations  and
activities  through rights  provided under the terms of the amended and restated
agreement  of  limited   partnership   which   governs  each  of  the  operating
partnerships  and our legal  relationship  to each operating  partnership as its

                                     - 9 -
<PAGE>

general partner.  Matters requiring approval of the holders of a majority of the
O.P.  Units,  which  necessarily  would  include  the Berg  Group,  include  the
following:

     -    the  amendment,  modification  or  termination of any of the operating
          partnership agreements;

     -    the  transfer of any  general  partnership  interest in the  operating
          partnerships,  including, with certain exceptions, transfers attendant
          to any merger, consolidation or liquidation of our corporation;

     -    the admission of any additional or substitute  general partners in the
          operating partnerships;

     -    any other change of control of the operating partnerships;

     -    a general  assignment for the benefit of creditors or the  appointment
          of a  custodian,  receiver  or  trustee  for any of the  assets of the
          operating partnerships; and

     -    the  institution  of  any  bankruptcy  proceeding  for  any  operating
          partnership.

     In addition, as long as the Berg Group members and their affiliates,  other
than us and the operating  partnerships,  beneficially own, in the aggregate, at
least 15% of the  outstanding  shares of common stock on a fully diluted  basis,
which is  calculated  based on all  outstanding  shares of common  stock and all
shares  of  common  stock  that  could  be  acquired  upon the  exercise  of all
outstanding options to acquire our voting stock, as well as all shares of common
stock  issuable  upon  exchange  of all O.P.  Units,  the consent of the limited
partners  holding the right to vote a majority of the total number of O.P. Units
outstanding is also required with respect to:

     -    the sale or other transfer of all or  substantially  all of the assets
          of  the  operating  partnerships  and  certain  mergers  and  business
          combinations resulting in the complete disposition of all O.P. Units;

     -    the issuance of limited partnership interests senior to the O.P. Units
          as to distributions, assets and voting; and

     -    the liquidation of the operating partnerships.

     The liquidity of an investment in the Company's common stock, including our
ability to respond to  acquisition  offers,  will be subject to the  exercise of
these rights.

OUR CONTRACTUAL  BUSINESS  RELATIONSHIPS  WITH THE BERG GROUP PRESENT ADDITIONAL
   CONFLICTS  OF  INTEREST  WHICH  MAY  RESULT  IN  THE  REALIZATION OF ECONOMIC
   BENEFITS  OR  THE  DEFERRAL OF TAX  LIABILITIES  BY  THE  BERG  GROUP WITHOUT
   EQUIVALENT BENEFITS TO OUR STOCKHOLDERS

     Our  contracts  with the Berg Group  provide it with  interests  that could
conflict with those of our other stockholders, including the following:

     -    our headquarters are leased from an entity owned by the Berg Group, to
          whom we pay rent of approximately $6,700 per month;

     -    the Berg Group is  permitted  to  conduct  real  estate  and  business
          activities other than our business;

     -    if we decline  an  opportunity  that has been  offered to us, the Berg
          Group may pursue it,  which  would  reduce the amount of time that Mr.
          Berg could  devote to our affairs and could result in the Berg Group's
          development  of  properties  that  compete  with  our  properties  for
          tenants;

     -    in general, we have agreed to limit the liability of the Berg Group to
          our  corporation  and our  stockholders  arising from the Berg Group's
          pursuit of these other opportunities;

     -    we acquired most of our  properties  from the Berg Group on terms that
          were not  negotiated  at  arm's  length  and  without  many  customary
          representations  and  warranties  that  we  would  have  sought  in an
          acquisition from an unrelated party; and

     -    we have  assumed  liability  for debt to the Berg  Group  and debt for
          which the Berg Group was liable.

                                     - 10 -
<PAGE>

     The Berg Group has agreed that the independent  directors  committee of our
board of directors must approve all new  transactions  between us and any of its
members, or between us and any entity in which it directly or indirectly owns 5%
or more of the equity interests,  including the operating  partnerships for this
purpose.   This  committee   currently  consists  of  three  directors  who  are
independent of the Berg Group.

     EXCLUDED PROPERTIES.  With our prior knowledge, the Berg Group retained two
R&D properties in Scotts Valley, Santa Cruz County,  California, in which we and
the operating partnerships have no ownership interest. Efforts of the Berg Group
to lease these other  properties  could  interfere  with similar  efforts on our
behalf.

     PENDING  DEVELOPEMENT  PROJECTS.  We and the  operating  partnerships  have
agreed under the terms of a Pending  Projects  Acquisition  Agreement to acquire
from the Berg  Group  two  additional  R&D  properties  potentially  aggregating
approximately  175,000 rentable square feet as each is completed and leased. The
purchase  price  for  each  property  will  be  calculated   based  on  a  fixed
capitalization  rate applied to actual average rental rates on the property over
the lease term. We currently estimate that the aggregate purchase price of these
two  properties,  assuming  payment in cash and/or  assumption of debt,  will be
approximately  $24.0  million.  The Berg Group may elect to receive cash or O.P.
Units,  valued at $4.50 per unit,  which value was set when we entered  into the
acquisition agreement with the Berg Group in May 1998. Our stock was not trading
at that time.  As the market price of a share of common stock was $8.50 at March
15, 2000,  this  valuation  represents a  substantial  discount from the current
market  value of the common  stock that may be issued in exchange for these O.P.
Units. Our issuance of O.P. Units to acquire any of these properties, instead of
paying cash, may result in a higher acquisition cost and additional depreciation
expenses that reduce our net income per share.  Acquisitions  of additional O.P.
Units by the Berg Group will increase the Berg Group's ownership interest in our
business  and could reduce the amount of cash  available  for  distribution  per
share to our other stockholders which could cause our stock price to fall.

     The Berg Group's  election to receive cash in place of O.P. Units for these
properties  and to place debt on the  properties  that we would be  required  to
assume would reduce our  liquidity  and could  increase our debt to total market
capitalization  ratio. These factors could harm our business and cause our stock
price to fall, while the Berg Group receives substantial benefits.

     BERG LAND HOLDINGS.  The Berg Group owns several parcels of unimproved land
in the Silicon Valley that we and the operating  partnerships  have the right to
acquire  under the terms of the Berg Land  Holdings  Option  Agreement.  We have
agreed to pay a fixed amount plus  additional  charges for any of the properties
that we do acquire.  We must pay the  acquisition  price in cash unless the Berg
Group elects,  in its  discretion,  to receive O.P.  Units valued at the average
market price of a share of common stock during the 30-day  period  preceding the
acquisition  date. At the time of acquisition,  which is subject to the approval
of  the  independent  directors  committee  of our  board  of  directors,  these
properties may be encumbered by debt that we or the operating  partnerships will
be  required  to  assume  or repay.  The use of our cash or an  increase  in our
indebtedness to acquire these properties could have a material adverse effect on
our  financial  condition,  results  of  operations  and  ability  to make  cash
distributions to our stockholders.

     TAX CONSEQUENCES OF SALE OF PROPERTIES. Because many of our properties have
unrealized  taxable gain, a sale of those properties could create adverse income
tax  consequences for limited  partners of the operating  partnerships.  We have
agreed with Carl E. Berg, Clyde J. Berg and John Kontrabecki,  a limited partner
in  some  of the  operating  partnerships,  that  each  can  prevent  us and the
operating  partnerships  from  selling  or  transferring  properties  that  were
directly  or  indirectly  acquired  from him in the  UPREIT  acquisition  in any
taxable  transaction prior to December 29, 2008. As a result,  our opportunities
to sell  these  properties  may be  limited.  If we need  to sell  any of  these
properties to raise cash to service our debt,  acquire new properties,  pay cash
distributions to stockholders or for other working capital  purposes,  we may be
unable to do so. These  restrictions could harm our business and cause our stock
price to fall.

     TERMS OF TRANSFERS:  ENFORCEMENT OF AGREEMEnT OF LIMITED PARTNERSHIP.  The
terms of the Pending  Projects  Acquisition  Agreement,  the Berg Land  Holdings
Option Agreement,  the partnership  agreement of each operating  partnership and
other  material  agreements  through which we have acquired our interests in the
operating  partnerships and the properties formerly controlled by the Berg Group
were  not  determined  through  arm's-length  negotiations,  and  could  be less
favorable to us than those obtained from an unrelated  party.  In addition,  Mr.
Berg and representatives of the Berg Group sitting on our board of directors may
be subject to conflicts of interests  with respect to their  obligations  as our
directors to enforce the terms of the  partnership  agreement of each  operating
partnership when such terms conflict with their personal interests. The terms of
our  charter  and  bylaws  also  were  not   determined   through   arm's-length
negotiations.  Some of these terms,  including  representations  and  warranties
applicable to acquired  properties,  are not as favorable as those that we would
have sought  through  arm's-length  negotiations  with unrelated  parties.  As a
result,  an  investment  in our  common  stock  may  involve  risks not found in
businesses  in which the terms of material  agreements  have been  negotiated at
arm's length.

                                     - 11 -
<PAGE>

     RELATED  PARTY DEBT.  As of  December  31,  1999,  we were liable for loans
aggregating  approximately  $31.2 million  payable to the Berg Group.  Effective
March 1, 2000,  the Berg Group  extended to the Company a $50.0  million line of
credit which is secured by seven of our  properties  and expires  March 2001. We
have the right to draw on the line of credit and are liable for repayment of all
amounts  owing under the line of credit.  All of these loans bear interest at an
annual rate of LIBOR plus 1.30  percent.  If we are unable to repay our debts to
the Berg Group when due, the Berg Group could take action to enforce our payment
obligations.  Loan defaults of this type could  materially  adversely affect our
business,  financial condition and our results of operations and cause our stock
price to fall.  They also could result in a substantial  reduction in the amount
of cash  distributions  to our  stockholders.  In  turn,  if we fail to meet the
minimum distributions test because of a loan default or another reason, we could
lose  our  REIT  classification  for  federal  income  tax  purposes.  For  more
information  please  refer to " --- ---  Failure to satisfy  federal  income tax
requirements  for REIT's could reduce our  distributions,  reduce our income and
cause our stock price to fall.

OUR  OPTION TO  ACQUIRE  R&D  PROPERTIES  DEVELOPED  ON  EXISTING  LAND AND LAND
   ACQUIRED IN THE FUTURE BY THE BERG GROUP WILL TERMINATE WHEN THE BERG GROUP'S
   OWNERSHIP INTEREST HAS BEEN REDUCED.

     The Berg Land Holdings Option Agreement, as amended, which provides us with
significant benefits and opportunities to acquire additional R&D properties from
the Berg Group, will expire when the Berg Group and their affiliates  (excluding
us and the  operating  partnerships)  own less than 65% of our common stock on a
fully diluted  basis,  which is calculated  based on all  outstanding  shares of
common  stock and all shares of common  stock that  could be  acquired  upon the
exercise  of all  outstanding  options to acquire our voting  stock,  as well as
shares of common stock issuable upon exchange of all O.P. Units.  Termination of
the Berg Land  Holdings  Option  Agreement  could  result in  limitation  of our
growth, which could cause our stock price to fall.

WE MAY CHANGE OUR  INVESTMENT  AND  FINANCING  POLICIES AND  INCREASE  YOUR RISK
   WITHOUT STOCKHOLDER APPROVAL.

     Our board of directors  determines the investment and financing policies of
the  operating  partnerships  and our  policies  with  respect to certain  other
activities, including our business growth, debt capitalization, distribution and
operating policies.  Our board of directors may amend these policies at any time
without a vote of the  stockholders.  Changes in these policies could materially
adversely affect our financial  condition,  results of operations and ability to
make cash  distributions to our stockholders,  which could harm our business and
cause our stock price to fall. For more information please refer to "Item 7. ---
Managements  Discussion  and  Analysis  of  Financial  Condition  and Results of
operations Policies with Respect to Certain Activities."

ANTI-TAKEOVER  PROVISIONS IN OUR CHARTER COULD PREVENT ACQUISITIONS OF OUR STOCK
   AT A SUBSTANTIAL PREMIUM.

     Provisions  of our charter and our bylaws could  delay,  defer or prevent a
transaction or a change in control of our corporation, or a similar transaction,
that might  involve a premium  price for our shares of common stock or otherwise
be in the best interests of our stockholders. Provisions of the Maryland general
corporation  law,  which would apply to  potential  business  combinations  with
acquirers  other  than the Berg  Group or  stockholders  who  invested  in us in
December 1998, also could prevent the acquisition of our stock for a premium, as
discussed in "Certain Provisions of Maryland Law and of our Charter and Bylaws."

AN INVESTMENT  IN OUR STOCK  INVOLVES  RISKS RELATED TO REAL ESTATE  INVESTMENTS
   THAT COULD HARM OUR BUSINESS AND CAUSE OUR STOCK PRICE TO FALL.

     RENTAL  INCOME  VARIES.  Real property  investments  are subject to varying
degrees of risk.  Investment  returns available from equity  investments in real
estate  depend  in  large  part on the  amount  of  income  earned  and  capital
appreciation  which our  properties  generate,  as well as our related  expenses
incurred.  If our  properties  do  not  generate  revenues  sufficient  to  meet
operating  expenses,  debt  service  and  capital  expenditures,  our income and
ability to make  distributions to our stockholders  will be adversely  affected.
Income from our  properties may also be adversely  affected by general  economic
conditions,  local  economic  conditions  such as oversupply of commercial  real
estate, the attractiveness of our properties to tenants and prospective tenants,
competition  from  other  available  rental  property,  our  ability  to provide
adequate  maintenance and insurance,  the cost of tenant  improvements,  leasing
commissions  and tenant  inducements  and the  potential of increased  operating
costs, including real estate taxes.

     EXPENDITURES FOR PROPERTY  OWNERSHIP ARE FIXED.  Income from properties and
real  estate  values are also  affected by a variety of other  factors,  such as
governmental  regulations and applicable laws, including real estate, zoning and
tax laws,  interest  rate  levels and the  availability  of  financing.  Various
significant  expenditures  associated with an investment in real estate, such as
mortgage payments, real estate taxes and maintenance expenses, generally are not
reduced when  circumstances

                                     - 12 -
<PAGE>

cause a reduction in revenue from the  investment.  Thus, our operating  results
and our cash flow may decline materially if our rental income is reduced.

     ILLIQUIDITY.  Real estate investments are relatively illiquid, which limits
our ability to  restructure  our portfolio in response to changes in economic or
other conditions.

     GEOGRAPHIC CONCENTRATION. All of our properties are located in the southern
portion of the San  Francisco  Bay Area  commonly  referred  to as the  "Silicon
Valley." The Silicon  Valley economy has been strong for the past several years,
but  future  increases  in  values  and  rents  for our  properties  depend to a
significant extent on the health of this region's economy.

     LOSS OF KEY TENANTS. Most of our properties are occupied by single tenants,
many of whom are large, publicly traded information technology companies. Losing
a key tenant could  adversely  affect our  operating  results and our ability to
make  distributions  to  stockholders  if we are  unable to  obtain  replacement
tenants promptly.

     TENANT  BANKRUPTCIES.   Key  tenants  could  seek  the  protection  of  the
bankruptcy  laws,  which could result in the rejection and  termination of their
leases, thereby causing a reduction in our income.

     OUR  SUBSTANTIAL  INDEBTEDNESS.  Our  properties are subject to substantial
indebtedness.  If we are unable to make  required  mortgage  payments,  we could
sustain a loss as a result of  foreclosure  on our  properties by the mortgagor.
Failure  to renew or replace  the Berg  Group line of credit  when it expires in
March 2001 would  materially  affect our  business and affect our ability to pay
dividends to stockholders. We cannot assure you that we will be able to obtain a
replacement  line of credit with terms similar to the Berg Group line of credit,
or at all. Our cost of borrowing  funds could increase  substantially  after the
Berg Group line of credit  expires.  We have adopted a policy of  maintaining  a
consolidated  ratio of debt to total market  capitalization,  which includes for
this  purpose  the  market  value  of all  shares  of  common  stock  for  which
outstanding O.P. Units are exchangeable, of less than 50%. This ratio may not be
exceeded without the approval of more than 75% of our entire board of directors.
Our board of  directors  may vote to change this policy,  however,  and we could
become more highly  leveraged,  resulting in an increased risk of default on our
obligations  and an increase in debt service  requirements  that could adversely
affect our financial  condition,  our operating  results and our ability to make
distributions to our stockholders.

     ENVIRONMENTAL CLEAN-UP LIABILITIES.  Our properties and properties formerly
held  by  our  subsidiaries  may  expose  us  to  liabilities  under  applicable
environmental and health and safety laws. If these liabilities are material, our
financial  condition  and  ability  to pay cash  distributions  may be  affected
adversely, which would cause our stock price to fall.

     UNINSURED  LOSSES.  We may sustain uninsured losses with respect to some of
our  properties.  If these losses are  material,  our financial  condition,  our
operating results and our ability to make  distributions to our stockholders may
be affected adversely.

     EARTHQUAKE  DAMAGES ARE  UNINSURED.  All of our  properties  are located in
areas that are subject to earthquake  activity.  Our  insurance  policies do not
cover  damage  caused by seismic  activity,  although  they do cover losses from
fires after an earthquake.  We generally do not consider such insurance coverage
to be economical.  If an earthquake occurs and results in substantial  damage to
our  properties,  we could lose our investment in those  properties,  which loss
would have a material adverse effect on our financial  condition,  our operating
results and our ability to make distributions to our stockholders.

FAILURE TO SATISFY FEDERAL INCOME TAX  REQUIREMENTS  FOR REIT'S COULD REDUCE OUR
   DISTRIBUTIONS, REDUCE OUR INCOME AND CAUSE OUR STOCK PRICE TO FALL.

     FAILURE  TO  QUALIFY  AS A REIT.  We intend to elect to be a REIT and to be
taxed as such under the federal  income tax laws for the year ended December 31,
1999.  Although we currently intend to operate in a manner designed to enable us
to qualify and maintain our REIT status,  it is possible that economic,  market,
legal, tax or other  considerations may cause us to fail to qualify as a REIT or
may cause our board of directors either to refrain from making the REIT election
or to revoke that  election  once made.  To maintain  REIT status,  we must meet
certain  tests for income,  assets,  distributions  to  stockholders,  ownership
interests and other significant  conditions.  If we fail to qualify as a REIT in
any taxable year, we will not be allowed a deduction  for  distributions  to our
stockholders  in  computing  our taxable  income and would be subject to federal
income tax,  including any  applicable  alternative  minimum tax, on our taxable
income at regular corporate rates.  Moreover,  unless we were entitled to relief
under  certain  provisions  of the tax  laws,  we  would  be  disqualified  from
treatment as a REIT for the four taxable  years  following the year in which our
qualification  was lost. As a result,  funds  available for  distribution to our
stockholders  would be reduced for each of the years  involved and, in addition,
we would no longer be required to make distributions to our stockholders.

                                     - 13 -
<PAGE>

     REIT DISTRIBUTION REQUIREMENTS. To maintain REIT status, we must distribute
as a dividend to our stockholders at least 95% of our otherwise  taxable income,
after certain adjustments, with respect to each tax year. We may also be subject
to a 4% non-deductible excise tax in the event our distributions to stockholders
fail  to  meet  certain  other  requirements.   Failure  to  comply  with  these
requirements  could  result  in our  income  being  subject  to  tax at  regular
corporate rates and could cause us to be liable for the excise tax.

     OWNERSHIP  LIMIT NECESSARY TO MAINTAIN REIT  QUALIFICATION.  As a REIT, the
federal tax laws  restrict the  percentage  of the total value of our stock that
may be owned by five or fewer  individuals to 50% or less. Our charter generally
prohibits  the direct or indirect  ownership of more than 9% of our common stock
by any stockholder.  This limit excludes the Berg Group,  which has an aggregate
ownership limit of 20%. In addition,  as permitted by our charter,  our board of
directors  has  authorized an exception to two other  stockholders  that permits
them to  collectively  own,  directly or  indirectly,  up to 18.5% of our common
stock  on an  aggregate  basis,  subject  to the  terms  of an  ownership  limit
exemption  agreement.  In general,  our charter prohibits the transfer of shares
which  result in a loss of our REIT  qualification  and  provides  that any such
transfer  or any  other  transfer  which  causes a  stockholder  to  exceed  the
ownership limit will result in the shares being  automatically  transferred to a
trust for the benefit of a  charitable  beneficiary.  Accordingly,  in the event
that  either  the  Berg  Group  or the two  stockholders  increase  their  stock
ownership in our  corporation,  a stockholder  who acquires shares of our common
stock, even though his, her or its aggregate  ownership may be less than 9%, may
be required to transfer a portion of that  stockholder's  shares to such a trust
in order to preserve our status as a REIT.

STOCKHOLDERS ARE NOT ASSURED OF RECEIVING CASH DISTRIBUTION FROM US.

     Our  income  will  consist  primarily  of our  share of the  income  of the
operating partnerships, and our cash flow will consist primarily of our share of
distributions from the operating partnerships. Differences in timing between the
receipt of income and the payment of expenses in arriving at our taxable  income
or the taxable income of the operating  partnerships  and the effect of required
debt amortization payments could require us to borrow funds, directly or through
the  operating  partnerships,  on  a  short-term  basis  to  meet  our  intended
distribution policy.

     Our  board  of  directors   will   determine   the  amount  and  timing  of
distributions  by  the  operating  partnerships  and  of  distributions  to  our
stockholders.  Our board of directors will consider many factors prior to making
any distributions, including the following:

     -    the amount of cash available for distribution;

     -    the operating partnerships' financial condition;

     -    whether to reinvest funds rather than to distribute such funds;

     -    the operating partnerships' capital expenditures;

     -    the effects of new property acquisitions, including acquisitions under
          our existing agreements with the Berg Group;

     -    the annual distribution  requirements under the REIT provisions of the
          federal income tax laws; and

     -    such other factors as our board of directors deems relevant.

     We  cannot  assure  you that we will be able to meet or  maintain  our cash
distribution objectives.

OUR PROPERTIES COULD BE SUBJECT TO PROPERTY TAX REASSESSMENTS.

     We do not  believe  that our  acquisition  of  interests  in the  operating
partnerships  in the UPREIT  acquisition  resulted in any  statutory  changes in
ownership  that could give rise to a  reassessment  of any of the properties for
California  property tax purposes.  We cannot assure you,  however,  that county
assessors or other tax administrative agencies in California will not attempt to
assert that such a change occurred as a result of these  transactions.  Although
we believe that such a challenge would not be successful  ultimately,  we cannot
assure you  regarding  the  outcome of any  related  dispute  or  proceeding.  A
reassessment could result in increased real estate taxes on our properties that,
as a practical  matter, we may be unable to pass through to our tenants in full.
This could reduce our net income and our funds  available for  distribution  and
cause our stock price to fall.

                                     - 14 -
<PAGE>

OUR   OBLIGATION  TO  PURCHASE   TENDERED  O.P.  UNITS  COULD  REDUCE  OUR  CASH
   DISTRIBUTIONS.

     Each of the limited partners of the operating partnerships,  other than Mr.
Berg and Clyde J. Berg, has the annual right to cause the operating partnerships
to purchase the limited  partner's  O.P.  Units at a purchase price based on the
average  market  value  of the  common  stock  for  the  ten-trading-day  period
immediately  preceding the date of tender.  Upon a limited partner's exercise of
any such right, we will have the option to purchase the tendered O.P. Units with
available  cash,  borrowed  funds or the proceeds of an offering of newly issued
shares of common  stock.  These put rights  became  exercisable  on December 29,
1999,  and are available  once during a 12-month  period.  If the total purchase
price of the O.P. Units tendered by all of the eligible  limited partners in one
year exceeds $1 million,  we or the operating  partnerships  will be entitled to
reduce  proportionately  the  number  of O.P.  Units to be  acquired  from  each
tendering  limited  partner so that the total  purchase price does not exceed $1
million.  The exercise of these put rights may reduce the amount of cash that we
have available to distribute to our stockholders and could cause our stock price
to fall.

     In addition,  after  December  1999, all O.P. Unit holders may tender their
O.P.  Units  to us  for  shares  of  common  stock  on a  one-for-one  basis  at
then-current  market value or an equivalent amount in cash, at our election.  If
we elect to pay cash for the O.P. Units, our liquidity may be reduced and we may
lack  sufficient  funds to  continue  paying  the amount of our  anticipated  or
historical cash distributions. This could cause our stock price to fall.

SHARES ELIGIBLE FOR FUTURE SALE COULD AFFECT THE MARKET PRICE OF OUR STOCK.

     We cannot predict the effect, if any, that future sales of shares of common
stock, or the  availability of shares for future sale,  could have on the market
price of the  common  stock.  Sales of  substantial  amounts  of  common  stock,
including  shares issued in connection  with the exercise of the exchange rights
held by the limited  partners of the operating  partnerships,  or the perception
that such sales could occur, could adversely affect prevailing market prices for
the common  stock.  Additional  shares of common  stock may be issued to limited
partners,  subject to the applicable REIT qualification ownership limit, if they
exchange  their O.P. Units for shares of common stock pursuant to their exchange
rights, or may be sold by us to raise funds required to purchase such O.P. Units
if the limited partners elect to tender O.P. Units to us using their put rights.
In addition,  the holders of approximately 1 million shares of common stock that
can be sold subject to Rule 144, including the volume limitation or Rule 144(k),
can  resell  those  shares  free of or Rule 144  restriction  or  under  another
currently  effective resale  prospectus.  We may halt offers and sales of shares
under that prospectus under certain circumstances.

MARKET INTEREST RATES MAY REDUCE THE VALUE OF THE COMMON STOCK.

     One of the factors that investors consider important in deciding whether to
buy or sell  shares  of a REIT is the  distribution  rate on such  shares,  as a
percentage of the price of such shares,  relative to market  interest  rates. If
market interest rates go up, prospective  purchasers of REIT shares may expect a
higher distribution rate. Higher interest rates would not, however, increase the
funds  available for us to distribute,  and, in fact,  would likely increase our
borrowing  costs and decrease funds  available for  distribution.  Thus,  higher
market interest rates could cause the price of our common stock to fall.

                                     - 15 -
<PAGE>


Item 2.  Properties

GEOGRAPHIC AND TENANT FOCUS

     We focus on the facility  requirements of information  technology companies
in the Silicon Valley, which include space for office, research and development,
light manufacturing and assembly.  With the Silicon Valley's highly educated and
skilled work force,  history of numerous successful start-up companies and large
contingent of venture  capital firms,  we believe that this region will continue
to spawn successful new high-growth industries and entrepreneurial businesses to
an extent matched  nowhere else in the United States.  We believe that our focus
and thorough  understanding  of the Silicon  Valley real estate market enable us
to:

     -    anticipate trends in the market;
     -    identify and  concentrate  our efforts on the most  favorably  located
          sub-markets;
     -    take  advantage  of  our   experience   and  extensive   contacts  and
          relationships with local government agencies,  real estate brokers and
          subcontractors, as well as with tenants and prospective tenants; and
     -    identify strong tenants

     All of our  properties  are  general  purpose  R&D  properties,  located in
desirable  sub-markets of the Silicon  Valley.  Many of our properties have been
developed for, or leased to, single tenants,  many of which are large,  publicly
traded information technology companies. Most of our major tenants have occupied
our properties for many years under triple-net leases that require the tenant to
pay substantially all operating costs, including property insurance, real estate
taxes and general operating costs.

LEASING

     The current  leases for the  properties  typically  have terms ranging from
three to ten  years.  Most of the  leases  provide  for  fixed  periodic  rental
increases.  Substantially  all of the leases are triple-net  leases  pursuant to
which the tenant is required to pay substantially all of the operating  expenses
of the property,  including all maintenance and repairs,  excluding only certain
structural repairs to the building shell, property taxes and insurance.  Most of
the leases  contain  renewal  options which allow the tenant to extend the lease
based on adjustments to then  prevailing  market rates, or based on fixed rental
adjustments, which may be below market rates.

PROPERTY PORTFOLIO

     All of our properties  are R&D  properties.  Generally,  our properties are
one- to four-story buildings of tilt-up concrete construction,  have 3.5 or more
parking spaces per thousand  rentable square feet, clear ceiling heights of less
than 18 feet,  and range in size from 18,000 to 211,000  rentable  square  feet.
Most of the office  space is open and  suitable  for  configuration  to meet the
tenants' requirements with the use of movable dividers.

     The  following  table  sets  forth  certain  information  relating  to  our
properties as of December 31, 1999.
<TABLE>
<CAPTION>

                                                   Percentage                                             Major
                                        Total     Leased as of    Average                                Tenants'
                           No. of      Rentable    December 31,     1999                                Rentable      1999 Annual
Location                 Properties     Sq. Ft.       1999       Occupancy    Major Tenants              Sq. Ft.     Base Rents (1)
------------------------------------------------------------------------------------------------------------------------------------
<S>                         <C>       <C>           <C>           <C>        <C>                       <C>           <C>
10401 Bubb(2)                1          20,330        100%          100%      Celerity Systems           20,330       $  386,255

2001 Logic                   1          72,426        100%          100%      Xilinx                                   1,477,902

45700 Northport Loop         1          47,570        100%          100%      Philips Electronics        47,570          698,346

45738 Northport Loop         1          44,256        100%          100%      EIC Corporation            44,256          532,643

4050 Starboard Drive         1          52,232        100%          100%      Flash Electronics, Inc.    52,232          752,141

3501 W. Warren Ave.-
  46600 Fremont Blvd.        1          67,864        100%          100%      Alcatel Comptech, Inc      51,864        1,098,869

48800 Milmont Drive          1          53,000        100%          100%      Premisys Communications    53,000          591,687

4750 Patrick Henry           1          65,780        100%           92%      Intertrust Networking      65,780        1,016,301

4949 Hellyer Avenue          1         200,484        100%          100%      Cisco Systems Inc.        200,484        2,033,580

                                     - 16 -
<PAGE>
Triangle Technology Park(3)  7         416,527         89%           97%      Intevac Corporation       166,663        4,798,101
                                                                              SDL, Inc.                 102,150
                                                                              Maxell Corporation         63,812

5850-5870 Hellyer            1         109,715        100%          100%      Clear Logic, Inc.          64,805        1,322,204
                                                                              Gaxzoox Networks, Inc.     44,910

2251 Lawson                  1         125,000        100%          100%      Amdahl Corporation        125,000        1,249,345

1230 Arques                  1          60,000        100%          100%      Amdahl Corporation         60,000          305,669

1250 Arques                  4         200,000        100%          100%      Amdahl Corporation        200,000          755,922

3120 Scott                   1          75,000        100%          100%      Amdahl Corporation         75,000        1,217,833

20400 Mariani                1         105,000        100%          100%      Behring Diagnostics       105,000        1,008,000

10500 De Anza                1         211,000        100%          100%      Apple Computer, Inc.      211,000        4,338,840

20605-705 Valley Green       2         142,000        100%          100%      Apple Computer, Inc.      142,000        1,975,382

10300 Bubb                   1          23,400        100%          100%      Apple Computer, Inc.       23,400          393,120

10440 Bubb Road              1          19,500        100%          100%      Linotext Digital Color     19,500          252,720

10460 Bubb                   1          48,302        100%          100%      General Surgical           48,302          579,624
                                                                                Innovations, Inc.

1135 Kern Avenue             1          18,300        100%          100%      Davicom Semiconductor,     18,300          244,029

1190 Morse/405 Tasman        1          28,350        100%          100%      Coptec West                28,350          328,292

450 National                 1          36,100        100%          100%      Savi Technology, Inc.      36,100          345,756

3301 Olcott                  1          64,500        100%          100%      NEC Electronics, Inc.      64,500        1,103,153

2800 Bayview                 1          59,736        100%          100%      Concept System Design,     59,736          636,078

6850 Santa Teresa            1          30,000          0%           75%      Vacant                                     160,146

140-150 Great Oaks-6781      2         105,300        100%           88%      Atcor Corporation          52,000          746,813
                                                                              Amtech Corporation         31,500

6540-6541 Via Del Oro        2          66,600        100%          100%      Exsil Incorporated         20,078          613,145
                                                                              Alcatel Network Systems,   17,400
                                                                                Inc.
                                                                              Modutek                    17,400

6311-6351 San Ignacio        5         360,254        100%          100%      On Command Video          131,320        3,738,213
                                                                              Sequel, Inc.               66,042
                                                                              Avnet, Inc.                53,494
                                                                              Photon Dynamics            50,400
                                                                              Teledex                    30,000

6320-6360 San Ignacio        1         157,292        100%          100%      Bell Sports, Inc.          63,638        1,573,237
                                                                              Delrina/Symantec Corp.     45,000

                                     - 17 -
<PAGE>
2610 N. First St.&75         2         170,810        100%          100%      Comerica Bank              93,984        2,103,850
                                                                              County of Santa Clara      63,310

2033-2243 Samaritan          3         235,122        100%          100%      Condor Systems            110,490        2,931,310
                                                                              Texas Instrument           48,677

1170 Morse                   1          34,750        100%          100%      CA Parkinsons              34,750          385,064

3236 Scott                   1          54,672        100%          100%      Celeritek, Inc.            54,672          698,712

1212 Bordeaux                1          71,800        100%          100%      ESL Incorporated           71,800        1,273,344

McCandless Technology        14        705,956       97.1%         99.7%      Larscom, Inc.             118,708        8,816,272
                                                                              Arrow Electronics, Inc.   104,606
                                                                              Mektec Corporation         51,602
                                                                              Sherpa Corporation         50,768
                                                                              Chartered Semiconductor    45,312
                                                                              Adaptec                    42,700
                                                                              Panasonic Industrial Co.   40,970

1600 Memorex Drive           1         107,500        100%          100%      Sasco                     107,500          714,999

1650 Richard Ave.            1          52,800        100%          100%      Forward Technology         52,800          678,941

1700 Richard Ave.            1          58,783        100%          100%      IXC Communications         58,783          235,130(2)
                          --------------------                                                                      ----------------

TOTAL                       80       5,307,048                                                                      $ 69,237,107
                          --------------------                                                                      ----------------
</TABLE>


(1)  Annual cash rents do not include any effect for straight-lining.

(2)  The property was purchased  during 1999. The 1999 Annual Base Rent reflects
     rent received from the date of acquisition through December 31, 1999.

     We own 100% of all of the  properties,  except for one of the  buildings in
the Triangle  Technology  Park,  which is owned by a joint  venture in which we,
through an operating partnership,  own a 75% interest, and the property at 10401
Bubb Rd.,  which is owned by a joint  venture in which we,  through an operating
partnership, own an 83.33% interest.

                                     - 18 -
<PAGE>


LEASE EXPIRATIONS

     The following table sets forth a schedule of the lease  expirations for the
properties for each of the ten years beginning with 2000,  assuming that none of
the tenants exercise existing renewal options or termination  rights.  The table
excludes 75,998 rentable square feet, that was vacant as of December 31, 1999.
<TABLE>
<CAPTION>

                   Number of                                                           Percentage of Total Annual
  Year of Lease     Leases      Rentable Square Footage      2000 Annual Base Rent      Base Rent Represented By
   Expiration      Expiring   Subject to Expiring Leases   Under Expiring Leases (1)       Expiring Leases (2)
--------------------------------------------------------------------------------------------------------------------
<S>                <C>              <C>                      <C>                                 <C>
     2000             5                125,662                $  1,176,828                         1.4%
     2001            19                457,087                   5,135,835                         6.3%
     2002            20              1,122,542                  15,938,232                        19.7%
     2003            13                542,348                   6,545,823                         8.1%
     2004            23              1,203,949                  15,499,233                        19.1%
     2005            12                506,651                   7,284,471                         9.0%
     2006             4                745,321                  22,496,351                        27.8%
     2007             5                271,281                   3,001,213                         3.7%
     2008             1                125,000                   1,384,538                         1.7%
     2009             2                131,209                   2,577,972                         3.2%
             --------------------------------------------------------------------------------------------------

                    104              5,231,050                 $81,040,496                         100%
             --------------------------------------------------------------------------------------------------
</TABLE>


(1)  The base rent for leases  expiring in 2000 is based on January 2000 monthly
     rents  multiplied by 12. Base rent for all leases  expiring  after 2000 are
     based upon scheduled 2000 annual rents.

(2)  Based upon 2000 annual rents as discussed in Note (1).

RECENT DEVELOPMENTS

     The  Berg  Group  recently  acquired  approximately  9.5  acres  of land in
Sunnyvale,  California  with an  existing  98,500  rentable  square  foot  shell
building and expansion space for  approximately  a 100,000  rentable square foot
building.  This site has been leased to Global Centers, Inc. for 15 years with a
lease for the 98,500 square foot  building  commencing in April 2000 and a lease
for the 100,000  square foot building  commencing in March 2001. The Company has
the option to acquire this project  from the Berg Group upon its  completion  of
the 100,000 square foot building under the Berg Land Holdings Option  Agreement.
The Company  will receive no rents from this  property  prior to the exercise of
this option.

     In January 2000, we acquired a newly  constructed R & D property  leased to
E-Tek Dynamics, Inc. on Automation Parkway in San Jose, California consisting of
80,640  square  feet of rentable  space.  We acquired  this  property  under the
Pending Projects Acquisition Agreement.  We paid approximately $14.6 million for
this property. In connection with this acquisition,  the operating  partnerships
assumed total debt of approximately $5.0 million and issued a total of 1,346,480
O.P. Units to the Berg Group.   The  acquisition  was effective as of January 5,
2000.

ENVIRONMENTAL MATTERS

     To date, compliance with laws and regulations relating to the protection of
the  environment,  including those regarding the discharge of materials into the
environment  has not had any  material  effects  upon our capital  expenditures,
earnings or competitive position.

     Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real  property  may be held liable for the costs of removal
or remediation  of certain  hazardous or toxic  substances  located on or in the
property.  Such laws often impose liability on the owner and expose the owner to
governmental  proceedings  without  regard to whether  the owner knew of, or was
responsible for, the presence of the hazardous or toxic substances.  The cost of
any required  remediation or removal of such substances may be  substantial.  In
addition,  the owner's  liability as to any specific  property is generally  not
limited and could exceed the value of the property  and/or the aggregate  assets
of the owner. The presence of such substances, or the failure to properly remove
or remediate such  substances,  may also adversely affect the owner's ability to
sell or rent the

                                     - 19 -
<PAGE>
property or to borrow using the property as collateral.  Persons who arrange for
treatment or the disposal of  hazardous or toxic  substances  may also be liable
for the costs of any required  remediation  or removal of the hazardous or toxic
substances at a disposal  facility,  regardless of whether the facility is owned
or operated by such owner or entity.  In  connection  with the  ownership of the
properties or the treatment or disposal of hazardous or toxic substances, we may
be liable for such costs.

     Some of our  properties  are  leased,  in part,  to  businesses,  including
manufacturers, that use, store or otherwise handle hazardous or toxic substances
in their  business  operations.  These  operations  create a  potential  for the
release of hazardous or toxic substances. In addition, ground water contaminated
by chemicals used in various manufacturing  processes,  including  semiconductor
fabrication, underlies a significant portion of northeastern Santa Clara County,
where may of our properties are located.

     Environmental  laws also govern the  presence,  maintenance  and removal of
asbestos.  These laws require  that owners or operators of buildings  containing
asbestos properly manage and maintain the asbestos,  that they adequately inform
or train those who may come into contact with  asbestos and that they  undertake
special  precautions,  including  removal or other  abatement  in the event that
asbestos is disturbed during renovation or demolition of a building.  These laws
may impose fines and  penalties on building  owners or operators  for failure to
comply with these requirements and may allow third parties to seek recovery from
owners or operators  for personal  injury  associated  with exposure to asbestos
fibers.  We are aware  that  there are  abestos-containing  materials,  or ACMs,
present at several of the properties,  primarily in floor coverings.  We believe
that the ACMs present at these  properties  are generally in good  condition and
that no ACMs are  present  at the  remaining  properties.  We  believe we are in
compliance in all material  respects with all present  federal,  state and local
laws  relating to ACMs and that if we were given limited time to remove all ACMs
present at the  properties,  the cost of such removal  would not have a material
adverse effect on our financial condition,  results of operations and ability to
make cash distributions to our stockholders.

     Phase I  assessments  are  intended to discover  and  evaluate  information
regarding the  environmental  condition of the surveyed property and surrounding
properties.  Phase I assessments generally include a historical review, a public
records review, an investigation of the surveyed site and surrounding properties
and the preparation  and issuance of a written  report,  but do not include soil
sampling or sub-surface investigations  and typically do not include an asbestos
survey.  Environmental  assessments  have been  conducted  for about half of the
properties.

     The environmental investigations that have been conducted on our properties
have not  revealed  any  environmental  liability  that we believe  would have a
material  adverse effect on our financial  condition,  results of operations and
assets, and we are not aware of any such liability.  Nonetheless, it is possible
that there are material  environmental  liabilities of which we are unaware.  We
cannot assure you that future laws,  ordinances,  or regulations will not impose
any  material  environmental   liability,  or  that  the  current  environmental
condition of the  properties  has not been, or will not be,  affected by tenants
and occupants of the properties,  by the condition of properties in the vicinity
of the properties, or by third parties unrelated to us.

                                     - 20 -
<PAGE>


Item 3.  Legal Proceedings

     Neither we, the operating  partnerships  nor the  properties are subject to
any  material  litigation  nor, to our  knowledge,  is any  material  litigation
threatened against us, the operating  partnerships or the properties.  From time
to time, we are engaged in legal  proceedings  arising in the ordinary course of
our business, and we do not consider any of such proceedings to be material.

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

     None.

                                     - 21 -



<PAGE>

PART II

Item 5.  Market for Registrant's Common Stock and Related Stockholder Matters

     Our common stock is listed on the American Stock Exchange  ("AMEX") and the
Pacific  Exchange,  Inc. and trades under the symbol "MSW." The previous halt in
trading instituted by AMEX, which began at the opening of trading on October 20,
1997,  ended when  trading  resumed on December  8, 1998.  The high and low sale
prices per share of common  stock  during each  quarter of 1998 and 1999 were as
follows:
<TABLE>
<CAPTION>

                                  1999                              1998
                     ------------------------------    ------------------------------
                          Low             High            Low(1)           High(1)
                     -------------    -------------    -------------    -------------
<S>                     <C>              <C>              <C>               <C>
1st Quarter              6 3/8            7 1/8             N/A              N/A
2nd Quarter              7 1/16           8 7/8             N/A              N/A
3rd Quarter              7 3/8            8 5/8             N/A              N/A
4th Quarter(2)           7 3/16           8 5/16           6 1/2             11
</TABLE>

(1)  High  and low  information  for the  first  three  quarters  of 1998 is not
     presented  because  trading of the common stock was  suspended  during this
     period.

(2)  During the fourth quarter of 1998,  amounts shown reflect high and low upon
     commencement of trading.

     As of March 15,  2000,  the number of holders of record of the common stock
was 408. We declared and paid total dividends of $0.56 per share during 1999. No
dividends were declared or paid during 1998.

     The closing  price of our common  stock on December  31, 1999 was $7.75 per
share.

                                     - 22 -
<PAGE>


Item 6.  Selected Financial Data

     The following table sets forth selected  historical  financial  information
for Mission West Properties,  Inc. See Part II - Item 7 "Management's Discussion
and  Analysis  of  Financial  Conditions  and Results of  Operations  - Overview
"Company   History"  for  discussion  of  business   combinations  and  property
dispositions that materially affect the comparability of the selected  financial
data. Selected consolidated financial data is derived from the audited financial
statements  and  notes  thereto  (see Part II - Item 8  "Consolidated  Financial
Statements and Supplementary Data," below) and is as follows:
<TABLE>
<CAPTION>


                                                                               One Month Ended
                                                Year Ended December 31,          December 31,           Year Ended November 30,
                                           ---------------------------------  -----------------   ----------------------------------
                                               1999              1998               1997            1997        1996        1995
                                           -------------   -----------------  -----------------   ----------  ----------  ----------
                                                                            (dollars in thousands)
<S>                                      <C>            <C>                 <C>                  <C>         <C>         <C>
      OPERATING DATA:
      Revenue:
          Rental revenues                    $73,726         $27,285                              $ 1,376     $ 7,065     $ 7,146
          Tenant reimbursements               11,047           4,193                                    -           -           -
          Other                                1,220             278          $      27               359         348         380
                                           -------------   -----------------  -----------------   ----------  ----------  ----------
      Total revenues                          85,993          31,756                 27             1,735       7,413       7,526
                                           -------------   -----------------  -----------------   ----------  ----------  ----------

      Expenses:
         Property operating and
           maintenance real estate taxes      11,467           4,821                 -                246       1,643       1,783
         Interest                             11,623           4,685                 -                425       3,045       3,435
         Interest (related parties)            2,246           3,511                 -                  -           -           -
         General and administrative
           expenses                            1,185           1,501               139              1,467         991         945
         Depreciation and amortization        13,156           5,410                 -                246       1,369       1,352
                                           -------------   -----------------  -----------------   ----------  ----------  ----------
                                              39,677          19,928               139              2,384       7,048       7,515
                                           -------------   -----------------  -----------------   ----------  ----------  ----------
         Income before gain (loss) on sale
           of real estate assets, minority
           interest and income taxes          46,316          11,828              (112)              (649)        365          11
         Gain (loss) on sale                       -               -                 -              4,736        (306)         76
         Income (loss) before minority
           interest and income taxes          46,316          11,828              (112)             4,087          59          87
         Minority interest                    39,785          12,049                 -                  -           -           -
                                           -------------   -----------------  -----------------   ----------  ----------  ----------
         Income (loss) before income taxes     6,531            (221)             (112)             4,087          59          87
         (Benefit) provision for income            -               -               (38)             1,043          24          35
                                           -------------   -----------------  -----------------   ----------  ----------  ----------
             Net income (loss)             $   6,531        $   (221)         $    (74)           $ 3,044     $    35     $    52
                                           =============   =================  =================   ==========  ==========  ==========

         Basic income (loss) per share (1)     $.52           $(.13)             $(.05)             $18.48        $.77      $1.12
         Diluted income (loss) per             $.52           $(.13)             $(.05)             $18.48        $.72      $1.06

      PROPERTY AND OTHER DATA (2):

         Total properties, end of period         80              71
         Total square feet, end of period     5,307           4,519
         Average monthly rental revenue
           per square foot (3)                $1.16           $0.95
         Occupancy at end of period              99%             99%

FUNDS FROM OPERATIONS (2)(4):               $59,079         $17,238

         Cash flow from operations            60,298        $16,264              $ (46)           $ (1,000)     $1,221       $598
         Cash flow from investing            (12,084)          (118)                 -              46,198       2,528        191
         Cash flow from financing            (41,907)       (21,469)               150             (42,844)     (1,204)    (2,415)


                                                              December 31,                                  November 30,
                                         ----------------------------------------------------   ------------------------------------
                                             1999              1998               1997            1996         1995         1994
                                         -------------   -----------------  -----------------   ----------   ----------   ----------
                                                                            (dollars in thousands)
BALANCE SHEET DATA (5)

         Real estate assets, net of
           accumulated depreciation         $697,616        $516,029                  -           $46,285      $47,597     $49,612
         Total assets                        712,704         519,866          $   5,763                         47,570      50,963
         Debt                                133,952         184,389                  -                         31,967      34,382
         Debt - related parties               31,193          20,752                  -                 -            -           -
         Total liabilities                   215,212         213,234                552            32,142       33,433      36,243
         Minority interest                   396,810         273,379                  -                 -            -           -
         Stockholders' equity                100,682          33,253              5,211            14,182       14,137      14,720

         Common stock outstanding         16,972,374      8,218,594           1,501,104            45,704       45,624      48,957
         O.P. Units issued and
           outstanding                    76,205,789     60,151,697                   -                 -            -           -
</TABLE>

(1)  As adjusted  for the 1 for 30 reverse  stock split in  November  1997.

(2)  Property and other data shown only as of December 31, 1999 and 1998.

                                     - 23 -
<PAGE>

(3)  Average  monthly  rental  revenue  per square foot has been  determined  by
     taking the total base rent for the period,  divided by the number of months
     in the period, and then divided by the total square feet of occupied space.

(4)  As defined by the National  Association  of Real Estate  Investment  Trusts
     ("NAREIT"),  FFO represents net income (loss) before  minority  interest of
     unitholders (computed in accordance with GAAP), excluding gains (or losses)
     from debt  restructuring  and sales of property,  plus real estate  related
     depreciation and amortization (excluding amortization of deferred financing
     costs and depreciation of non-real estate assets) and after adjustments for
     unconsolidated partnerships and joint ventures. Management considers FFO an
     appropriate  measure of performance  of an equity REIT because,  along with
     cash flows from operating  activities,  financing  activities and investing
     activities,  it provides  investors with an understanding of our ability to
     incur and service  debt and make  capital  expenditures.  FFO should not be
     considered as an alternative  for net income as a measure of  profitability
     nor is it  comparable  to  cash  flows  provided  by  operating  activities
     determined  in  accordance  with GAAP.  FFO is not  comparable to similarly
     entitled  items  reported by other REITs that do not define them exactly as
     we define FFO. See Part II - Item 7  "Management's  Discussion and Analysis
     of Financial Condition and Results of Operations - Certain Policies.

(5)  Balance sheet information for 1997 is shown as of December 31, 1997.

                                     - 24 -
<PAGE>


     The following table sets forth selected  historical  financial  information
for the Berg Properties  (our accounting  predecessor) as of and for the periods
indicated  on an  historical  basis.  Selected  consolidated  financial  data is
derived from the audited  financial  statements and notes thereto (see Part II -
Item 8 "Consolidated Financial Statements and Supplementary Data," below) and is
as follows:
<TABLE>
<CAPTION>

                                                        Six Months
                                                          Ended
                                                         June 30,           Year Ended December 31,
                                                       ------------  ------------------------------------
                                                          1998          1997        1996        1995
                                                       ------------  -----------  ----------  ----------

                                                                     (dollars in thousands)
<S>                                                     <C>          <C>         <C>         <C>
                  OPERATING DATA:
                  Revenue:

                     Rental revenues                     $22,341      $40,163     $28,934     $23,064
                     Tenant reimbursements                 3,826        6,519       3,902       4,193
                                                       ------------  -----------  ----------  ----------
                       Total revenue                      26,167       46,682      32,836      27,257
                                                       ------------  -----------  ----------  ----------

                  Expenses:
                     Operating expenses                    2,088        3,741       1,906       2,032
                     Real estate taxes                     2,126        4,229       3,750       3,595
                     Management fee (related parties)        645        1,050         827         654
                     Interest (related parties)               61          248         293         357
                     Interest                              3,044        5,919       6,090       6,190
                     Depreciation and amortization         3,862        7,717       6,739       6,323
                                                       ------------  -----------  ----------  ----------
                                                          11,826       22,904      19,605      19,151
                                                       ------------  -----------  ----------  ----------
                     Income before gain on sale of
                       real estate and extraordinary      14,341       23,778      13,231       8,106
                       item
                     Gain on sale                              -         -           -         20,779
                                                       ------------  -----------  ----------  ----------
                     Income before extraordinary item     14,341       23,778      13,231      28,885
                     Extraordinary item                        -         -              610     3,206
                                                       ------------  -----------  ----------  ----------
                       Net income                        $14,341      $23,778     $13,841     $32,091
                                                       ============  ===========  ==========  ==========

                  PROPERTY AND OTHER DATA:

                     Total properties, end of period          58           58          53          50
                     Total square feet, end of period      3,779        3,779       3,392       3,195
                     Average monthly rental revenue
                       per square foot (1)                 $0.95        $0.86       $0.78       $0.71
                     Occupancy at end of period              100%        97.7%       91.9%       87.4%

                  FUNDS FROM OPERATIONS(2)               $18,203      $31,495     $19,970     $14,429

                     Cash flow from operations           $17,798      $29,909     $20,248     $16,392
                     Cash flow from investing                690      (17,251)    (29,275)     (6,353)
                     Cash flow from financing            (24,207)      (8,432)      9,433     (10,013)


                                                                                December 31,
                                                         June 30,    ------------------------------------
                                                          1998          1997        1996        1995
                                                       ------------  -----------  ----------  ----------
                                                                    (dollars in thousands)
                  BALANCE SHEET DATA:
                     Real estate assets, net of
                       accumulated depreciation          $95,600     $100,152       $90,710    $72,319
                     Total assets                        104,546      113,950        97,651     73,730
                     Debt                                 37,868       76,507        73,416     69,543
                     Debt - related parties              156,632        1,975         2,546      3,051
                     Total liabilities                   200,779       84,299        80,826     76,199
                     Partners' (deficit) / equity        (96,233)      29,651        16,825     (2,469)

</TABLE>


(1)  Average  monthly  rental  revenue  per square foot has been  determined  by
     taking the base rent for the period, divided by the number of months in the
     period, and then divided by the total square feet of occupied space.

(2)  As defined by the National  Association  of Real Estate  Investment  Trusts
     ("NAREIT"),  FFO represents net income (loss) before  minority  interest of
     unitholders (computed in accordance with GAAP), excluding gains (or losses)
     from debt  restructuring  and sales of property,  plus real estate  related
     depreciation and amortization (excluding amortization of deferred financing
     costs and depreciation of non-real estate assets) and after adjustments for
     unconsolidated partnerships and joint ventures. Management considers FFO an
     appropriate  measure of performance  of an equity REIT because,  along with
     cash flows from operating  activities,  financing  activities and investing
     activities,  it provides  investors with an understanding of our ability to
     incur and service  debt and make  capital  expenditures.  FFO should not be
     considered as an alternative  for net income as a measure of  profitability
     nor is it  comparable  to  cash  flows  provided  by  operating  activities
     determined  in  accordance  with GAAP.  FFO is not  comparable to similarly
     entitled  items  reported by other REITs that do not define them exactly as
     we define FFO. See Part II - Item 7  "Management's  Discussion and Analysis
     of Financial Condition and Results of Operations - Certain Policies.

                                     - 25 -
<PAGE>

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS,  INCLUDING BUT NOT
LIMITED  TO  STATEMENTS  WITH  RESPECT  TO  THE  FUTURE  FINANCIAL  PERFORMANCE,
OPERATING RESULTS, PLANS AND OBJECTIVES OF MISSION WEST PROPERTIES, INC.. ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY  ANTICIPATED DEPENDING UPON A
VARIETY OF FACTORS,  INCLUDING  THOSE  DESCRIBED  IN PART I - ITEM 1 "BUSINESS -
RISK FACTORS."

OVERVIEW

     In May 1998,  we, the Berg Group  members,  John  Kontrabecki,  and certain
other persons  entered into the  Acquisition  Agreement  providing,  among other
things,  for our  acquisition  of interests  as the sole general  partner in the
operating   partnerships.   At  the  time,  the  operating   partnerships   held
approximately  4.34  million  rentable  square feet of R&D  property  located in
Silicon  Valley.  The agreement  also provided for the parties to enter into the
Pending Projects Acquisition Agreement,  the Berg Land Holdings Option Agreement
and the Exchange Rights Agreement,  following  stockholder  approval.  Effective
July  1,  1998,  we  consummated  our  acquisition  of the  general  partnership
interests in the operating partnerships. We effected our purchase of the general
partnership interests by issuing to each of the operating  partnerships a demand
note bearing interest at 7.25% per annum, aggregating $35.2 million of principal
payable no later than July 1, 2000 (the `Demand Notes"). Effective July 1, 1998,
all limited partnership  interests in the operating  partnerships were converted
into 59,479,633 O.P. Units,  representing  ownership of approximately  87.89% of
the operating partnerships, upon consummation of the acquisition. Each O.P. Unit
may be  exchanged  for one share of common  stock  pursuant to certain  exchange
rights and is treated as a share of common  stock on a fully  diluted  basis and
also represents our minority ownership interests. At December 31, 1999, we owned
an 18.28% general partnership interest in the operating partnerships, taken as a
whole, on a weighted average basis.

     On December 29, 1998, we sold  6,495,058  shares of common stock at a price
of $4.50 per share to a number of accredited  investors to complete our May 1998
private placements.  The aggregate proceeds,  net of fees and offering costs, of
approximately  $27.8 million were used to pay down amounts outstanding under the
Demand Notes due to the operating partnerships. Also as of December 29, 1998, we
and the limited partners in the operating partnerships entered into the Exchange
Rights Agreement, and we entered into the Pending Projects Acquisition Agreement
and the Berg  Land  Holdings  Option  Agreement  with the Berg  Group  and other
sellers.

     In  April  1999,  we  acquired  an   approximately   515,700   square  foot
five-building R&D complex,  leased to Microsoft, on L'Avenida Avenue in Mountain
View,  California by purchasing all of the interests of Baccarat  Shoreline LLC,
which we have  renamed  Mission  West  Shoreline  LLC,  a wholly  owned  limited
liability company of Mission West Properties L.P. In the transaction, we assumed
debt totaling  approximately  $57.1  million on a  consolidated  basis,  and the
former members of Baccarat  Shoreline LLC received  13,206,629  O.P.  Units,  of
which various members of the Berg Group received 12,467,058 O.P. Units.

     In July 1999,  we completed a public  offering of  8,680,000  shares of our
common  stock at $8.25  per  share.  The net  proceeds  of  approximately  $66.9
million,  after deducting  underwriting discounts and other offering costs, were
used to reduce the  outstanding  balance on the line of credit  with Wells Fargo
Bank, N.A. ("Wells Fargo line") by approximately  $41.0 million and to reimburse
Microsoft  Corporation  for  approximately  $25.0  million  for shell and tenant
improvements   on  the  Microsoft   project.   The  remaining  net  proceeds  of
approximately $900,000 were retained for general corporate purposes.

     At December 31, 1999, the  outstanding  balance under the Demand Notes owed
to the  operating  partnerships  was $1.1  million.  The principal of the Demand
Notes,  along  with the  interest  expense,  which  is  interest  income  to the
operating  partnerships,  is eliminated in consolidation  and is not included in
the  corresponding  line items  within the  consolidated  financial  statements.
However,  the interest  income  earned by the operating  partnerships,  which is
interest  expense  to us,  in  connection  with  this  debt is  included  in the
calculation of minority  interest as reported on the  consolidated  statement of
operations, thereby reducing our net income by this same amount. At present, our
only  means for  repayment  of this debt be it in this form or  refinanced  with
another   lender,   is  through   distributions   received  from  the  operating
partnerships   in  excess  of  the  amount  of  dividends  to  be  paid  to  our
stockholders.

     We intend to elect and  qualify  to be taxed as a REIT for the the  taxable
year ended December 31, 1999.

     We have two wholly  owned  corporate  subsidiaries,  MIT Realty,  Inc.  and
Mission West Executive Aircraft Center. Both corporations are inactive.

                                     - 26 -
<PAGE>
COMPANY HISTORY

     Our original  predecessor was formed in 1969 as Palomar Mortgage Investors,
a  California  business  trust.  It operated as a REIT,  investing  primarily in
short-term and  intermediate-term  construction and development loans secured by
first  trust  deeds  on real  property.  In  1974,  Palomar  Mortgage  Investors
terminated  new  loan  activity  and,  in  1975,  changed  its  name to  Mission
Investment Trust. In 1979,  Mission  Investment Trust terminated its status as a
REIT and began to  develop  and market the  properties  that it owned.  In 1982,
Mission West Properties was  incorporated  as a successor to Mission  Investment
Trust.

     In January and May 1997,  we sold all of our real estate  assets to Spieker
Properties,  L.P. for approximately  $50.5 million in cash. In February 1997, we
paid a special dividend of $9.00 per share to our  stockholders.  After the sale
of assets and the payment of the  dividend  to  stockholders,  we retained  only
nominal  assets.  The board of directors  and  management  considered  available
strategic  alternatives for the remaining  corporate entity,  including possible
business or asset acquisitions or combinations,  a sale of the corporate entity,
and outright liquidation.

     Subsequently,  we accepted a proposal by the Berg Group to acquire  control
of the  corporation  as a vehicle to acquire R&D  properties,  or  interests  in
entities  owning such  properties,  from the Berg  Group.  On May 27,  1997,  we
entered into a stock purchase  agreement with the Berg Group,  which transferred
most of its share purchase  rights to  unaffiliated  accredited  investors.  The
transaction  was  completed  on  September  2,  1997,  at which  time all of our
existing  officers  and  directors  resigned  and the Berg  Group  and the other
investors acquired a 79.6% controlling ownership position as a group.

     In July 1998,  we acquired  control of four existing  limited  partnerships
(referred to collectively as the "operating partnerships"), by becoming the sole
general partner in each one effective July 1, 1998 for financial  accounting and
reporting  purposes  ("the  Acquisition").  We purchased an  approximate  12.11%
interest in each of the operating partnerships.  We effected the purchase of our
general partnership interests by issuing to the operating  partnerships separate
demand notes bearing  interest at 7.25% per annum. The total principal amount of
the Demand Notes issued was $35,200.  All limited  partnership  interests in the
operating   partnerships   were  converted  into  59,479,633  units  of  limited
partnership  interest,  which represented an ownership interest of approximately
87.89%  of the  operating  partnerships.  The  operating  partnerships  are  the
vehicles   through  which  we  will  own  our  assets,   will  make  our  future
acquisitions, and generally conduct our business.

     On October 20, 1997, we paid a further  distribution  of $3.30 per share to
our stockholders from available cash, including  approximately $900,000 received
in the September 1997  transaction.  No portion of the  distribution was paid on
shares acquired by the Berg Group and its co-investors.  In connection with that
distribution,  the AMEX halted  trading of the common stock on October 20, 1997.
Neither we nor the AMEX set a deadline for the  resumption  of trading,  nor did
the AMEX  provide  guidance  beyond  declaring  its  desire  that we have a firm
commitment to acquire a controlling  interest in the R&D  properties of the Berg
Group  and to  raise  additional  capital.  On  November  23,  1998,  we sent to
stockholders a proxy  statement/prospectus for a meeting on December 28, 1998 to
approve or ratify the transactions constituting our UPREIT acquisition, our sale
of common  stock under two May 1998  private  placements,  the pending  projects
acquisition agreement and the Berg land holdings option agreement between us and
the Berg Group, and our reincorporation in the State of Maryland. On December 8,
1998, the AMEX recommenced trading of our common stock.

     On December 28, 1998, our  stockholders  approved and ratified the proposed
transactions,  and on December 30, 1998, we reincorporated under the laws of the
State of Maryland  through the merger of Mission  West  Properties  into Mission
West Properties,  Inc. Shares of the former company,  Mission West Properties, a
California  corporation,  which were  outstanding  at December  30,  1998,  were
converted into shares of our common stock on a one-for-one basis.

RESULTS OF OPERATIONS

     Our  acquisition  of the general  partnership  interests  in the  operating
partnerships  during  the  third  quarter  of  1998  substantially  altered  our
operations. As a consequence,  operating results for the year ended December 31,
1999 are not  meaningfully  comparable  to our  operating  results  for the same
period of 1998,  and operating  results for the year ended December 31, 1998 are
not meaningfully  comparable to operating results for the thirteen-month  period
ended December 31, 1997.

COMPARISON  OF THE YEAR ENDED  DECEMBER 31, 1999 TO THE YEAR ENDED  DECEMBER 31,
  1998.

     As of December 31, 1999, we owned a general partnership interest of 20.28%,
21.32%,  15.33%  and 12.18% in  Mission  West  Properties,  L.P.,  Mission  West
Properties,   L.P.  I,  Mission  West  Properties,  L.P.  II  and  Mission  West
Properties,  L.P. III, respectively,  which are the operating  partnerships.  We
owned an 18.28%  general  partnership  interest in the  operating

                                     - 27 -
<PAGE>
partnerships,  taken as a whole, on a weighted  average basis as of December 31,
1999.  We  owned  a  12.02%  general  partnership   interest  in  the  operating
partnerships,  taken as a whole, on a weighted  average basis as of December 31,
1998.

     The year ended  December 31, 1999 was our first full year of operation with
the R & D properties acquired from the Berg Group and others in July 1998.

     For the year ended December 31, 1999, rental revenues from real estate were
approximately  $73.7 million,  which included an increase of approximately  $4.3
million over base rental  revenues to reflect rental revenues on a straight-line
basis. Tenant reimbursements were approximately $11.0 million, and other income,
including interest, was approximately $1.2 million.  Included in other income is
a gain of $393,000  from the sale of  securities.  Total  expenses  for the year
ended  December  31,  1999,   were   approximately   $39.7  million,   of  which
approximately $38.5 related directly to our real estate operations.  General and
administrative expenses accounted for the remainder of the expenses.

     The minority  interest portion of income was  approximately  $46.3 million,
resulting  in net  income  of  approximately  $6.5  million  for the year  ended
December 31, 1999.  Minority interest represents the limited partners' ownership
interest of 81.72%,  on a weighted average basis as of December 31, 1999, in the
operating partnerships.

COMPARISON  OF THE YEAR ENDED  DECEMBER  31, 1998 TO THE  THIRTEEN-MONTH  PERIOD
  ENDED DECEMBER 31, 1997.

     As of December 31, 1998, we owned a general partnership interest of 12.04%,
12.11%,  11.96%  and 12.11% in  Mission  West  Properties,  L.P.,  Mission  West
Properties,   L.P.  I,  Mission  West  Properties,  L.P.  II  and  Mission  West
Properties,  L.P. III, respectively,  which are the operating partnerships.  The
acquisition of the general partnership  interests in the operating  partnerships
in July 1998 was accounted for as a purchase. Our consolidated operating results
for the year ended December 31, 1998 include the results of  operations,  assets
and  other  financial  data for the  operating  partnerships  from  July 1, 1998
through  December 31, 1998.  This,  the results of operations for the year ended
December  31,  1998  include  only six months of activity  for our current  real
estate operations,  and a comparison to the full year ended December 31, 1999 is
not meaningful and has been omitted.

     For the year ended December 31, 1998, rental revenues from real estate were
approximately  $27.3 million,  which  included an adjustment  for  straight-line
rents of approximately $1.6 million.  Tenant  reimbursements  were $4.2 million,
and other income,  including interest,  totaled  approximately  $278,000.  Total
expenses for 1998 reached almost $20.0  million,  of which  approximately  $18.4
million related directly to newly acquired real estate  operations.  General and
administrative expenses accounted for the remainder of our expenses.

     The minority  interest's portion of income was approximately $12.0 million,
resulting  in a  consolidated  net loss of $221,000  to us for the same  period.
Minority interest represents the limited partners' ownership interest of 87.98%,
on a weighted average basis, in the operating partnerships.

     During the fiscal year ended  December  31,  1997,  we sold our entire real
estate  portfolio of 11 properties.  Upon  completion of the sale of nine of the
properties,  we  received  approximately  $50.5  million in cash,  from which we
repaid all debt  encumbering  the  properties,  thereby  eliminating  all future
interest  expense,  and  paid a  majority  of  the  related  transaction  costs,
including  $3.0 million in  "break-up"  fees from  previously  terminated  sales
transactions.  We  recognized  a net gain of  approximately  $4.7 million on the
sale. In addition, we declared and paid a special dividend of $9.00 per share on
February 27, 1997 to  stockholders of records on February 19, 1997 and a special
cash  distribution  of $3.30 per share on October  21, 1997 to  stockholders  of
record on August 28, 1997.  Accordingly,  a comparison of the operating  results
for that period with the operating  results for the year ended December 31, 1998
is not meaningful and has been omitted.

CHANGES IN FINANCIAL CONDITION

DECEMBER 31, 1999 COMPARED WITH DECEMBER 31, 1998

     During 1999, we acquired five newly constructed R&D properties, all located
in Silicon Valley. These acquisitions added approximately 788,000 square feet of
rentable  space  and were  acquired  from the Berg  Group  under  the Berg  Land
Holdings Option Agreement and the Pending Projects  Acquisition  Agreement.  The
total gross acquisition price for these five properties was approximately $193.6
million.   We  financed  these  acquisitions  by  the  operating   partnerships'
assumption  of  $36.4  million  of debt due Berg & Berg  Enterprises,  Inc.  the
assumption by the operating  partnerships of other  liabilities of $32.8 million

                                     - 28 -
<PAGE>

(including  the  assumption of the sellers'  obligation  to reimburse  Microsoft
Corporation  for  shell and  tenant  improvements  of $32.1  million)  and,  the
issuance of 16,311,232 O.P. Units, of which 15,420,564 O.P. Units were issued to
members of the Berg Group.

     Michael Anderson, our former Vice President,  Chief Operating Officer and a
director,  resigned from the Company effective April 30, 1999. We had previously
issued 200,000 shares of our common stock to Mr. Anderson in exchange for a note
receivable  payable to us for  $900,000.  Upon Mr.  Anderson's  resignation,  we
purchased  117,361 of the  200,000  shares of common  stock,  and  canceled  the
related share purchase obligation representing $528,000 of the original $900,000
note receivable.  We waived interest expense of approximately $32,000 due on the
portion of the note receivable  relating to the canceled  shares.  The remaining
$372,000 of the note  receivable  was paid in full during the second  quarter of
1999.

     In July 1999,  we completed a public  offering of  8,680,000  shares of our
common  stock at $8.25  per  share.  The net  proceeds  of  approximately  $66.9
million,  after deducting  underwriting discounts and other offering costs, were
used to reduce the outstanding  balance on the Wells Fargo line by approximately
$41.0 million and to reimburse  Microsoft  Corporation for  approximately  $25.0
million  for  shell  and  tenant  improvements  on the  Microsoft  project.  The
remaining  net  proceeds of  approximately  $900,000  were  retained for general
corporate purposes.

     During the third quarter of 1999, we entered into a new lease agreement for
2001 Logic  Drive  with  Xilinx  Incorporated  ("Xilinx").  The lease  agreement
includes an option granted to Xilinx to purchase the building at a predetermined
price. In September 1999, in accordance with the option  provisions of the lease
agreement,  Xilinx paid to us a deposit of approximately $21.6 million to secure
its option right. Xilinx can exercise the option only between April 30, 2000 and
July 31, 2000. Upon exercise of the option,  the Company must refund the deposit
amount and Xilinx must deposit into escrow funds equal to the purchase  price of
$21.6 million.  In the event Xilinx does not exercise its option, we must refund
the deposit in full to Xilinx, without interest.

     During the year ended December 31, 1999, options were exercised for a total
of 191,920  shares.  The exercise price for all options  exercised was $4.50 per
share and total proceeds to the Company were approximately $863,000.

DECEMBER 31, 1998 COMPARED WITH DECEMBER 31, 1997

     As a result of our  acquisition  of the general  partnership  interests and
control of the operating partnerships,  our financial statements consolidate the
financial  position and results of the operating  partnerships,  effective as of
July 1, 1998.  Accordingly,  through our general  partnership  interests,  as of
December 31, 1998, we owned, operated and managed 71 properties representing 4.5
million rentable square feet.

     On  September  23,  1998,  in our  capacity as the  general  partner of the
operating partnerships,  we obtained a loan from Prudential Insurance Company of
America in the amount of $130.0 million (the "Prudential Loan"). We used the net
proceeds of the loan to repay  approximately  $14.2  million of  mortgage  notes
payable,  and used the  remaining  amount to reduce  the  outstanding  principal
balance  owing under the mortgage  notes  payable to the Berg Group,  which is a
related party. The loan is cross-collateralized  and secured by a single deed of
trust  encumbering  18 properties  improved with 24 buildings and  consisting of
approximately  1.7 million square feet of rentable space, all of which are owned
by the operating partnerships.  The loan bears interest at a fixed rate of 6.56%
per annum, matures on October 15, 2008 and is payable in monthly installments of
approximately  $827,000,   which  includes  principal,   based  upon  a  30-year
amortization,  and interest.  The Prudential  Loan has a substantial  prepayment
penalty.  The loan is nonrecourse to the operating  partnerships  and us, except
with respect to certain matters such as environmental  liability relating to the
encumbered properties,  the payment of taxes and assessments with respect to the
encumbered  properties,  the  responsibility  to return security deposits to the
tenants of the encumbered  properties,  insurance or condemnation  proceeds that
are not properly  applied under the terms of the loan,  damages that result from
early  termination or amendment to specified major leases,  waste of the subject
properties, bankruptcy or insolvency of any of the operating partnerships or us,
and any  fraud or  misrepresentations  by us or the  operating  partnerships  in
connection  with the loan. In addition,  some limited  partners have  guaranteed
portions of the loan.

     On September 30, 1998, the operating  partnerships assumed a $100.0 million
line of credit  with Wells  Fargo  Bank,  N.A from the Berg  Group.  The line of
credit was subsequently  reduced to $50 million in October 1999. The Wells Fargo
line matured  February 29, 2000 and bore interest at the lesser of (a) the Wells
Fargo prime rate in effect on the first day of each  calendar  month;  (b) LIBOR
plus  1.65%;  or (c) the Wells  Fargo Funds Rate quoted on the first day of each
calendar  month plus 1.65%.  Borrowings  outstanding  at December  31, 1998 were
approximately $27.2 million.

                                     - 29 -
<PAGE>
     During the  fourth  quarter of 1998,  we closed on the  acquisition  of two
newly  constructed  R&D  properties  located on Richard  Avenue in Santa  Clara,
California and Hellyer Avenue in San Jose, California.  These acquisitions added
approximately  163,000  square feet of rentable space and were acquired from the
Berg  Group  under the Berg  Land  Holdings  Option  Agreement  and the  Pending
Projects Acquisition Agreement.  The total gross acquisition price for these two
properties was approximately $13.7 million.  Through the operating partnerships,
we assumed approximately $9.6 million of debt due Berg & Berg Enterprises,  Inc.
and issued 672,064 L.P. Units of which 618,684 were issued to various members of
the Berg Group.

     On March 30, 1998, Michael J. Anderson, our former Vice President and Chief
Operating  Officer,  purchased 200,000 shares of common stock at $4.50 per share
in exchange for a $900,000  note payable to us and due March 30, 2003.  The note
was a full recourse  promissory note bearing interest at an annual rate of 5.59%
and was  collateralized  by a pledge of the  shares.  Additionally,  in December
1998,  Mr.  Anderson  acquired  25,000  shares of our common  stock upon partial
exercise of his option grant. The exercise price was $4.50 per share.

     On December 29, 1998, we completed  the sale of 6,495,058  shares of common
stock, at a price of $4.50 per share, to a number of accredited investors in two
May 1998  private  placements.  The  aggregate  proceeds to us, net of a fee and
offering costs,  was  approximately  $27.8 million.  We used the proceeds to pay
outstanding  amounts under the Demand Notes owed to the operating  partnerships.
Offering  costs  included  200,000  shares of common  stock  issued for services
rendered with the placement of such shares.

     Following the sale of all 11 of our  properties  in 1997,  coupled with the
cash dividends paid to  stockholders,  only cash and  receivables  remained and,
therefore,  the resulting corporate entity had insignificant  revenue-generating
capabilities and cash-generating capabilities and minimal operations, aside from
interest income and general and administrative expenses.

LIQUIDITY AND CAPITAL RESOURCES

     We  expect  our  principal   source  of  liquidity  for   distributions  to
stockholders,   debt  service,   leasing   commissions  and  recurring   capital
expenditures to be Funds from Operations  ("FFO"),  and the borrowings under the
line of credit with the Berg Group.  We expect these  sources of liquidity to be
adequate to meet projected  distributions  to  stockholders  and other presently
anticipated  liquidity  requirements  in 2000.  We expect to meet our  long-term
liquidity  requirements  for  the  funding  of  property  development,  property
acquisitions  and other  material  non-recurring  capital  improvements  through
long-term  secured and  unsecured  indebtedness  and the issuance of  additional
equity  securities  by us.  We  expect  our FFO to be the  principal  source  of
liquidity for  distributions,  debt service,  leasing  commissions and recurring
capital

     Our $50 million Wells Fargo line of credit expired on February 29, 2000 and
was repaid with  proceeds from and replaced by a $50 million line of credit from
the Berg Group. The Wells Fargo line of credit was  collateralized  by 14 of our
properties  and was guaranteed by Mr. Berg and certain other members of the Berg
Group.  The Berg  Group  line of credit  is  currently  collateralized  by seven
properties,  bears  interest at LIBOR plus 1.30  percent,  and matures in March,
2001.  We  believe  that the terms of the Berg  Group  line of credit  were more
favorable than those available from Wells Fargo or similar lenders.  See "Item 1
-- Business -- Rish Factors -- Our contractual business  realationships with the
Berg Group  presents  additional  conflicts of interest  which may result in the
realization of economic  benefits or the defferal of tax liabilities by the Berg
Group without equivolent benefits to our stockholders."

     At December 31, 1999, we had total  indebtedness  of  approximately  $165.1
million,  including approximately $134.0 million of fixed rate mortgage debt and
approximately  $31.1  million of variable  rate  mortgage  debt due to a related
party  debt.  Of total fixed  debt,  the  Prudential  Secured  Loan  represented
approximately  $128.3  million.   During  the  year  ended  December  31,  1999,
distributions  payable  to various  members  of the Berg Group of  approximately
$27.3  million  relating  to the first,  second and third  quarters of 1999 were
converted to related party debt,  on terms  identical to the Wells Fargo line of
credit.

     As of December 31, 1999,  our debt to total  market  capitalization  ratio,
which is computed as our total debt outstanding divided by the sum of total debt
outstanding  plus the market  value of common stock (based on an $7.70 per share
price) on a fully diluted basis, including the conversion of all O.P. Units into
common  stock,  was  approximately  18.6% based upon an  estimated  total market
capitalization of approximately $887.3 million.

                                     - 30 -
<PAGE>

     The  following  table  sets  forth  certain   information   regarding  debt
outstanding as of December 31, 1999:
<TABLE>
<CAPTION>


                                                                                             At December    Maturity      Interest
             Debt Description                            Collateral Properties                 31, 1999       Date          Rate
--------------------------------------------  --------------------------------------------  -------------  -----------  ------------
Line of Credit:                                                                                 ($ in
                                                                                               thousands)
<S>                                           <C>                                             <C>            <C>         <C>
Wells Fargo                                   1810 McCandless Drive, Milpitas, CA                             2/00        Variable
                                              1740 McCandless Drive, Milpitas, CA
                                              1680 McCandless Drive, Milpitas, CA
                                              1600 McCandless Drive, Milpitas, CA
                                              1500 McCandless Drive, Milpitas, CA
                                              1450 McCandless Drive, Milpitas, CA
                                              1350 McCandless Drive, Milpitas, CA
                                              1325 McCandless Drive, Milpitas, CA
                                              1425 McCandless Drive, Milpitas, CA
                                              1526 McCandless Drive, Milpitas, CA
                                              1575 McCandless Drive, Milpitas, CA
                                              1625 McCandless Drive, Milpitas, CA
                                              1745 McCandless Drive, Milpitas, CA
                                              1765 McCandless Drive, Milpitas, CA

Mortgage Notes Payable (related parties):
                                              2033-2043 Samaritan Drive, San Jose, CA          $31,193       12/00        Variable
                                              2133 Samaritan Drive, San Jose, CA               -------
                                              2233-2243 Samaritan Drive, San Jose, CA
Mortgage Notes Payable)
Prudential Capital Group                      20400 Mariani, Cupertino, CA                       1,902        3/09          8.75%
New York Life Insurance Company               10440 Bubb Road, Cupertino, CA                       405        8/09          9.625%
Home Savings & Loan Association               10460 Bubb Road, Cupertino, CA                       477        1/07          9.5%
Mellon Mortgage Company                       3530 Bassett, Santa Clara, CA                      2,853        6/01          8.125%
Prudential Insurance Company of America       10300 Bubb, Cupertino, CA                        128,315       10/08          6.56%
                                              10500 N. DeAnza, Cupertino, CA
                                              4050 Starboard, Fremont, CA
                                              45700 Northport Loop, Fremont, CA
                                              45738 Northport Loop, Fremont, CA
                                              450-460 National, Mountain View, CA
                                              4949 Hellyer, San Jose, CA
                                              6311 San Ignacio, San Jose, CA
                                              6321 San Ignacio, San Jose, CA
                                              6325 San Ignacio, San Jose, CA
                                              6331 San Ignacio, San Jose, CA
                                              6341 San Ignacio, San Jose, CA
                                              6351 San Ignacio, San Jose, CA
                                              3236 Scott, Santa  Clara, CA
                                              3560 Bassett, Santa  Clara, CA
                                              3570 Santa  Clara, CA
                                              3580 Bassett, Santa Clara, CA
                                              1135 Kern, Sunnyvale, CA
                                              1212 Bordeaux, Sunnyvale, CA
                                              1230 E. Arques, Sunnyvale, CA
                                              1250 E. Arques, Sunnyvale, CA
                                              1170 Morse, Sunnyvale, CA
                                              3540 Bassett, Santa Clara, CA
                                              3542 Bassett, Santa Clara, CA
                                              3544 Bassett, Santa Clara, CA
                                              3550 Bassett, Santa Clara, CA
                                                                                            -------------
Mortgage Notes Payable Subtotal                                                                   133,952
                                                                                            -------------
Total                                                                                            $165,145
                                                                                            -------------
</TABLE>
                                     - 31 -
<PAGE>
     The following table presents certain  information  concerning  projects for
which we, through our interests in the operating partnerships, have the right to
acquire under the Pending Development Projects Acquisition Agreement or the Berg
Land Holdings Option Agreement. The table includes only those projects for which
development has commenced.
<TABLE>
<CAPTION>

                                  Approximate
                                Rentable Area      Anticipated       Total Estimated
Property                        (Square Feet)    Acquisition Date    Acqusition Value
------------------------       ---------------  ------------------  ------------------
<S>                                <C>               <C>               <C>
Pending Projects:
  Automation (1 building)            61,056           Q2 2000            $ 6,700
  Automation (1 building)           114,028           Q1 2001             12,700
                               ---------------                      ------------------
                     Subtotal       175,084                               19,400
                               ---------------
Berg Land Holdings:
  Hellyer IV (50% JV)               160,000           Q2 2000             11,600
  Hellyer View                       77,184           Q3 2000              9,300
  Hellyer III (Phase I)             117,740           Q4 2000             14,800
  Candescent (Phase I)              255,000           Q1 2000             25,000
  Hellyer Vista (Phase I)           125,000           Q4 2000             15,000
                               ---------------                      ------------------
                     Subtotal       734,924                               75,700
                               ---------------                      ------------------
TOTAL                               910,008                              $95,100
</TABLE>

HISTORICAL CASH FLOWS

     Net cash provided by operating  activities  for the year ended December 31,
1999 was  approximately  $60.3 million,  compared to, net cash used in operating
activities of  approximately  $16.3 million for the year ended December 31, 1998
and the thirteen-month period ended December 31, 1997, respectively.  The change
was a direct result of our acquisition of our general  partnership  interests in
the operating partnerships during the third quarter of 1998.

     Net cash used in investing  activities was approximately  $12.1 million for
the year  ended  December  31,  1999,  compared  to net cash  used in  investing
activities  of  approximately  $118,000  and  net  cash  provided  by  investing
activities of  approximately  $46.2 million for the year ended December 31, 1998
and for the thirteen-month  period ended December 31, 1997,  respectively.  Cash
used in  investing  activities  during  1999  related  to  improvements  made to
existing  real  estate  assets,  as  well  as  to  payments  made  to  Microsoft
Corporation for shell and tenant  improvements,  which were partially  offset by
the  receipt of $21.6  million for a  refundable  option  payment.  Cash used in
investing activities during 1998 related solely to improvements made to existing
real  estate  assets  acquired  as  part  of our  investment  in  the  operating
partnerships.  Net cash provided by investing  activities in 1997 related solely
to the sales proceeds realized by us on the final disposition of our real estate
holdings held prior to 1998.

     Net cash used in financing  activities was approximately  $41.9 million for
the year ended  December  31, 1999  compared to $21.5 and $42.7  million for the
year ended  December 31, 1998 and for the  thirteen-month  period ended December
31, 1997,  respectively.  During 1999, we reduced debt  outstanding by utilizing
net proceeds from the underwritten public offering of 8,680,000 shares of common
stock for net  proceeds  of $66.9  million  and by  utilizing  cash  provided by
operating activities. For the year ended December 31, 1999, we paid dividends to
our  stockholders  and made  distributions to our O.P Unit holders totaling $6.5
million. During 1998, we reduced debt outstanding by utilizing proceeds from new
borrowings,  issuing  6,495,058  shares of  common  stock  for net  proceeds  of
approximately $28.1 million and utilizing cash provided by operating activities.
During the  thirteen-month  period ended  December 31, 1997,  we repaid all debt
outstanding at that time, and made dividend payments  aggregating  approximately
$18.9 million.

CAPITAL EXPENDITURES

     The properties  require periodic  investments of capital for tenant-related
capital expenditures and for general capital  improvements.  For the years ended
December 31, 1994 through  December 31, 1999, the recurring  tenant  improvement
costs and  leasing  commissions  incurred  with  respect to new leases and lease
renewals of the properties previously owned or controlled by members of the Berg
Group averaged  approximately $1.5 million annually.  We will have approximately
582,749  rentable square feet under expiring leases from January 1, 2000 through
December 31, 2001.  We expect that the average  annual cost of recurring  tenant
improvements  and  leasing  commissions,  related to these  properties,  will be
approximately  $.75 million  annually from January 1, 2000 through  December 31,
2001.  We  believe  we will  recover

                                     - 32 -
<PAGE>
substantially all of these sums from the tenants under the new or renewed leases
through increases in rental rates.  Until we actually sign the leases,  however,
we  cannot  assure  you that this will  occur.  We expect to meet our  long-term
liquidity  requirements  for the  funding  of  property  acquisitions  and other
material  non-recurring  capital  improvements  through  long-term  secured  and
unsecured  indebtedness and the issuance of additional  equity securities by the
Company,  but cannot be assumed that we will be able to meet our requirements on
favorable terms. See "----Certain Policies."

FUNDS FROM OPERATIONS

     As defined by the National  Association  of Real Estate  Investment  Trusts
("NAREIT"),  FFO  represents net income (loss) before  minority  interest of O.P
unit  holders,   computed  in  accordance  with  generally  accepted  accounting
principles,  excluding  gains (or losses) from debt  restructuring  and sales of
property,  plus real estate related  depreciation  and  amortization,  excluding
amortization  of deferred  financing  costs and  depreciation of non-real estate
assets,  and  after  adjustments  for  unconsolidated   partnerships  and  joint
ventures.  Management  considers FFO an appropriate measure of performance of an
equity REIT because, along with cash flows from operating activities,  financing
activities and investing activities, it provides investors with an understanding
of our ability to incur and service  debt,  and make capital  expenditures.  FFO
should  not be  considered  as an  alternative  for net  income as a measure  of
profitability  nor  is  it  comparable  to  cash  flows  provided  by  operating
activities   determined  in  accordance  with  generally   accepted   accounting
principles,  nor is FFO  necessarily  indicative of funds  available to meet our
cash  needs,  including  our need to make cash  distributions  to  satisfy  REIT
requirements.

     Our  definition  of FFO also  assumes  conversion  at the  beginning of the
period of all convertible securities, including minority interests that might be
exchanged for common stock.  Our FFO does not represent the amount available for
management's  discretionary  use,  as  such  funds  may be  needed  for  capital
replacement  or expansion,  debt service  obligations or other  commitments  and
uncertainties.

     Furthermore,  FFO is not comparable to similarly entitled items reported by
other  REITs that do not define  FFO  exactly as we do. FFO for the years  ended
December 31, 1999 and 1998 is as follows:

<TABLE>
<CAPTION>

                                                                     For the Year Ended December 31,
                                                       ---------------------------------------------------------
                                                                  1999                            1998
                                                       --------------------------     --------------------------
                                                                        (dollars in thousands)
<S>                                                           <C>                             <C>
Net income  (loss)                                             $ 6,531                         $  (221)
Add:
   Minority Interest                                            39,785                          12,041
   Depreciation                                                 13,156                           5,410
Less:
   Gain on sale of securities                                     (393)                              -
                                                       --------------------------     -------------------------
FFO                                                            $59,079                         $17,238
                                                       ==========================     ==========================
</TABLE>

OVERVIEW OF DISTRIBUTION POLICY

     We intend to make  regular  quarterly  distributions  to  holders of common
stock based on our funds available for distribution ("FAD"), which is calculated
as  FFO  less  straight-lines   rents,  leasing  commissions  paid  and  capital
expenditures  made  during  the  respective  period.  Our  ability  to make such
distributions will be affected by numerous factors including,  most importantly,
the receipt of distributions from the operating partnerships.

     FAD  does  not  represent  cash  generated  from  operating  activities  in
accordance with generally accepted accounting  principles and is not necessarily
indicative of cash available to fund cash needs.  The actual return that we will
realize and the amount  available  for  distributions  to  stockholders  will be
affected  by a number of  factors,  including  the  revenues  received  from our
properties,  our operating expenses, the interest expense incurred on borrowings
and planned and unanticipated capital expenditures.

     We anticipate that cash available for distribution will exceed earnings and
profits for federal income tax purposes, as the latter figure takes into account
non-cash  expenses,  such as depreciation and amortization,  that we will incur.
Distributions, other than capital gain distributions, by us to the extent of our
current and  accumulated  earnings  and profits for federal  income tax purposes
most likely will be taxable to U.S.  stockholders  as ordinary  dividend  income
unless a stockholder is a tax-exempt entity. Distributions in excess of earnings
and profits  generally  will be treated as a  non-taxable  reduction of the U.S.
stockholder's  basis  in the  common  stock to the  extent  of such  basis,  and
thereafter as taxable gain.  The percentage of such  distributions  in excess of
earnings and profits, if any, may vary from period to period.

                                     - 33 -
<PAGE>
     Distributions  will be determined by our board of directors and will depend
on actual  FAD,  our  financial  condition,  capital  requirements,  the  annual
distribution  requirements  under the REIT provisions of the Code and such other
factors as the board of directors deems  relevant.  For a discussion of the risk
that we will not meet our distribution objectives, see Part I - Item 1 "Business
- Risk  Factors--Stockholders  are not assured of receiving  cash  distributions
from us." The  calculation of FAD for the years ended December 31, 1999 and 1998
is as follows:

<TABLE>
<CAPTION>

                                                                      For the Year Ended December 31,
                                                       ---------------------------------------------------------
                                                                  1999                           1998
                                                       --------------------------     --------------------------
                                                                        (dollars in thousands)
<S>                                                           <C>                              <C>
FFO                                                            $59,079                          $17,238
Less:
    Straight-lined rents                                         4,340                            1,624
    Leasing commissions                                            434                              140
    Capital expenditures                                           708                              118
                                                       --------------------------     --------------------------
FAD                                                            $53,597                          $15,356
                                                       ==========================     ==========================
</TABLE>

POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

     We have adopted policies with respect to investment,  financing,  conflicts
of interest and other  activities.  These  policies have been  formulated by our
board of directors,  are set forth in our charter, bylaws, operating partnership
agreements  or agreements  with the Berg Group,  and generally may be amended or
revised  from  time to time,  subject  to  applicable  agreement  terms,  at the
discretion of the board of directors without a vote of the  stockholders.  Among
other things, these policies provide that:

     -    so long as the Berg Group members and their affiliates,  other than us
          and the operating partnerships, beneficially own, in the aggregate, at
          least 15% of the outstanding shares of common stock on a fully diluted
          basis,  which is calculated based on all outstanding  shares of common
          stock and all shares of common  stock that could be acquired  upon the
          exercise of all  outstanding  options to acquire our voting stock,  as
          well as all shares of common stock  issuable upon exchange of all O.P.
          Units, the approval of a majority of our directors,  including Carl E.
          Berg or his  designee as a director,  and of the holders of a majority
          of the O.P.  Units is required  for us to take title to assets,  other
          than   temporarily  in  connection   with  an  acquisition   prior  to
          contributing such assets to the operating partnerships,  or to conduct
          business other than through the operating  partnerships,  or for us or
          the operating  partnerships  to engage in any business  other than the
          ownership,  construction,  development  and  operation  of real estate
          properties,  or for certain fundamental  corporate actions,  including
          amendments  to  our  charter,  bylaws  or  any  operating  partnership
          agreement   and  any   merger,   consolidation   or  sale  of  all  or
          substantially  all  of  our  assets  or the  assets  of the  operating
          partnerships;

     -    changes in certain policies with respect to conflicts of interest must
          be consistent with legal requirements;

     -    certain  policies  with respect to  competition  by the Berg Group are
          imposed  pursuant to  provisions  of the  acquisition  agreement  that
          cannot be amended or waived  without the  approval of the  independent
          directors committee of our board of directors;

     -    we cannot take any action intended to terminate our qualification as a
          REIT  without  the  approval  of more than 75% of the entire  board of
          directors; and

     -    we cannot undertake  certain other specified  transactions,  including
          the issuance of debt securities, and borrowings in excess of specified
          limits,  or the  amendment  of our  charter  and  bylaws,  without the
          approval of more than 75% of the entire board of directors.

     INVESTMENT POLICIES

     We expect to pursue our  business  and  investment  objectives  principally
through the direct ownership by the operating partnerships of our properties and
future acquired properties. Development or investment activities are not limited
to any specified  percentage of our assets.  We may also  participate with other
entities  in  property  ownership,  through  joint  ventures  or

                                     - 34 -
<PAGE>
other  types of  co-ownership.  Equity  investments  may be subject to  existing
mortgage  financing and other  indebtedness  which have priority over our equity
interests.

     While we will  emphasize  equity  real estate  investments,  we may, in our
discretion and subject to the percentage ownership  limitations and gross income
tests necessary for REIT qualification, invest in mortgage and other real estate
interests,  including securities of other real estate investment trusts. We have
not  previously  invested  in  mortgages  or  securities  of other  real  estate
investment  trusts,  and we do not  have  any  present  intention  to make  such
investments.

     FINANCING POLICIES

     To the extent that our board of  directors  determines  to seek  additional
capital,  we may raise such capital through  additional equity  offerings,  debt
financing or retention of cash flow, or through a combination  of these sources,
after  consideration  of provisions of the Code requiring the  distribution by a
REIT of a certain percentage of its taxable income and taking into account taxes
that  would be  imposed  on  undistributed  taxable  income.  It is our  present
intention  that any  additional  borrowings  will be made through the  operating
partnerships,  although  we may incur  borrowings  that would be reloaned to the
operating partnerships.  Borrowings may be unsecured or may be secured by any or
all of our assets,  the operating  partnerships or any existing or new property,
and may have full or limited  recourse to all or any portion of our assets,  the
operating partnerships or any existing or new property.

     We have not established any limit on the number or amount of mortgages that
may be placed on any single property or on our portfolio as a whole. We may also
determine  to finance  acquisitions  through the exchange of  properties  or the
issuance of  additional  O.P.  Units in the  operating  partnerships,  shares of
common stock or other securities.

     In the event that the board of  directors  determines  to raise  additional
equity capital,  it has the authority,  without stockholder  approval,  to issue
additional  shares of common  stock,  preferred  stock or other  capital  stock,
including securities senior to the common stock, in any manner and on such terms
and for such  consideration  it deems  appropriate,  including  in exchange  for
property.  In the event that we issue any shares of common  stock or  securities
convertible  into or  exchangeable  or exercisable  for, shares of common stock,
subject to limited exceptions,  such as the issuance of common stock pursuant to
any stock incentive plan adopted by us or pursuant to limited partners' exercise
of the exchange  rights or the put rights,  the limited  partners  will have the
right to purchase  common stock or such  securities  in order to maintain  their
respective  percentage interests in us on a fully diluted basis. If the board of
directors  determines  that we will  raise  additional  equity  capital  to fund
investments by the operating partnerships,  we will contribute such funds to the
operating  partnerships  as a contribution to capital and purchase of additional
general partnership interest; however, holders of O.P. Units will have the right
to participate in such funding on a pro rata basis. In the event that holders of
O.P. Units sell their O.P. Units to us upon exercise of their put rights, we are
authorized to raise the funds for such purchase by issuing  additional shares of
common stock.  Alternatively,  we may issue additional shares of common stock in
exchange for the tendered O.P. Units.

     Our  board of  directors  also has the  authority  to cause  the  operating
partnerships to issue  additional O.P. Units in any manner and on such terms and
for such  consideration,  as it deems  appropriate,  including  in exchange  for
property. In the event that the operating  partnerships issue new O.P. Units for
cash, but not property,  the limited partners holding O.P. Units in an operating
partnership  will have the right to  purchase  O.P.  Units in order,  and to the
extent  necessary,  to maintain their  respective  percentage  interests in that
operating partnership.  The new O.P. Units will be exchangeable for common stock
pursuant  to the  exchange  rights or may be  tendered to us pursuant to the put
rights.

     DISPOSITION POLICIES

     We  have  no  current  intention  of  disposing  of any of our  properties,
although we reserve the right to do so. The tax basis of the limited partners in
the properties in the operating  partnerships is substantially less than current
fair market value.  Accordingly,  prior to the  disposition of their O.P. Units,
upon a disposition of any of the properties, a disproportionately large share of
the gain for  federal  income tax  purposes  would be  allocated  to the limited
partners.  For a more  detailed  discussion  of these tax effects,  see "Federal
Income  Tax   Considerations--Tax   Aspects  of  the  Operating   Partnerships."
Consequently,  it may be in  the  interests  of the  limited  partners  that  we
continue to hold the properties in order to defer such taxable gain. In light of
this tax effect,  the  operating  partnership  agreements  provide  that,  until
January 2009, or until the Berg Group members and their  affiliates,  other than
us and the operating partnerships, beneficially own, in the aggregate, less than
15% of the outstanding shares of common stock on a fully diluted basis, which is
calculated  based on all  outstanding  shares of common  stock and all shares of
common stock that could be acquired upon the exercise of all outstanding options
to acquire our voting stock, as well as all shares of common stock issuable upon
exchange of all O.P. Units, if earlier,  Mr. Berg and Clyde J. Berg may prohibit
the operating  partnerships from disposing of properties which they designate in
a taxable transaction. Mr. Kontrabecki has a similar right with respect to seven
of the properties,  which right will lapse before the end of the ten-year period
if his beneficial ownership interest falls below 750,000 O.P. Units. The limited
partners may seek to cause us to retain the properties

                                     - 35 -
<PAGE>
even when such action may not be in the interests of some, or a majority, of our
stockholders.  The  operating  partnerships  will be able to effect  "tax-free,"
like-kind  exchanges under Section 1031 of the Code, or in connection with other
non-taxable  transactions,   such  as  a  contribution  of  property  to  a  new
partnership,  without obtaining the prior written consent of these  individuals.
The approval of a majority of our directors, including Mr. Berg or his designee,
will be required to sell all or substantially all of our assets.  The consent of
the holders of a majority of the O.P. Units will be required to effect a sale or
sales of all,  or  substantially  all,  of the  assets  of any of the  operating
partnerships.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     We do not believe that recently issued accounting standards will materially
impact our financial statements.

YEAR 2000

     INTRODUCTION

     The term  "Year  2000  issue" is a general  term used to  describe  various
problems  that may result from the improper  processing  by computer  systems of
dates  after  1999.   These  problems  could  result  in  a  system  failure  or
miscalculations causing disruptions of operations.

     Our efforts to address Year 2000 issues consisted of reviewing our computer
information systems, evaluating other computer systems that do not relate to our
internal  information systems but include embedded technology at our properties,
such as security, heating, ventilation and air conditioning,  elevator, fire and
safety systems,  and communicating with certain significant  third-party service
providers to determine  whether there will be any  interruption in their systems
that could affect us.

     OUR SYSTEMS

     INFORMATION TECHNOLOGY SYSTEMS. We have reviewed our information technology
systems and have  contacted  vendors to determine  whether such systems are Year
2000  compliant.  Based upon our inquiries,  we have determined that our primary
network operating system, Windows NT Server 4.0, and all of our desktop personal
computers are Year 2000  compliant.  The vendor for our property  management and
accounting software has provided us with Year 2000 compliant software upgrade.

     EMBEDDED SYSTEMS.  We believe that, in most cases, under the lease terms it
is the  tenant's  sole  responsibility  to  ensure  that the  embedded  systems,
providing,   for  example,   building  security,   heating,   ventilation,   air
conditioning,  fire alarms and sprinklers,  and elevator service,  are Year 2000
compliant.  We have  made  limited  inquiries  to the  vendors  for  some of the
embedded systems used on our properties. Although we have concluded that many of
our tenants are responsible for certain Year 2000 compliance  costs,  there is a
possibility  that certain  tenants will not agree with such  conclusions.  As of
March  15,  2000,  we were not  aware  of any  systems  that  are not Year  2000
compliant.

     RISKS PRESENTED BY YEAR 2000 ISSUES

     We have not budgeted any amount to address Year 2000 issues.  At this time,
we have not identified any specific business functions that are likely to suffer
material  disruption as a result of Year 2000-related events or that will have a
material  adverse effect on our financial  condition,  results of operations and
ability to make cash distributions to our stockholders. Although we believe that
our estimates and expectations concerning the scope and cost of Year 2000 issues
that we may  confront  are based on  reasonable  assumptions,  our actual  cost,
progress and expenses with respect to our plan to address Year 2000 issues could
differ  materially  from  those  set  forth  in  the  foregoing  forward-looking
statements.

                                     - 36 -
<PAGE>


Item 7A. Quantitative and Qualitative Disclosures about Market Risk

     Our exposure to market risk for changes in interest rates relates primarily
to our current and future  debt  obligations.  We are  vulnerable,  however,  to
significant  fluctuations  of  interest  rates on our  floating  rate debt,  and
pricing on our future debt.

     The following table 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.  Average interest rates are based on implied LIBOR for
the respective time period.  Fair value  approximates  book value for fixed rate
debt. Of the fair value of secured notes payable,  approximately  $129.4 million
represents the Prudential secured loan.
<TABLE>
<CAPTION>

                                                2000       2001       2002      2003      2004   Thereafter    Total   Fair Value
                                                ----       ----       ----      ----      ----   ----------    -----   ----------
                                                                                (in thousands)
<S>                                          <C>         <C>         <C>       <C>      <C>       <C>       <C>         <C>
VARIABLE RATE DEBT:
   Secured notes payable (related parties)    $31,193                                                        $ 31,193   $ 31,193
   Average interest rate                       (7.06)

FIXED RATE DEBT:
   Secured notes payable                        1,890     $4,636     $2,034    $2,179    $2,333    $120,880  $133,952   $133,952
   Average interest rate                        6.64%      6.64%      6.64%     6.64%     6.64%       6.64%
</TABLE>

                                     - 37 -
<PAGE>



Item 8.  Financial Statements and Supplementary Data

                          MISSION WEST PROPERTIES, INC.
                          INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

                                                                                                                   PAGE
                                                                                                                 ---------
<S>                                                                                                                <C>
Report of Independent Accountants                                                                                   39
Consolidated Balance Sheets of Mission West Properties, Inc. at December 31, 1999 and 1998                          40
Consolidated Statements of Operations of Mission West Properties, Inc. for the years ended                          41
  December 31, 1999 and 1998, the one-month ended December 31, 1997 and the year ended
  November 30, 1997
Consolidated Statements of Changes in Stockholders' Equity of Mission West Properties, Inc.                         42
  for the years ended December 31, 1999 and 1998, the one-month ended December 31, 1997
  and the year ended November 30, 1997
Consolidated Statements of Cash Flows of Mission West Properties, Inc. for the years ended                          43
  December 31, 1999 and 1998, the one-month ended December 31, 1997 and the year ended
  November 30, 1997
Notes to the Consolidated Financial Statements                                                                      44
Report of Independent Accountants                                                                                   59
Schedule III: Real Estate and Accumulated Depreciation of Mission West Properties, Inc. as of                       60
  December 31, 1999
Report of Independent Accountants                                                                                   64
Combined Balance Sheets of the Berg Properties (Predecessor) at June 30, 1998 and December 31, 1997                 65
Combined Statement of Operations of the Berg Properties (Predecessor) for the six months ended June 30,             66
  1998 and the years ended December 31, 1997 and 1996
Combined Statements of Net Equity (Deficit) of the Berg Properties (Predecessor) for the six months ended           67
  June 30, 1998 and the years ended December 31, 1997 and 1996
Combined Statements of Cash Flows for the Berg Properties (Predecessor) for the six months ended June               68
  30, 1998 and the years ended December 31, 1997 and 1996
Notes to the Consolidated Financial Statements                                                                      69
Report of Independent Accountants                                                                                   75
Schedule III: Real Estate and Accumulated Depreciation of the Berg Properties (Predecessor) as of                   76
     December 31, 1997

</TABLE>
                                     - 38 -
<PAGE>

                        Report of Independent Accountants

To the Board of Directors and Shareholders
of Mission West Properties, Inc.

In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Mission West
Properties,  Inc. and its subsidiaries  (the "Company") at December 31, 1999 and
1998,  and the  results of their  operations  and their cash flows for the years
ended  December 31, 1999 and 1998 and November 30, 1997 and the one month period
ended  December 31, 1997, in conformity  with  accounting  principles  generally
accepted in the United States. These financial statements are the responsibility
of the  Company's  management;  our  responsibility  is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements  in  accordance  with auditing  standards  generally  accepted in the
United  States  which  require  that we plan and  perform  the  audit to  obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

San Francisco, California
January 21, 2000

                                     - 39 -
<PAGE>


                          MISSION WEST PROPERTIES, INC.
                           CONSOLIDATED BALANCE SHEETS
             (Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>

                                     ASSETS
                                                                                           December 31,
                                                                                    1999                  1998
                                                                           ---------------------  --------------------
<S>                                                                                  <C>                   <C>
Real estate assets:
  Land                                                                                $ 149,416             $  90,929
  Buildings and improvements                                                            566,766               430,510
                                                                           ---------------------  --------------------
                                                                                        716,182               521,439
  Less accumulated depreciation                                                         (18,566)               (5,410)
                                                                           ---------------------  --------------------
Net real estate assets                                                                  697,616               516,029

Cash and cash equivalents                                                                 6,553                   246
Deferred rent                                                                             5,964                 1,624
Other assets (net of accumulated amortization of
  $275 and $43 at December 31, 1999 and 1998, respectively)                               2,571                 1,967
                                                                           ---------------------  --------------------
    Total assets                                                                      $ 712,704             $ 519,866
                                                                           =====================  ====================


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
Line of credit                                                                        $       -             $  27,201
Mortgage notes payable                                                                  133,952               157,188
Mortgage notes payable (related parties)                                                 31,193                20,752
Interest payable                                                                          1,005                   632
Security deposits                                                                         2,335                 2,061
Prepaid rental income                                                                     7,802                 3,246
Dividends/distributions payable                                                          14,019                     -
Refundable option payment                                                                21,564                     -
Accounts payable and accrued expenses                                                     3,342                 2,154
                                                                           ---------------------  --------------------
    Total liabilities                                                                   215,212               213,234
                                                                           ---------------------  --------------------
Commitments and contingencies (Notes 4, 6 and 17)

Minority interest                                                                       396,810               273,379

Stockholders' equity:
Preferred stock, no par value, 200,000 shares authorized,
    none issued and outstanding                                                               -                     -
Common stock, $.001 par value and no par at December 31, 1999
    and 1998, respectively, 200,000,000 shares authorized, 16,972,374
    shares and 8,218,594  shares issued and outstanding at December 31,                      17                     8
    1999 and 1998, respectively
Paid-in capital                                                                         122,746                55,528
Less amounts receivable from private placement                                                -                  (900)
Accumulated deficit                                                                     (22,081)              (21,383)
                                                                           ---------------------  --------------------
    Total stockholders' equity                                                          100,682                33,253
                                                                           ---------------------  --------------------
    Total liabilities and stockholders' equity                                        $ 712,704             $ 519,866
                                                                           =====================  ====================
</TABLE>



                 See notes to consolidated financial statements

                                     - 40 -
<PAGE>


                          MISSION WEST PROPERTIES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  (Dollars in thousands, except per share data)
<TABLE>
<CAPTION>

                                                   Year Ended December 31,
                                          -------------------------------------------      One Month Ended           Year Ended
                                                 1999                    1998             December 31, 1997       November 30, 1997
                                          -------------------     -------------------     ------------------     -------------------
<S>                                              <C>                      <C>                  <C>                        <C>
Revenue:
Rental revenues from real estate                  $   73,726              $   27,285            $         -                $  1,376
Tenant reimbursements                                 11,047
Other income, including interest                       1,220                     278                     27                     359
                                          -------------------     -------------------     ------------------     -------------------
                                                      85,993                  31,756                     27                   1,735

Expenses:
Property operating, maintenance and real
    taxes                                             11,467                                                                    246
Interest                                              11,623                   4,685                      -                     425
Interest (related parties)                             2,246
General and administrative expenses                    1,185                                            139                   1,467
Depreciation                                          13,156                   5,410                      -                     246
                                          -------------------     -------------------     ------------------     -------------------
                                                      39,677                  19,928                    139                   2,384

Income (loss) before gain  on sale of
    real estate assets, minority
    interest and income taxes                         46,316                  11,828                   (112)                   (649)
Gain on sale of real estate assets                         -                       -                      -                   4,736
                                          -------------------     -------------------     ------------------     -------------------
Income (loss) before minority interest
    and income taxes                                  46,316                  11,828                   (112)                  4,087

Minority interest                                     39,785                  12,049                      -                       -
                                         --------------------    --------------------    -------------------     -------------------
Net income (loss) before income taxes                  6,531                    (221)                  (112)                  4,087
Benefit (provision) for income taxes                       -                       -                     38                  (1,043)
                                         --------------------    --------------------    -------------------     -------------------
Net income (loss)                                 $    6,531              $     (221)           $       (74)              $   3,044
                                         ====================    ====================    ===================     ===================

Per share amounts:
Basic net income (loss) per share                 $     0.52              $    (0.13)           $     (0.05)              $   18.48
                                         ====================    ====================    ===================     ===================
Diluted net income (loss) per share               $     0.52              $    (0.13)           $     (0.05)              $   18.48
                                         ====================    ====================    ===================     ===================
</TABLE>


                 See notes to consolidated financial statements

                                     - 41 -
<PAGE>


                          MISSION WEST PROPERTIES, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                    (Dollars in thousands, except share data)


<TABLE>
<CAPTION>

                                                                                        Amounts on
                                                                                        Receivable                     Total
                                           Shares of Common      Common      Paid-in      Private     Accumulated   Stockholders'
                                           Stock Outstanding     Stock       Capital     Placement      Deficit        Equity
                                          ------------------- ----------- ------------ ------------- ------------- ---------------
<S>                                           <C>                         <C>                         <C>             <C>
Balance, November 30, 1996                        45,704                   $ 19,456                    $ (5,274)       $ 14,182
Issuance of common stock upon private
  placement                                      200,000                        900                                         900
Issuance of common stock upon private
  placement                                    1,250,000                      5,625                                       5,625
Amounts receivable on 1997 private
  placements                                                                              $  (484)                         (484)
Issuance of common stock upon option
  exercise                                         5,400                        726                                         726
Net income                                                                                                3,044           3,044
Dividends paid                                                                                          (18,858)        (18,858)
                                          ------------------- ----------- ------------ ------------- ------------- ---------------
Balance, November 30, 1997                     1,501,104                     26,707          (484)      (21,088)          5,135

Amounts received from 1997 private
  placements                                                                                  150                           150
Net (loss)                                                                                    (74)                          (74)
                                          ------------------- ----------- ------------ ------------- ------------- ---------------
Balance, December 31, 1997                     1,501,104                     26,707          (334)      (21,162)          5,211
Issuance of common stock upon option
  exercise                                       225,000                      1,013          (900)                          113
Issuance of common stock upon private
  placement                                    6,495,058                     27,827                                      27,827
Amounts received from 1997 private
  placements                                                                                  334                           334
Odd lot tender offer                              (2,568)                       (11)                                        (11)
Net (loss)                                                                                                 (221)           (221)
Reincorporation (Note 1)                                        $    8           (8)                                          -
                                          ------------------- ----------- ------------ ------------- ------------- ---------------
Balance, December 31, 1998                     8,218,594             8       55,528          (900)      (21,383)         33,253
Issuance of common stock upon option
  exercise                                       191,920                        863                                         863
Issuance of common stock from public
  offering                                     8,680,000             9       66,891                                      66,900
Odd lot tender offer                                (779)           (8)                                                      (8)
Repurchase of common stock                      (117,361)                      (528)          528                             -
Amounts received from 1998 private
  placements                                                                                  372                           372
Dividends paid                                                                                           (7,229)         (7,229)
Net income                                                                                                6,531           6,531
                                          ------------------- ----------- ------------ ------------- ------------- ---------------
Balance, December 31, 1999                    16,972,374        $   17     $122,746             -      $(22,081)       $100,682
                                          =================== =========== ============ ============= ============= ===============

</TABLE>



                 See notes to consolidated financial statements

                                     - 42 -
<PAGE>


                          MISSION WEST PROPERTIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)
<TABLE>
<CAPTION>


                                                                                                       One
                                                                                                      Month
                                                                Year Ended December 31,               Ended            Year Ended
                                                     ------------------------------------------    December 31,       November 30,
                                                              1999                  1998               1997              1997
                                                     --------------------- -------------------- ------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:

<S>                                                          <C>                   <C>                <C>               <C>
Net income (loss)                                             $    6,531            $   (221)          $    (74)         $  3,044
Adjustments to reconcile net income (loss) to net
       cash provided by operating activities:
     Minority interest                                            39,785               12,049                 -                 -
     Depreciation                                                 13,156                5,410                 -               246
     (Gain) on sale of real estate assets                              -                    -                              (4,736)
Change in operating assets and liabilities:
     Deferred rent                                                (4,340)              (1,624)                -                 -
     Other assets                                                   (604)              (1,594)                              1,295
     Interest payable                                                373                  632
     Security deposits                                               127                  218
     Prepaid rental income                                         4,555                  812
     Accounts payable and accrued expenses                           714                  582                28              (849)
                                                     --------------------- -------------------- ------------------ -----------------
     Net cash provided by (used in) operating
       activities                                                 60,298               16,264               (46)           (1,000)
                                                     --------------------- -------------------- ------------------ -----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to real estate                                      (33,648)                (118)
Refundable option payment                                         21,564
Net proceeds from the sale of real estate assets                       -                    -                 -            46,198

                                                     --------------------- -------------------- ------------------ -----------------
     Net cash (used in) provided by investing
       activities                                                (12,084)                (118)                             46,198
                                                     --------------------- -------------------- ------------------ -----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on line of credit                                 (27,201)             (11,843)
Proceeds from mortgage notes payable                                   -              130,000
Principal payments on mortgage notes payable                     (23,236)             (19,586)                            (30,753)
Principal payments on mortgage notes payable
  (related parties)                                              (53,068)            (148,279)
Payments on receivable from private placements                       372                    -                 -                 -
Net proceeds from issuance of common stock                        66,900               28,161                               6,041
Net proceeds from exercise of stock options                          863                  113                                 726
Repurchase of common stock                                            (8)                 (11)
Minority interest distributions                                   (1,844)                 (24)
Dividends                                                         (4,685)                   -                 -           (18,858)
                                                     --------------------- -------------------- ------------------ -----------------
     Net cash (used in) provided by financing
       activities                                                (41,907)             (21,469)              150           (42,844)
                                                     --------------------- -------------------- ------------------ -----------------
     Net increase (decrease)  in cash and cash
       equivalents                                                 6,307               (5,323)              104             2,354
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                         246                5,569             5,465             3,111
                                                     --------------------- -------------------- ------------------ -----------------
CASH AND CASH EQUIVALENTS, END OF YEAR                        $    6,553            $     246          $  5,569          $  5,465
                                                     ===================== ==================== ================== =================

</TABLE>




                 See notes to consolidated financial statements

                                     - 43 -
<PAGE>


                          MISSION WEST PROPERTIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)


<PAGE>


1. ORGANIZATIONS AND FORMATION OF THE COMPANY

     Mission  West  Properties,  Inc.  ("the  Company")  is a fully  integrated,
self-managed real estate company that acquires and manages  office/research  and
development/manufacturing ("R&D") properties in the portion of the San Francisco
Bay Area  commonly  referred  to as Silicon  Valley.  In July 1998,  the Company
acquired control of four existing limited partnerships (referred to collectively
as the "operating  partnerships"),  by becoming the sole general partner in each
one effective July 1, 1998 for financial accounting and reporting purposes ("the
Acquisition").  The Company purchased an approximate  12.11% interest in each of
the  operating  partnerships.  The Company  effected the purchase of its general
partnership  interests by issuing to the operating  partnerships separate demand
notes  bearing  interest  at 7.25% per annum  (the  "Demand  Notes").  The total
principal amount of the Demand Notes issued was $35,200. All limited partnership
interests in the operating  partnerships were converted into 59,479,633 units of
limited  partnership  interest ("O.P.  Units"),  which  represented an ownership
interest of approximately  87.89% of the operating  partnerships.  The operating
partnerships  are the  vehicles  through  which the Company will own its assets,
will make its future acquisitions, and generally conduct its business.

     On December 30, 1998, the Company was reincorporated  under the laws of the
State of Maryland through a merger with and into Mission West  Properties,  Inc.
Accordingly, shares of the former company, Mission West Properties, a California
corporation  (no par),  which  were  outstanding  at  December  30,  1998,  were
converted  into  shares  of  common  stock  ($.001  par  value  per  share) on a
one-for-one basis.

     As of December 31, 1999, the Company owns a general partnership interest of
20.28%, 21.32%, 15.34% and 12.18% in Mission West Properties, L.P., Mission West
Properties,   L.P.  I,  Mission  West  Properties,  L.P.  II  and  Mission  West
Properties, L.P. III, respectively, for a 18.28% general partnership interest in
the operating partnerships, taken as a whole, on a weighted average basis.

     The Company,  through the operating partnerships,  owns interests in 80 R&D
properties, all of which are located in the Silicon Valley.

     The Company was formerly  engaged in  developing,  owning,  operating,  and
selling income-producing real estate located principally in Southern California.
As discussed in Note 15, Sale of Real Estate Investments below, the Company sold
all of its Southern California real estate holdings during 1997.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     PRINCIPLES OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION:

     The accompanying  consolidated financial statements include the accounts of
the  Company  and  its   controlled   subsidiaries,   including   the  operating
partnerships.  All significant intercompany transactions have been eliminated in
consolidation.

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  ("GAAP") requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of contingent  assets and  liabilities  at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.

     REAL ESTATE ASSETS:

     Real  estate  assets  are stated at the lower of cost or fair  value.  Cost
includes expenditures for improvements or replacements.  Maintenance and repairs
are charged to expense as incurred.  Gains and losses from sales are included in
income in accordance with Statement of Financial  Accounting  Standard  ("SFAS")
No. 66, Accounting for Sales of Real Estate.

                                     - 44 -
<PAGE>
     The Company  reviews real estate assets for impairment  whenever  events or
changes in  circumstances  indicate that the carrying amount of an asset may not
be  recoverable.  If the  carrying  amount of the asset  exceeds  its  estimated
undiscounted  net cash flow before  interest,  the  Company  will  recognize  an
impairment loss equal to the difference between its carrying amount and its fair
value.  If impairment is recognized,  the reduced  carrying  amount of the asset
will be accounted  for as its new cost.  For a depreciable  asset,  the new cost
will be depreciated  over the asset's  remaining  useful life.  Generally,  fair
values are estimated  using  discounted  cash flow,  replacement  cost or market
comparison analyses. The process of evaluating for impairment requires estimates
as to future  events and  conditions,  which are  subject to varying  market and
economic factors. Therefore, it is reasonably possible that a change in estimate
resulting  from judgments as to future events could occur which would affect the
recorded  amounts of the  property.  As of December  31, 1999,  the  properties'
carrying values did not exceed the estimated fair values.

     DEPRECIATION:

     Depreciation  is computed  using the  straight-line  method over  estimated
useful lives of 40 years for buildings and improvements.

     CASH AND CASH EQUIVALENTS:

     The Company  considers  highly liquid  short-term  investments with initial
maturities of three months or less to be cash equivalents.

     Cash  and  cash  equivalents  are  primarily  held  in a  single  financial
institution, and at times, such balances may be in excess of the Federal Deposit
Insurance Corporation insurance limit.

     OTHER ASSETS:

     Included  in  other  assets  are  costs   associated  with  obtaining  debt
financing.  Such costs are being amortized over the term of the associated debt,
by a method that approximates the effective interest method.

     REVENUE RECOGNITION:

     Rental  income is  recognized  on the  straight-line  method of  accounting
required by generally  accepted  accounting  principles under which  contractual
rent payment increases are recognized evenly over the lease term. The difference
between  recognized  rental  income and rental  cash  receipts  is  recorded  as
deferred rent on the balance sheet.  Certain lease agreements contain terms that
provide for additional  rents based on  reimbursement  of certain  costs.  These
additional rents are reflected on the accrual basis.

     INCOME TAXES:

     The Company intends to elect to be taxed as a real estate  investment trust
("REIT")  under the  Internal  Revenue  Code of 1986,  as amended,  (the "Code")
commencing  with the taxable  year ended  December  31,  1999.  In order for the
Company to qualify as a REIT,  it must  distribute  annually at least 95% of its
REIT taxable income, as defined in the Code, to its stockholders and comply with
certain other requirements.  Accordingly,  for the year ended December 31, 1999,
no  provision  for federal  income taxes has been  included in the  accompanying
consolidated financial statements.

     For the year ended  December 31, 1999,  approximately  7% of the  dividends
paid or payable to the Company's  stockholders represent a return of capital for
income tax purposes. The 1999 distributions did not include any capital gain.

     For the year ended December 31, 1998, the one-month ended December 31, 1997
and the year  ended  November  30,  1997,  income  taxes were  accounted  for in
accordance with SFAS No. 109, Accounting for Income Taxes. Deferred income taxes
were provided for all temporary  differences  and operating  loss and tax credit
carry forwards.  Deferred tax assets were reduced by a valuation allowance when,
in the opinion of  management,  it was more likely than not that some portion or
all of the deferred  tax assets  would not be realized.  Deferred tax assets and
liabilities  were  adjusted  for the effects of changes in tax laws and rates on
the date of enactment.

     The Company had no tax liability for the year ended December 31, 1998.

                                     - 45 -
<PAGE>
     NET INCOME PER SHARE:

     The  computation  of net income per share is based on the weighted  average
number of common  shares  outstanding  during the period.  Diluted  earnings per
share  amounts  are  based  upon the  weighted  average  of  common  and  common
equivalent shares outstanding during the year.

     ACCOUNTING FOR STOCK-BASED COMPENSATION:

     SFAS 123, Accounting for Stock-Based Compensation, encourages, but does not
require  companies  to  record   compensation  cost  for  stock-based   employee
compensation  plans at fair value. The Company has chosen to continue to account
for  stock-based  compensation  using the intrinsic  value method  prescribed in
Accounting  Principles  Board  Opinion No. 25,  Accounting  for Stock  Issued to
Employees and related interpretations.  Accordingly, compensation cost for stock
options is  measured as the excess,  if any, of the quoted  market  price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock.

     FAIR VALUE OF FINANCIAL INSTRUMENTS:

     The Company's financial instruments include cash, receivables, payables and
debt.  Considerable judgement is required in interpreting market data to develop
estimates of fair value.  Accordingly,  the estimates  presented  herein are not
necessarily  indicative  of the  amounts  that the  Company  could  realize in a
current  market  exchange.  The  use  of  different  market  assumptions  and/or
estimation  methodologies may have a material effect on the estimated fair value
amounts.

     Based on borrowing rates currently  available to the Company,  the carrying
amount of mortgage debt and the line of credit,  approximate  fair value.  Cash,
receivables and payables are also carried at amounts that approximate fair value
due to their short-term maturities.

     CONCENTRATION OF CREDIT RISK:

     The Company's  properties are not geographically  diverse,  and our tenants
operate primarily in the information technology industry. Additionally,  because
the  properties  are leased to 89  tenants,  default by any major  tenant  could
significantly  impact  the  results  of  the  consolidated  total.  One  tenant,
Microsoft  Corporation accounted for approximately 18.0% of the Company's rental
revenues  for the year ended  December 31,  1999,  with the next largest  tenant
accounting  for 9.1% of total rental  revenues.  For the year ended December 31,
1998, one tenant, Apple Computers, Inc. accounted for approximately 12.2% of the
Company's rental revenues,  with the next largest tenant  accounting for 6.6% of
total  rental  revenues.  However,  management  believes  the risk of default is
reduced  because of the critical  nature of these  properties for ongoing tenant
operations.

     REVERSE STOCK SPLIT:

     All share and per share  amounts have been adjusted to reflect the 1 for 30
reverse stock split which occurred in November 1997.

     FISCAL YEAR CHANGE:

     In November 1997, the board of directors approved a change in the Company's
fiscal year end from November 30 to December 31, effective for the calendar year
beginning  January 1, 1997. The results for the year ended November 30, 1997 and
the one month ended December 31, 1997 are presented.

                                     - 46 -
<PAGE>
3.  ACQUISITION

     The  Acquisition  was  accounted  for as a purchase with the results of the
operating  partnerships included from July 1, 1998. The fair value of the assets
acquired was $507,807 and liabilities assumed totaled $239,903.

     The pro forma results listed below are unaudited and assume the Acquisition
occurred at the beginning of each period presented:
<TABLE>
<CAPTION>

                                                       Proforma Year             Proforma Year
                                                     Ended December 31,        Ended December 31,
                                                           1998                      1997
                                                    --------------------      --------------------
<S>                                                       <C>                     <C>
Total Revenues                                             $62,253                 $ 56,120
                                                    --------------------      --------------------
Expenses:
  Operating, maintenance and real estate taxes               9,251                    8,511
  Interest expenses (including related parties)             17,631                   18,055
  General and administrative expenses                        1,501                    1,467
  Depreciation and amortization                             10,781                  10,6424
                                                    --------------------      --------------------
                                                            39,164                   38,876
                                                    --------------------      --------------------
Income before minority interest, gain on sale
  of real estate and income taxes                           23,089                   17,245
Minority interest                                           22,541                   16,691
                                                    --------------------      --------------------
Income before gain on real estate and income taxes             548                      554
Gain on sale of real estate                                      -                    4,736
                                                    --------------------      --------------------
Income before income taxes                                     548                    5,290
Provision for income taxes                                     142                    1,375
                                                    --------------------      --------------------
Net income                                                 $   406                 $  3,915
                                                    ====================      ====================
Basic and diluted net income per share                     $   .24                 $  23.77
                                                    ====================      ====================
</TABLE>

4.  STOCK TRANSACTIONS

     On May 27, 1997, the Company entered into a Stock Purchase Agreement with a
group of private  investors led by Carl E. Berg,  his brother Clyde J. Berg, the
members of their  respective  immediate  families,  and  certain  entities  they
control (the "Berg Group")  pursuant to which the Company agreed to sell 200,000
shares of common  stock to the Berg Group for a purchase  price of $900 in cash,
or $4.50 per share. On August 5, 1997, the shareholders  approved the stock sale
transaction.  This sale of common stock was  completed on September 2, 1997,  at
which time all  officers  and  directors  resigned and the Berg Group became the
controlling  shareholder  with an  approximate  80%  ownership  position  in the
Company.

     Subsequent  to  the   September   1997  common  stock  sale,  a  series  of
transactions were approved by the Company's shareholders that included the 1 for
30 reverse stock split, a private placement of 1,250,000 shares of the Company's
common  stock at $4.50 per share and the  adoption of the  Company's  1997 Stock
Option Plan.

     On December 29, 1998, the Company completed the sale of 6,495,058 shares of
common stock, at a price of $4.50 per share to a number of accredited  investors
in two separate private placements.  The aggregate proceeds to the Company,  net
of fees and offering costs, was $27,827. The proceeds were used to pay a portion
of  the   outstanding   amounts   under  the  Demand  Notes  due  the  operating
partnerships.  As of December 31, 1999,  $1,103 remained  outstanding  under the
Demand Notes. The Demand Notes, along with the interest expense (interest income
to the operating  partnerships),  are  eliminated in  consolidation  and are not
included  in the  corresponding  line items  within the  consolidated  financial
statements.

     The limited partners of the operating partnerships have the right to tender
their O.P.  Units to the Company for shares of common stock or, at the Company's
election,  for cash. Each of the limited partners of the operating  partnerships
(other than Carl E. Berg and Clyde J. Berg) has the annual right to exercise put
rights and cause the operating partnerships to purchase a portion of the limited
partner's  O.P.  Units at a purchase  price based on the average market value of
the common stock for the 10-trading day period immediately preceding the date of
tender,  generally  limited to one-third of the aggregate  number of O.P.  Units
owned by each limited partner.  Upon the exercise of any such right by a limited
partner,  the Company will have the option to purchase the tendered  O.P.  Units
with  available  cash,  borrowed  funds or the  proceeds of an offering of newly

                                     - 47 -
<PAGE>

issued  shares of common stock.  These put rights are available  once a year. If
the total  purchase  price of the O.P.  Units  tendered  by all of the  eligible
limited  partners in one year exceeds $1 million,  the Company or the  operating
partnerships will be entitled to reduce proportionately the number of O.P. Units
to be acquired form each  tendering  limited  partner so that the total purchase
price does not exceed $1 million. There were no O.P. Units tendered in 1999.

     On March 30, 1998,  the Company  issued  200,000  shares of common stock at
$4.50 per share to Michael  Anderson,  Chief Operating Officer and a director of
the Company, in exchange for a $900 note receivable payable to the Company.  The
note was a full  recourse  promissory  note  bearing  interest  at 5.59% and was
collateralized by a pledge of the shares. Effective April 30, 1999, Mr. Anderson
resigned from the Company.  Upon Mr.  Anderson's  resignation,  the Company,  in
accordance with the terms of its agreements with Mr.  Anderson,  repurchased and
subsequently   canceled   117,361  of  the  200,000   shares  of  common  stock,
representing $528 of the original $900 note receivable. The remaining portion of
the note receivable in the amount of $372 was paid in full.

     During the second and fourth  quarters of 1998, the Company  received total
payments of $334 relating to amounts  receivable from the private  placements of
shares of common stock in November 1997.

     In July 1999, the Company  completed a public offering at 8,680,000  shares
of its  common  stock at $8.25 per  share.  The net  proceeds  of  approximately
$66,900,  after deducting  underwriting discounts and other offering costs, were
used to reduce the  outstanding  balance on the line of credit  with Wells Fargo
Bank,  N.A.  ("Wells  Fargo  line") by  approximately  $41,000 and to  reimburse
Microsoft   Corporation   for   approximately   $25,000  for  shell  and  tenant
improvements   on  the  Microsoft   project.   The  remaining  net  proceeds  of
approximately $900 were retained for general corporate purposes.

     During the year ended December 31, 1999, options were exercised for a total
of 191,920  shares.  The exercise price for all options  exercised was $4.50 per
share and total proceeds to the Company were $863.

5.  MINORITY INTEREST

     Minority  interest   represents  the  separate  private  ownership  of  the
operating partnerships,  by the Berg Group and other non-affiliate interests. In
total,  these  interests  account for 81.72% and 87.98%,  on a weighted  average
basis, of the ownership  interests in the real estate  operations of the Company
as of December 31, 1999 and 1998,  respectively.  Minority  interest in earnings
has been calculated by taking the net income of the operating partnerships (on a
stand-alone  basis)  multiplied by the respective  minority  interest  ownership
percentage.

     There are two properties  (owned  through two separate joint  ventures) for
which 100% of the ownership is not held within the operating  partnerships.  The
operating  partnerships  own a 75% interest in one of the joint  ventures and an
88% interest in the other joint  venture.  For the year ended  December 31, 1999
and the period of July 1, 1998 through December 31, 1998, income associated with
the interests held by the  non-affiliated  third parties of these two properties
is $113 and $42, respectively.

6.  REAL ESTATE

     PENDING PROJECTS ACQUISITION AGREEMENT

     The Company has entered  into the Pending  Projects  Acquisition  Agreement
under which the Company will  acquire,  through the  operating  partnerships  of
approximately  one million  additional  rentable square feet upon the completion
and leasing of a number of pending development projects owned by certain members
of the Berg Group.  The agreement fixes the acquisition  value to be received by
the sellers based upon the  capitalized  rental value of the property when fully
leased or as approved by the Independent Directors committee. As of December 31,
1999, the Company has completed  five  acquisitions  under the Pending  Projects
Acquisition  Agreement  representing  762,920 rentable square feet (see Property
Acquisitions  below).  In January 2000,  the Company  completed  one  additional
acquisition  representing 80,640 square feet. There are two buildings with total
rentable square feet of approximately  175,000 anticipated to be acquired in the
future  under the Pending  Projects  Acquisition  Agreement.  As of December 31,
1999,  the  estimated  acquisition  cost for  these  remaining  projects  is $24
million.  The Company expects to acquire these two buildings by the end of first
quarter 2001.

                                     - 48 -
<PAGE>
     The sellers of the pending  development  projects may elect to receive cash
or O.P.  Units at a value of $4.50 per unit,  which was set in May 1998 based on
the $4.50 per share price of the  Company's  common  stock  agreed to in private
placement  transactions  at that time.  As the current  market  value price of a
share of common  stock  exceeds the $4.50  price,  this  valuation  represents a
substantial  discount from the current market value of the common stock that may
be issued in exchange for these O.P. Units.  Under GAAP, the acquisition cost in
the form of O.P. Units issued will be valued based upon the current market value
of the Company's common stock on the date the acquisition closes.  Consequently,
the Company's actual accounting cost of these future acquisitions will depend in
large  part on the  percentage  of the fixed  acquisition  value paid for by the
issuance  of O.P.  Units  and the  price of the  Company's  common  stock on the
closing  of the  acquisition.  For  properties  acquired  during  1999 under the
Pending Projects Acquisition  Agreement,  the difference resulted in an increase
of $49.0 million in the acquisition cost for accounting purposes compared to the
fixed acquisition value.

     BERG LAND HOLDINGS OPTION AGREEMENT

     Through the  operating  partnerships,  the  Company  also has the option to
acquire any future R&D property  developed  by the Berg Group on land  currently
owned or  optioned,  or acquired for these  purposes in the future,  directly or
indirectly,  by Carl E. Berg or Clyde J.  Berg.  The  owners of the  future  R&D
property  developments may obtain cash or, at their option, O.P. Units. To date,
the Company has completed two  acquisitions  under the Berg Land Holdings Option
Agreement representing  approximately 187,415 rentable square feet (see Property
Acquisitions below). Upon the Company's exercise of an option to purchase any of
the future R&D property  developments,  the acquisition price will equal the sum
of (a) the  full  construction  cost of the  building;  plus (b) 10% of the full
construction cost of the building;  plus (c) interest at LIBOR (London Interbank
Offer  Rate)  plus  1.65% on the  amount  of the full  construction  cost of the
building for the period from the date funds were  disbursed by the  developer to
the close of escrow;  plus (d) the  original  acquisition  cost of the parcel on
which the improvements will be constructed, which range from $8.50 to $20.00 per
square foot for land  currently  owned;  (e) plus 10% per annum of the amount of
the  original  acquisition  cost of the parcel from the later of January 1, 1998
and the  seller's  acquisition  date,  to the close of escrow;  minus  (f);  the
aggregate principal amount of all debt encumbering the acquired property.

     No  estimate  can be given at this time as to the total cost to the Company
to acquire projects under the Berg Land Holdings Agreement, nor the timing as to
when the  Company  will  acquire  such  projects.  However,  the  Berg  Group is
currently constructing 5 properties with a total of 734,924 rentable square feet
that the Company has the right to acquire under this  agreement.  As of December
31, 1999,  the estimated  acquisition  value to the operating  partnerships  for
these 5 projects is $75.7 million dollars.  The final acquisition price of these
5 properties could differ significantly from this estimate.

     PROPERTY ACQUISITIONS

     As of  December  31,  1999,  the  Company  has  acquired  a total  of 7 R&D
properties  under  its  agreements  with  the  Berg  Group.  All  seven of these
acquisitions are currently 100% occupied by one or more tenants.

     The following  table  provides  information as to the estimated fair market
value,  calculated using an estimated  capitalization rate of 10% based upon the
first year's cash rent, actual cost (to the Berg Group), which includes land and
construction  costs,  and the actual  acquisition  price  paid by the  operating
partnerships:

<TABLE>
<CAPTION>
                               Average
                             Year's Rent      Rentable
                             Per Square        Square        Estimated        Acquisition
Property                        Foot          Footage        Fair Value          Price
------------------------- ---------------- -------------- ---------------- -----------------
                                                             (unaudited)
<S>                           <C>             <C>             <C>              <C>
1999 ACQUISITIONS
Great Oaks                     $1.38            54,996         $  9,107         $  8,558
L'Avenida                      $2.95           515,700          182,558          156,107
Automation Parkway             $1.69            80,640           16,354           15,963
Richard Avenue                 $0.80            58,783            5,940            5,756
Fontanosa Avenue               $1.30            77,700           12,121            7,169
                                           -------------- ---------------- -----------------
                                               787,820          226,080          193,553
                                           -------------- ---------------- -----------------
1998 ACQUISITIONS
Richard Avenue                 $1.06           109,715            6,716            4,198
Hellyer Avenue                 $0.99            52,800           13,034            9,494
                                           -------------- ---------------- -----------------
  Subtotal                                     162,515           19,750           13,692
                                           -------------- ---------------- -----------------
  Total                                        950,335         $245,830         $207,245
                                           ============== ================ =================
</TABLE>
                                     - 49 -
<PAGE>
     During the third  quarter of 1999,  the  Company  entered  into a new lease
agreement for 2001 Logic Drive with Xilinx  Incorporated  ("Xilinx").  The lease
agreement  includes an option  granted to Xilinx to purchase  the  building at a
predetermined price. In September 1999, in accordance with the option provisions
of the lease  agreement,  Xilinx  paid to us a deposit  of  approximately  $21.6
million to secure its option right.  Xilinx can exercise the option only between
April 30, 2000 and July 31, 2000. Upon exercise of the option,  the Company must
refund the deposit amount and Xilinx must deposit into escrow funds equal to the
purchase  price of $21.6  million.  In the event  Xilinx does not  exercise  its
option, the Company must refund the deposit in full to Xilinx, without interest.

                                     - 50 -
<PAGE>

7.  DEBT

     The  following  table  sets  forth  certain   information   regarding  debt
outstanding as of December 31, 1999 and 1998:

<TABLE>
<CAPTION>

                                                                                   Balance                               Interest
     Debt Description                    Collateral Properties                  At December 31,        Maturity Date       Rate
----------------------------------  -------------------------------------  --------------------------  --------------  -------------
Line of Credit:                                                                1999          1998
                                                                           ------------  ------------
<S>                                 <C>                                     <C>            <C>              <C>             <C>
Wells Fargo                         1810 McCandless Drive, Milpitas, CA             -       $27,201(1)       2/00            (2)
                                    1740 McCandless Drive, Milpitas, CA
                                    1680 McCandless Drive, Milpitas, CA
                                    1600 McCandless Drive, Milpitas, CA
                                    1500 McCandless Drive, Milpitas, CA
                                    1450 McCandless Drive, Milpitas, CA
                                    1350 McCandless Drive, Milpitas, CA
                                    1325 McCandless Drive, Milpitas, CA
                                    1425 McCandless Drive, Milpitas, CA
                                    1526 McCandless Drive, Milpitas, CA
                                    1575 McCandless Drive, Milpitas, CA
                                    1625 McCandless Drive, Milpitas, CA
                                    1745 McCandless Drive, Milpitas, CA
                                    1765 McCandless Drive, Milpitas, CA
Mortgage Notes Payable
  (related parties):
                                    2033-2043 Samaritan Drive, San Jose, CA    31,193(3)     20,752(3)      12/00(4)         (2)
                                    2133 Samaritan Drive, San Jose, CA
                                    2233-2243 Samaritan Drive, San Jose, CA
Mortgage Notes Payable):(5)
Great West Life & Annuity
  Insurance Company                 6320 San Ignacio Ave., San Jose, CA             -         7,732          2/04(6)         7.0%
Great West Life & Annuity
  Insurance Company                 6540 Via del Oro, San Jose,                     -         3,689          5/04(6)         7.0%
                                    6385 San Ignacio Ave., San Jose, CA
Prudential Capital Group            20400 Mariani, Cupertino, CA                1,902         2,034          3/09            8.75%
New York Life Insurance Company     10440 Bubb Road, Cupertino,                   405           430          8/09            9.625%
Home Savings & Loan Association     10460 Bubb Road, Cupertino,                   477           525          1/07            9.5%
Amdahl Corporation                  3120 Scott, Santa Clara, CA                     -         6,945          3/14(6)         9.42%
Citicorp U.S.A. Inc.                2800 Bayview Drive,                             -         3,105          4/00(6)         (7)
Mellon Mortgage Company             3530 Bassett, Santa Clara,                  2,853         2,961          6/01            8.125%
Prudential Insurance Company
  of America(8)                     10300 Bubb, Cupertino, CA                 128,315       129,767         10/08            6.56%
                                    10500 N. DeAnza, Cupertino, CA
                                    4050 Starboard, Fremont, CA
                                    45700 Northpoint Loop, Fremont, CA
                                    45738 Northpoint Loop, Fremont, CA
                                    450-460 National, Mountian View, CA
                                    4949 Hellyer, San Jose, CA
                                    6311 San Ignacio, San Jose, CA
                                    6321 San Ignacio, San Jose, CA
                                    6325 San Ignacio, San Jose, CA
                                    6331 San Ignacio, San Jose, CA
                                    6341 San Ignacio, San Jose, CA
                                    6351 San Ignacio, San Jose, CA
                                    3236 Scott, Santa Clara, CA
                                    3560 Bassett, Santa Clara, CA
                                    3570 Bassett, Santa Clara, CA
                                    3580 Bassett, Santa Clara, CA
                                    1135 Kern, Sunnyvale, CA
                                    1212 Bordeaux, Sunnyvale, CA
                                    1230 E. Arques, Sunnyvale, CA
                                    1250 E. Arques, Sunnyvale, CA
                                    1170 Morse, Sunnyvale, CA
                                    3540 Bassett, Santa Clara, CA
                                    3542 Bassett, Santa Clara, CA
                                    3544 Bassett, Santa Clara, CA
                                    3550 Bassett, Santa Clara, CA
Mortgage Notes Payable Subtotal                                               133,952       157,188
                                                                           ------------  ------------
Total                                                                        $165,145      $205,141
                                                                           ============  ============
</TABLE>

(1)  Amounts  available under the Wells Fargo line at December  31,1999 and 1998
     were $50,000 and $72,799,  respectively.  Certain members of the Berg Group
     are liable as guarantors under this line of credit.

(2)  The lesser of (a) the Wells  Fargo prime rate in effect on the first day of
     each calendar month; (b) LIBOR plus 1.65%; or (c) the Wells Fargo Purchased
     Funds Rate quoted on the first day of each calendar  month plus 1.65%.  The
     average  rate for the year ended  December  31,  1999 and the three  months
     ended 1998 was 7.06 and 6.66%, respectively.

(3)  There is no set repayment plan associated with this debt; payments are made
     to Berg & Berg Enterprises, Inc. on demand.

(4)  Original  due date was March 1999.  The Company has  received an  extension
     from Berg & Berg Enterprises, Inc. to December 2000.

(5)  Mortgage notes payable generally  require monthly  installments of interest
     and  principal  over various  terms  extending  through the year 2009.  The
     weighted  average  interest  rate of mortgage  notes  payable was 6.64% and
     6.80% at December 31, 1999 and 1998, respectively.

(6)  The Company repaid this debt in full during 1999

(7)  One month LIBOR plus 1.625% adjusted monthly (6.68% at December 31, 1998).

(8)The  Prudential  Loan is  payable  in  monthly  installments  of $827,  which
     includes principal (based upon a 30 year  amortization) and interest.  John
     Kontrabecki,  one of the limited  partners,  has  guaranteed  approximately
     $12,000 of this debt.  Costs and fees  incurred  with  obtaining  this loan
     aggregated approximately $900.

                                     - 51 -
<PAGE>



     Scheduled principal payments on debt for the years ending, are as follows:
<TABLE>
<CAPTION>

                                 Mortgage Notes      Mortgage Notes Payable
                                    Payable            (Related Parties)           Total
                                ----------------    ------------------------    -----------
<S>                               <C>                     <C>                    <C>
December 31, 2000                     1,890                $31,193                 33,083
December 31, 2001                     4,636                                         4,636
December 31, 2002                     2,034                                         2,034
December 31, 2003                     2,179                                         2,179
December 31, 2004                     2,333                                         2,333
Thereafter                          120,880                                       120,880
                                ----------------    ------------------------    -----------
                                   $133,952                $31,193               $165,145
                                ================    ========================    ===========

</TABLE>


8.  OPERATING PARTNERSHIP DISTRIBUTIONS

     During 1999, the Company, as general partner of the operating partnerships,
declared  quarterly  distributions  aggregating  $0.56 per O.P.  Unit. for total
distributions  of $47,705,  including  $13,975  payable in January  2000.  Total
distributions  attributable  to O.P. Units owned by various  members of the Berg
Group was $38,090.  Of this amount,  $27,307 was converted to related party debt
during the year ended  December 31, 1999,  and the  remaining  distributions  of
$10,783 was converted to related party debt in January 2000.

     On December 28,  1998,  the Company,  as general  partner of the  operating
partnerships,   declared  a  $0.17  per  O.P.   Unit   distribution   for  total
distributions of $11,633.  Of this amount,  $9,599 was due to various members of
the Berg Group and was converted to related party debt on December 31, 1998. The
Company  received $1,408 which was used to repay amounts  outstanding  under the
Demand Notes owed to the operating partnerships. A distribution in the amount of
$298 was  attributable to units held by John Kontrabecki and was applied against
amounts owed by him to the operating  partnerships  as of December 31, 1998. The
remaining  amount of $328 was owed to other O.P. Unit holders and is included in
accounts payable and accrued  expenses in the  consolidated  balance sheet as of
December 31, 1998. Such amounts were paid in January 1999.

9.  STOCK-BASED COMPENSATION PLANS

     The  Company's  1997  Stock  Option  Plan  was  approved  by the  Company's
shareholders  on November  10,  1997.  The 1997 Stock Option Plan was adopted so
that the Company may attract and retain the high quality employees,  consultants
and  directors  necessary to build the Company's  infrastructure  and to provide
ongoing incentives to the Company's employees in the form of options to purchase
the  Company's  common stock by enabling  them to  participate  in the Company's
success.

     The  1997  Stock  Option  Plan  provides  for the  granting  to  employees,
including  officers  (whether or not they are  directors)  of  "incentive  stock
options"  within the meaning of Section 422 of the Code, and for the granting of
non-statutory  options to employees,  consultants  and directors of the Company.
Options to purchase a maximum of 5,500,000 shares of common stock may be granted
under the 1997 Stock Option Plan,  subject to equitable  adjustments  to reflect
certain corporate events.  During 1999,  options were granted to three employees
totaling  237,000  which become  exercisable  in monthly  installments  equal to
1/48th of the underlying  shares beginning on the first month anniversary of the
grant date.  Additionally,  during 1999,  one employee was granted an option for
100,000 shares that become  exercisable as follows:  a) 10,000 shares on May 10,
2000; b) each month thereafter for 36 months,  an additional  2,500 shares.  All
options  granted to  employees  in 1998 become  exercisable  as follows:  a) six
months from date of grant,  6.25%; b) one year from date of grant, an additional
12.50%; c) each month thereafter for 36 months, an additional 2.26%. Each option
has a term of 6 years from the date of grant subject to earlier  termination  in
certain  events  related  to  termination  of  employment.  Options  granted  to
directors  will become  exercisable  cumulatively  with respect to 1/48th of the
underlying  shares on the first day of each month  following  the date of grant.
Generally, the options must be exercised while the optionee is a director of the
Company.  The option price is equal to the fair market value of the common stock
on the date of grant.

     The remaining  contractual lives of unexercised  options granted range from
January 2004 to July 2005. All options granted during 1999 and 1998 have a $8.25
and $4.50 option price per share, respectively.

                                     - 52 -
<PAGE>


     The following table shows the activity and detail for the 1997 Stock Option
Plan:
<TABLE>
<CAPTION>

                                          1997 Stock        Option Price
                                         Option Plan         Per Share
                                        --------------     --------------
<S>                                      <C>                   <C>
Balance, December 31, 1997                       -
   Options granted                         905,000              $4.50
   Options exercised                      (225,000)
                                        --------------
Balance, December 31, 1998                 680,000
   Options granted                         337,000              $8.25
   Options exercised                      (191,920)
   Options cancelled                      (299,722)
                                        --------------
Balance, December 31, 1999                 525,358
                                        ==============
</TABLE>

     As of December 31, 1999,  4,569,722  additional  options were available for
grant.  None of the  options  granted  are  contingent  upon the  attainment  of
performance  goals or subject to other  restrictions.  As of December  31, 1999,
outstanding options to purchase 64,231 shares of common stock were exercisable.

     The Company  applies APB 25 and related  interpretations  in accounting for
its stock-based  compensation plans.  Accordingly,  no compensation  expense has
been recognized for its stock-based  compensation  plans. Had compensation  cost
for the Company's stock option plans been  determined  based upon the fair value
at the grant date for awards under these plans  consistent  with the methodology
prescribed under SFAS No. 123,  "Accounting for Stock-Based  Compensation",  the
Company's  net  income and net income  per share  would have been  decreased  by
approximately  $132 or $.02 per share,  resulting  in a total  consolidated  net
income of $6,399 or $0.51 per share,  for the year ended  December 31, 1999. The
estimated  fair value of the options  granted during 1999 was $9.20 per share on
the  date of  grant  using  the  Black-Scholes  option  pricing  model  with the
following  assumptions:  dividend yield of 8%,  volatility of 24.56%,  risk free
rate of 5.65% and an expected life of 5 years.  For the year ended  December 31,
1998, the Company's net loss and net loss per share would have been increased by
approximately $146 or $.09 per share, resulting in a total consolidated net loss
of $367 or $.21 per  share.  The  estimated  fair value of the  options  granted
during  1998 ranged from $4.95 to $5.01 per share on the date of grant using the
Black-Scholes  option  pricing  model with the following  assumptions:  dividend
yield of 8%,  volatility  of  24.07%,  risk free  rates of 4.53% to 5.72% and an
expected life of 5 years.

     Prior to the  adoption  of the 1997 Stock  Option  Plan,  the Company had a
Director  Stock  Option  Plan and an  Incentive  Stock  Option  Plan under which
non-salaried directors and officers,  respectively, could purchase shares of the
Company's  common  stock at a minimum  option price based on market value at the
date of grant.  Options granted under these two plans became exercisable ratably
over five years and  expired  after a period  not to exceed ten years.  Upon the
sale of the  majority  of the  Company's  real  estate  assets (see Note 15) the
provisions  of these two plans  accelerated  (unvested  shares at that date were
451).  All the options  issued in  connection  with this plan were  exercised or
cancelled in February 1997.

     Activity in these two plans comprised the following:
<TABLE>
<CAPTION>

                                                         December 31,
                                                            1997
                                                       ---------------
<S>                                                        <C>
Beginning share balance                                     2,967
Exercised (Between $90 and $292.5 per share)               (2,747)
Canceled ($274 per share)                                    (220)
                                                       ---------------
        Ending share balance                                    -
                                                       ===============
</TABLE>
                                     - 53 -
<PAGE>
     The Company has adopted an employee  investment  plan (the  "Plan"),  under
Section 401(k) of the Internal Revenue Code. Employees who are at least 21 years
old and who  have  completed  six  months  of  eligibility  service  may  become
participants in the Plan. Each  participant may make  contributions  to the Plan
through  salary  deferrals  in amounts of at least 1% to a maximum of 15% of the
participant's  compensation,  subject  to  certain  limitations  imposed  by the
Internal  Revenue  Code.  The  Company  contributes  an  amount up to 15% of the
participant's  compensation  contributed,  based upon management's discretion. A
participant's  contribution  to the Plan is 100%  vested and  nonforfeitable.  A
participant will become vested in 100% of the Company's  contributions after two
years of eligible  service.  For the years ended December 31, 1999 and 1998, the
Company  recognized  $46 and $22 of expense for employer  contributions  made in
connection with this plan, respectively.

10.  NET INCOME PER SHARE

     Basic net  income  per share is  computed  by  dividing  net  income by the
weighted-average number of common shares outstanding for the period. Diluted net
income  per  share  is  computed   by   dividing   net  income  by  the  sum  of
weighted-average  number of common  shares  outstanding  for the period plus the
assumed exercise of all dilutive securities.

     The computation for weighted average shares is detailed below:
<TABLE>
<CAPTION>

                                                        Year Ended          Year Ended           Month Ended          Year Ended
                                                       December 31,        December 31,         December 31,         November 30,
                                                           1999                1998                 1997                 1997
                                                     -----------------   ------------------   ------------------   -----------------
<S>                                                     <C>                   <C>                  <C>                   <C>
     Weighted average shares outstanding (basic)         12,553,854            1,688,059            1,501,104             164,692
     Incremental shares from assumed option exercise        104,586               22,730                    -                   -
                                                     -----------------   ------------------   ------------------   -----------------
     Weighted average shares outstanding (diluted)       12,658,440            1,710,789            1,501,104             164,692
                                                     =================   ==================   ==================   =================
</TABLE>


     The  outstanding  O.P. Units have been excluded from the diluted net income
per share  calculation  as there  would be no effect  on the  amounts  since the
minority interests' share of income would also be added back to net income. O.P.
Units  outstanding at December 31, 1999 and 1998 were 76,205,789 and 60,151,697,
respectively.

11.  INCOME TAXES

     The Company intends to elect to be taxed as a real estate  investment trust
("REIT")  under the  Internal  Revenue  Code of 1986,  as amended,  (the "Code")
commencing  with the taxable  year ended  December  31,  1999.  In order for the
Company to qualify as a REIT,  it must  distribute  annually at least 95% of its
REIT taxable income, as defined in the Code, to its stockholders and comply with
certain other requirements.  Accordingly,  for the year ended December 31, 1999,
no  provision  for federal  income taxes has been  included in the  accompanying
consolidated financial statements.

     Deferred tax assets (liabilities) comprise the following:
<TABLE>
<CAPTION>

                                              December 31,
                                                 1998
                                          --------------------
<S>                                             <C>
Prepaid rent                                     $134
                                          --------------------
  Deferred tax assets                             134
                                          ====================

Deferred rental revenue                           (67)
                                          --------------------
  Deferred tax liabilities                        (67)
                                          ====================
                                                   67

Deferred tax asset valuation allowance            (67)
                                          --------------------
Net deferred taxes                               $  -
                                          ====================
</TABLE>


                                     - 54 -
<PAGE>




     The provision for (benefit  from) income taxes  reconciles to the statutory
rate as follows:
<TABLE>
<CAPTION>

                                                                                         One month ended
                                                                December 31,              December 31,            November 30,
                                                                   1998                      1998                      1997
                                                            -------------------- ----------------------------- ---------------------
<S>                                                              <C>                        <C>                       <C>
Statutory federal tax rate                                        34.0%                      34.0%                     34.0%
Increase (decrease) in taxes resulting from:
   Depreciation differences                                        6.0                          -                         -
   Change in deferred tax asset valuation allowance              (34.0)                         -                       1.6
   Alternative minimum taxes                                         -                          -                         -
   State income tax, net of federal tax benefit                   (6.0)                         -                      (1.4)
   Reconciliation of previous tax estimates                          -                          -                      (8.9)
   Other                                                             -                          -                         -
                                                            -------------------- ----------------------------- ---------------------
                                                                     0%                      34.0%                     25.3%
                                                            ==================== ============================= =====================
</TABLE>


     The provision for (benefit from) income taxes comprises the following:
<TABLE>
<CAPTION>

                          Year ended        One month ended       Year ended
                         December 31,         December 31,        November 30
                            1998                 1997                1997
                      ------------------ --------------------- -----------------
<S>                        <C>                <C>                  <C>
Current:
   Federal                  -                  $ (38)               $  491
   State                    -                                           85
                      ------------------ --------------------- -----------------
                            -                                          576
                      ------------------ --------------------- -----------------
Deferred:
   Federal                  -                                          467
   State                    -                                            -
                      ------------------ --------------------- -----------------
                            -                                          467
                      ------------------ --------------------- -----------------
                            -                  $ (38)               $1,043
                      ================== ===================== =================
</TABLE>



     As of  December  31,  1998,  the  Company  had no  deferred  tax  assets or
liabilities.  The provision for (benefit from) income taxes  reflects  temporary
differences  in the  recognition  of revenue and  expense for tax and  financial
reporting  purposes.  These  temporary  differences  primarily  arose  from  the
recognition of rental revenue from real estate, recognition of accrued expenses,
capitalized  interest and a difference in the depreciable basis for tax than for
financial  reporting  purposes.  The Company  carried back federal net operating
losses to prior years for refunds and carried forward state net operating losses
to be applied against future operating income, if any.

     Due to the  uncertainty  of realizing  the benefit of certain  deferred tax
assets given the Company's intent on electing to be taxed as a REIT, a valuation
allowance was  established in 1998. The net decrease in the valuation  allowance
for fiscal year 1997 was due to changes in the state loss carry forward amounts.

                                     - 55 -
<PAGE>
12.  RELATED PARTY TRANSACTIONS

     As of December  31,  1999 and 1998,  the Berg Group  owned  71,885,187  and
56,464,623 O.P. Units, respectively, of the total 76,205,789 and 60,151,697 O.P.
Units issued and  outstanding,  respectively.  Along with the  Company's  common
shares  owned by the  Berg  Group,  the Berg  Group's  interest  in the  Company
represents  77.2% and 82.8% of the  Company as of  December  31,  1999 and 1998,
respectively,  assuming  conversion of the O.P.  Units into common shares of the
Company.

     In connection with the Acquisition, through the operating partnerships, the
Company assumed certain liabilities which included amounts due to the Berg Group
in the amount of $1,989 for management fees and interest  expense.  Such amounts
were paid as of December 31, 1998.

     As of  December  31,  1999 and  1998,  debt in the  amount of  $31,193  and
$20,752,  respectively,  was  due  Berg & Berg  Enterprises,  Inc.  This  amount
includes  $36,380 and $9,606 of debt assumed in connection with the acquisitions
of properties from the Berg Group in 1999 and 1998,  respectively  (see Note 6).
Additionally, during 1999 and 1998, the operating partnerships declared and paid
distributions of $0.41and $0.17 per O.P. Unit, respectively. The amount of these
distributions payable to various members of the Berg Group of $27,307 and $9,599
were  converted  to  related  party  debt  during  1999 and 1998,  respectively.
Interest expense  incurred in connection with debt due Berg & Berg  Enterprises,
Inc.  was  $2,246 and $3,511 for the years  ended  December  31,  1999 and 1998,
respectively.

     Carl E. Berg has a  significant  financial  interest  in one  company  that
leases space from the  operating  partnerships.  This company  occupies,  in the
aggregate,  5,862 square feet at a rate of $0.92 per square foot per month. This
lease  was  in  effect  prior  to  the  Company's  acquisition  of  its  general
partnership interests. The lease expires in 2001.

     The Company currently leases space owned by Berg & Berg  Enterprises,  Inc.
an  affiliate  of Carl E. Berg and Clyde J. Berg.  Rental  amounts and  overhead
reimbursements  paid to Berg & Berg  Enterprises,  Inc. were $80 and $61 for the
years ended December 31, 1999 and 1998, respectively.

13.  FUTURE MINIMUM RENTS

     The Company,  through the operating partnerships,  owns interests in 80 R&D
properties  that are leased to tenants under net  operating  leases with initial
terms extending to the year 2008, and are typically  subject to fixed increases.
Generally,  the leases grant tenants  renewal  options.  Future minimum  rentals
under  non-cancelable  operating  leases,  excluding  tenant  reimbursements  of
expenses, as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
<S>                                                          <C>

         2000                                                 $   80,404
         2001                                                     80,763
         2002                                                     72,158
         2003                                                     62,379
         2004                                                     52,808
      Thereafter                                                  65,886
                                                              ------------
                Total                                          $ 414,398
                                                              ============
</TABLE>
     Rental income from one tenant,  Microsoft Corporation,  was $13,249 for the
year ended  December  31, 1999,  or 18.0% of total rental  revenues for the same
period.  Future minimum rents from this tenant are $130,498.  Rental income from
one tenant, Apple Computers, was $3,340 for the year ended December 31, 1998, or
12.2% of total rental revenues for the same period

14.  SUPPLEMENTAL CASH FLOW INFORMATION:

     Cash paid for  interest  was  $13,406,  $7,540,  $0, and $410 for the years
ended  December 31, 1999 and 1998, the one month ended December 31, 1997 and for
the year ended November 30, 1997,  respectively.  The Company received an income
tax refund of $228 in the year ended  December  31, 1998 and paid income  taxes,
net of refunds, of $546 for the year ended November 30, 1997.

                                     - 56 -
<PAGE>
     In  connection  with the  Acquisition,  the Company,  through the operating
partnerships,  acquired  assets  with a  fair  value  of  $507,807  and  assumed
liabilities of $239,903.

     The Company  assumed the Wells Fargo line of credit on  September  30, 1998
from the Berg Group. As of that date, the outstanding balance on the Wells Fargo
line of credit was $39,044.  In  connection  with this  assumption,  the Company
retired $39,044 of related party debt due Berg & Berg Enterprises, Inc.

     In connection  with the  acquisitions  of properties,  the Company  assumed
$36,380 and $9,606 of related party debt due to Berg & Berg  Enterprises,  Inc.,
assumed other liabilities of $126 and $0, and issued 16,311,232 and 672,064 O.P.
Units for a total  acquisition value of $193,553 and $13,692 for the years ended
December 31, 1999 and 1998, respectively.

     Amounts  due to the Berg  Group in the  amount of  $27,307  and  $9,599 for
distributions  declared to O.P.  Unit holders,  were  converted to related party
debt due Berg & Berg Enterprises,  Inc. during the years ended December 31, 1999
and 1998, respectively.

15.  COMMITMENTS AND CONTINGENCIES

     The Company and the operating partnerships,  from time to time, are parties
to litigation arising out of the normal course of business.  Management does not
expect  that  such  matters  would  have  a  material   adverse  effect  on  the
consolidated financial position or results of operations of the Company.

     Insurance policies currently maintained by the Company do not cover seismic
activity, although they do cover losses from fires after an earthquake.

16.  SUBSEQUENT EVENTS (unaudited)

     In January  2000 the Berg Group  purchased a 50%  interest  in  TBI-Mission
West, LLC which has approximately 62 net acres in Morgan Hill,  California which
will support  development of approximately  961,000 square feet. The Company has
the option to acquire the 50%  interest in this project from the Berg Group upon
its completion and being fully leased  pursuant to the Berg Land Holdings Option
Agreement.

     In January 2000, we acquired a newly  constructed R & D property  leased to
E-Tek Dynamics, Inc. on Automation Parkway in San Jose, California consisting of
80,640  square  feet of rentable  space.  We acquired  this  property  under the
Pending Projects Acquisition Agreement.  We paid approximately $14.6 million for
this property.  In connection with this acquisition,  the operating  partnership
assumed total debt of approximately $5.0 million and issued a total of 1,346,480
O. P. Units to the Berg Group.

     The  Berg  Group  recently  acquired  approximately  9.5  acres  of land in
Sunnyvale,  California  with an  existing  98,500  rentable  square  foot  shell
building and expansion space for  approximately  a 100,000  rentable square foot
building.  This site has been leased to Global Centers, Inc. for 15 years with a
lease for the 98,500 square foot  building  commencing in April 2000 and a lease
for the 100,000  square foot building  commencing in March 2001. The Company has
the option to acquire this project  from the Berg Group upon its  completion  of
the 100,000 square foot building under the Berg Land Holdings Option  Agreement.
The Company  will receive no rents from this  property  prior to the exercise of
this option.

     In January  2000,  the Company  paid  dividends  aggregating  $2,544 to its
common stockholders which was payable as of December 31, 1999.

                                     - 57 -
<PAGE>

18.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)


     Quarterly financial  information for the year ended December 31, 1999 is as
follows:
<TABLE>
<CAPTION>

                                                First          Second           Third          Fourth
                                             ------------   -------------   -------------   -------------
<S>                                          <C>            <C>             <C>             <C>
Revenue                                       $   14,027     $    18,376     $    20,517     $    20,806

Income before minority interest               $    7,605     $    10,552     $    13,488     $    14,671
Net income                                    $      881     $     1,065     $     2,178     $     2,407

Per share data:
   Basic net income per share                 $     0.11     $      0.13     $      0.13     $      0.15
   Diluted net income per share               $     0.10     $      0.13     $      0.13     $      0.15
Weighted average number of common shares
  outstanding (basic)                          8,227,261       8,166,977      16,715,354      16,964,086
Weighted average number of common shares
  outstanding (diluted)                        8,415,412       8,305,603      16,808,181      17,056,913
</TABLE>


     Quarterly financial  information for the year ended December 31, 1998 is as
follows:
<TABLE>
<CAPTION>

                                                First          Second           Third         Fourth
                                             ------------   -------------   -------------  -------------
<S>                                          <C>             <C>            <C>            <C>
Revenue                                       $       77      $       64     $    15,455    $    16,160

(Loss) income before minority interest        $     (153)     $     (273)    $     5,519    $     6,735
Net (loss) income                             $     (153)     $     (273)    $       130    $        75

Per share data:
   Basic net (loss) per share                 $    (0.10)     $    (0.16)    $      0.08    $      0.05
   Diluted net (loss) per share               $    (0.10)     $    (0.16)    $      0.08    $      0.05
Weighted average number of common shares
  outstanding (basic)                          1,503,933       1,698,536       1,698,536      1,847,342
Weighted average number of common shares
  outstanding (diluted)                        1,503,933       1,698,536       1,698,536      1,935,936

</TABLE>
                                     - 58 -
<PAGE>










                      Report of Independent Accountants on
                          Financial Statement Schedule


To the Board of Directors
of Mission West Properties, Inc.

Our audits of the consolidated  financial  statements  referred to in our report
dated  January 21, 2000  included in this Form 10-K of Mission West  Properties,
Inc. also included an audit of the financial  statement  schedule listed in Item
14(a)(2) of this Form 10-K. In our opinion,  this financial  statement  schedule
presents  fairly,  in all material  respects,  the information set forth therein
when read in conjunction with the related consolidated financial statements.

PricewaterhouseCoopers LLP

San Francisco, California
January 21, 2000

                                     - 59 -
<PAGE>







                          MISSION WEST PROPERTIES, INC.
                                  Schedule III
                    Real Estate and Accumulated Depreciation
                                December 31, 1999
                             (dollars in thousands)
<TABLE>
<CAPTION>

                                                             Initial Cost                           Total Cost (A)
                                                      --------------------------     Cost      -----------------------
                                         December 31,                 Buildings  Subsequent to             Buildings
                                            1998                         and     Construction\               and
Property Name                 City      Encumbrances      Land      Improvements  Acquisition     Land    Improvements   Total
----------------------- --------------- ------------- ------------ ------------- ------------- ---------- ------------ -------------
<S>                    <C>                <C>           <C>          <C>            <C>        <C>         <C>           <C>
10401-10411 Bubb        Cupertino    B                   $    632     $  3,078                  $    632    $  3,078      $  3,710
2001 Logic              Cupertino                           2,288       11,134                     2,288      11,134        13,422
47000 Northport         Fremont                   C         1,184        5,760       $     7       1,184       5,767         6,951
45738 Northport         Fremont                   C           891        4,338             5         891       4,343         5,234
4050 Starboard          Fremont                   C         1,329        6,467             8       1,329       6,475         7,804
3501 W. Warren/Fremont  Fremont                             1,866        9,082                     1,866       9,082        10,948
48800 Milmont           Fremont                             1,013        4,932                     1,013       4,932         5,945
4750 Patrick Henry      Santa Clara                         1,604        7,805           153       1,604       7,958         9,562
4949 Hellyer            San Jose                  C         3,593       17,484            61       3,593      17,545        21,138
3520 Bassett            Santa Clara   D                     1,104        5,371                     1,104       5,371         6,475
3530 Bassett            Santa Clara D,E    $  2,853           849        4,133                       849       4,133         4,982
5850-5870 Hellyer       San Jose                            2,787        6,502                     2,787       6,502         9,289
2025 Fontanosa          San Jose                            2,572        4,597                     2,572       4,597         7,169
2030 L' Avenida         Mountain View                      46,832      109,275                    46,832     109,275       156,107
1750 Automation Parkway San Jose                            4,789       11,174           315       4,789      11,489        16,278
2251 Lawson Lane        Santa Clara                         1,952        9,498                     1,952       9,498        11,450
1230 E. Arques          Sunnyvale                             540        2,628                       540       2,628         3,168
1250 E. Arques          Sunnyvale                           1,335        6,499                     1,335       6,499         7,834
3120 Scott Blvd.        Santa Clara                         2,044        9,948                     2,044       9,948        11,992
20400 Mariani           Cupertino             1,902         1,670        8,125                     1,670       8,125         9,795
10500 De Anza           Cupertino                 C         7,666       37,304                     7,666      37,304        44,970
20605-705 Valley Green  Cupertino                           3,490       16,984                     3,490      16,984        20,474
10300 Bubb              Cupertino                 C           635        3,090                       635       3,090         3,725
10440 Bubb              Cupertino               405           434        2,112                       434       2,112         2,546
10460 Bubb              Cupertino               477           994        4,838            30         994       4,868         5,862
1135 Kern               Sunnyvale                             407        1,982                       407       1,982         2,389
405 Tasman              Sunnyvale                             550        2,676                       550       2,676         3,226
450 National            Mountain View             C           611        2,973                       611       2,973         3,584
3301 Olcott             Santa Clara                         1,846        8,984                     1,846       8,984        10,830
2800 Bayview            Fremont                             1,070        5,205                     1,070       5,205         6,275
6850 Santa Teresa       San Jose                              377        1,836            27         377       1,863         2,240
6810 Santa Teresa       San Jose                            2,567        5,991            47       2,567       6,038         8,605
140-160 Great Oaks      San Jose                            1,402        6,822            91       1,402       6,913         8,315
6541 Via del Oro/
 6385-6387 San Ignacio  San Jose                            1,039        5,057                     1,039       5,057         6,096
6311-6351 San Ignacio   San Jose                  C         6,246       30,396            21       6,246      30,417        36,663
6320-6360 San Ignacio   San Jose                            2,616       12,732           197       2,616      12,929        15,545
75 E. Trimble/2610 N.
 First St.              San Jose                            3,477       16,919                     3,477      16,919        20,396
2033-2243 Samaritan     San Jose             31,193         5,046       24,556                     5,046      24,556        29,602
1170 Morse              Sunnyvale                 C           658        3,201                       658       3,201         3,859
3236 Scott              Santa Clara               C         1,234        6,005                     1,234       6,005         7,239
1212 Bordeaux           Sunnyvale                           2,250       10,948                     2,250      10,948        13,198
1325-1810 McCandless    Milpitas                           13,994       66,213           230      13,994      66,443        88,437
1600 Memorex            Santa Clara                         1,221        5,940                     1,221       5,940         7,161
1688 Richard            Santa Clara                         1,248        2,912             7       1,248       2,919         4,167
1700 Richard            Santa Clara                         1,727        4,029                     1,727       4,029         5,756
3506-3510 Bassett       Santa Clara   D                       943        4,591            52         943       4,643         5,586
3540-3544 Bassett       Santa Clara   D           C         1,565        7,615            57       1,565       7,672         9,237
3550 Bassett            Santa Clara   D           C         1,079        5,251                     1,079       5,251         6,330
3560 Bassett            Santa Clara   D           C         1,075        5,233                     1,075       5,233         6,308
3570-3580 Bassett       Santa Clara   D           C         1,075        5,233                     1,075       5,233         6,308
          Prudential Capital Group Loan     128,315 C
                                          ----------- ------------ ------------- ------------- ---------- ------------- ------------
                                           $165,415      $149,416     $565,458       $ 1,308    $149,416    $566,766      $716,182

                                          =========== ============ ============= ============= ========== ============= ============
</TABLE>


<PAGE>
<TABLE>
<CAPTION>

                                        Accumulated      Date of     Depreciable
Property Name                 City      Depreciation   Acquisition      Life
----------------------- --------------- ------------- ------------- -------------
<S>                    <C>                <C>            <C>          <C>
10401-10411 Bubb        Cupertino    B     $   117         7/98        40 Years
2001 Logic              Cupertino              419         7/98        40 Years
47000 Northport         Fremont                218         7/98        40 Years
45738 Northport         Fremont                165         7/98        40 Years
4050 Starboard          Fremont                245         7/98        40 Years
3501 W. Warren/Fremont  Fremont                343         7/98        40 Years
48800 Milmont           Fremont                187         7/98        40 Years
4750 Patrick Henry      Santa Clara            296         7/98        40 Years
4949 Hellyer            San Jose               659         7/98        40 Years
3520 Bassett            Santa Clara   D        203         7/98        40 Years
3530 Bassett            Santa Clara D,E        157         7/98        40 Years
5850-5870 Hellyer       San Jose               192        11/98        40 Years
2025 Fontanosa          San Jose                29        10/99        40 Years
2030 L' Avenida         Mountain View        2,049         4/99        40 Years
1750 Automation Parkway San Jose               144         7/99        40 Years
2251 Lawson Lane        Santa Clara            358         7/98        40 Years
1230 E. Arques          Sunnyvale              101         7/98        40 Years
1250 E. Arques          Sunnyvale              245         7/98        40 Years
3120 Scott Blvd.        Santa Clara            375         7/98        40 Years
20400 Mariani           Cupertino              307         7/98        40 Years
10500 De Anza           Cupertino            1,401         7/98        40 Years
20605-705 Valley Green  Cupertino              639         7/98        40 Years
10300 Bubb              Cupertino              118         7/98        40 Years
10440 Bubb              Cupertino               81         7/98        40 Years
10460 Bubb              Cupertino              185         7/98        40 Years
1135 Kern               Sunnyvale               77         7/98        40 Years
405 Tasman              Sunnyvale              102         7/98        40 Years
450 National            Mountain View          113         7/98        40 Years
3301 Olcott             Santa Clara            339         7/98        40 Years
2800 Bayview            Fremont                197         7/98        40 Years
6850 Santa Teresa       San Jose                71         7/98        40 Years
6810 Santa Teresa       San Jose               126         3/99        40 Years
140-160 Great Oaks      San Jose               258         7/98        40 Years
6541 Via del Oro/
 6385-6387 San Ignacio  San Jose               191         7/98        40 Years
6311-6351 San Ignacio   San Jose             1,142         7/98        40 Years
6320-6360 San Ignacio   San Jose               479         7/98        40 Years
75 E. Trimble/2610 N.
 First St.              San Jose               636         7/98        40 Years
2033-2243 Samaritan     San Jose               924         7/98        40 Years
1170 Morse              Sunnyvale              122         7/98        40 Years
3236 Scott              Santa Clara            227         7/98        40 Years
1212 Bordeaux           Sunnyvale              413         7/98        40 Years
1325-1810 McCandless    Milpitas             2,510         7/98        40 Years
1600 Memorex            Santa Clara            199         7/98        40 Years
1688 Richard            Santa Clara            108         9/98        40 Years
1700 Richard            Santa Clara             42         8/99        40 Years
3506-3510 Bassett       Santa Clara   D        174         7/98        40 Years
3540-3544 Bassett       Santa Clara   D        288         7/98        40 Years
3550 Bassett            Santa Clara   D        199         7/98        40 Years
3560 Bassett            Santa Clara   D        198         7/98        40 Years
3570-3580 Bassett       Santa Clara   D        198         7/98        40 Years
                                        -------------
                                           $18,566
                                        =============

</TABLE>
                                     - 61 -
<PAGE>
(A)  The aggregate  cost for federal income tax purposes at December 31, 1999 is
     $$132.7  million

(B)  16.67% of this property's ownership is held by unaffiliated parties outside
     the operating partnerships or the Company

(C)  Encumbered by the $128,315  Prudential  Capital Group loan - full amount of
     loan shown at the bottom of the schedule.

(D)  Part of the property group referred to as Triangle  Technology Park (E) 25%
     of this property's  ownership is held by  unaffiliated  parties outside the
     operating partnerships or the Company.

                                     - 62 -
<PAGE>




                          MISSION WEST PROPERTIES, INC.
                              NOTE TO SCHEDULE III
                           December 31, 1999 and 1998
                             (Dollars in thousands)

1.  Reconciliation of real estate and accumulated depreciation:
<TABLE>
<CAPTION>

                                                         1999                       1998
                                               ------------------------   ------------------------
<S>                                                  <C>                        <C>
Real estate investments:
  Balance at beginning of year                        $  521,439                          -
  Additions                                              194,743                 $  521,439
  Dispositions                                                 -                          -
                                               ------------------------   ------------------------
  Balance at end of year                              $  716,182                 $  521,439
                                               ========================   ========================

Accumulated depreciation:
  Balance at beginning of year                        $    5,410                          -
  Additions                                               13,156                 $    5,410
  Dispositions                                                 -                          -
                                               ------------------------   ------------------------
  Balance at end of year                              $   18,566                 $    5,410
                                               ========================   ========================

</TABLE>

                                     - 63 -
<PAGE>





                        Report of Independent Accountants

To the members of the Berg Group

In our  opinion,  the  accompanying  combined  balance  sheets  and the  related
combined  statements of  operations,  of net equity  (deficit) and of cash flows
present fairly,  in all material  respects,  the financial  position of the Berg
Properties  at June 30,  1998 and  December  31,  1997,  and the  results of its
operations  and its cash flows for the six month  period ended June 30, 1998 and
each of the two years in the period ended December 31, 1997, in conformity  with
generally accepted  accounting  principles.  These financial  statements are the
responsibility of the management of the Berg Properties;  our  responsibility is
to express an opinion on these  financial  statements  based on our  audits.  We
conducted our audits of these  statements in accordance with generally  accepted
auditing  standards  which  require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

San Francisco, California
January 29, 1999

                                     - 64 -
<PAGE>


                        THE BERG PROPERTIES (PREDECESSOR)
                             COMBINED BALANCE SHEETS
                  (Dollars in thousands, except per share data)
                                     -------


                                     ASSETS
<TABLE>
<CAPTION>

                                                                    June 30, 1998          December 31, 1997
                                                                 --------------------    ---------------------
<S>                                                                 <C>                      <C>
Real estate assets:
  Land                                                               $ 30,426                 $ 30,426
  Building and improvements                                            61,323                   61,262
  Tenant improvements                                                  85,790                   86,541
                                                                 --------------------    ---------------------
                                                                      177,539                  178,229

     Less, accumulated depreciation                                   (81,939)                 (78,077)
                                                                 --------------------    ---------------------
        Net real estate assets                                         95,600                  100,152
  Cash and cash equivalents                                                 -                    5,719
  Deferred rent                                                         4,964                    4,144
  Deferred costs and other costs                                        3,982                    3,935
                                                                 --------------------    ---------------------
               Total assets                                          $104,546                 $113,950
                                                                 ====================    =====================


                      LIABILITIES AND NET (DEFICIT) EQUITY

Liabilities:
  Lines of credit                                                           -                 $ 37,953
  Mortgage notes payable                                               37,868                   38,554
  Motgage notes payable (related parties)                             156,632                        -
  Notes payable (related parties)                                           -                    1,975
  Accounts payable and accrued expenses                                 2,233                    2,102
  Other liabilities                                                     4,046                    3,715
                                                                 --------------------    ---------------------
     Total liabilities                                                200,779                   84,299
                                                                 --------------------    ---------------------
  Net (deficit) equity                                                (96,233)                   29,651
                                                                 --------------------    ---------------------
               Total liabilities and net (deficit) equity            $104,546                  $113,950
                                                                 ====================    =====================
</TABLE>



                   See notes to combined financial statements

                                     - 65 -
<PAGE>


                        THE BERG PROPERTIES (PREDECESSOR)
                        COMBINED STATEMENTS OF OPERATIONS
                  (Dollars in thousands, except per share data)


<TABLE>
<CAPTION>


                                                Six Months                  Year Ended December 31,
                                                  Ended           --------------------------------------------
                                              June 30, 1998               1997                   1996
                                           -------------------    --------------------    --------------------
<S>                                            <C>                      <C>                    <C>
REVENUE:
  Rental revenue from real estate               $22,341                  $40,163                $28,934
  Tenant reimbursements                           3,826                    6,519                  3,902
                                           -------------------    --------------------    --------------------
                                                 26,167                   46,682                 32,836
                                           -------------------    --------------------    --------------------
EXPENSES:
  Property operating and maintenance              2,088                    3,741                  1,906
  Real estate taxes                               2,126                    4,229                  3,750
  Interest                                        3,044                    5,919                  6,090
  Interest (related parties)                         61                      248                    293
  Management fees (relates parties)                 645                    1,050                    827
  Depreciation and amortization                   3,862                    7,717                  6,739
                                           -------------------    --------------------    --------------------
                                                 11,826                   22,904                 19,605
                                           -------------------    --------------------    --------------------
Income before extraordinary item                 14,341                   23,778                 13,231
Extraordinary item                                    -                        -                    610
                                           -------------------    --------------------    --------------------
  Net income                                    $14,341                  $23,778                $13,841
                                           ===================    ====================    ====================

</TABLE>




                   See notes to combined financial statements

                                     - 66 -
<PAGE>


                        THE BERG PROPERTIES (PREDECESSOR)
                   COMBINED STATEMENTS OF NET EQUITY (DEFICIT)
                             (Dollars in thousands)


<TABLE>
<CAPTION>


<S>                                                             <C>
Balance (deficit), January 1, 1996                               $ (2,469)
  Contributions                                                    12,299
  Distributions                                                    (6,846)
  Net income                                                       13,841
                                                               -------------
Balance, December 31, 1996                                       $ 16,825
  Contributions                                                       755
  Distributions                                                   (11,707)
  Net income                                                       23,778
                                                               -------------
Balance, December 31, 1997                                        $29,651
  Distributions                                                  (140,225)
  Net income                                                       14,341
                                                               -------------
Balance (deficit), June 30, 1998                                 $(96,233)
                                                               =============
</TABLE>






                   See notes to combined financial statements

                                     - 67 -
<PAGE>



                        The Berg Properties (Predecessor)
                       COMBINED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)
<TABLE>
<CAPTION>


                                                          Six months ended
                                                              June 30,                        Year Ended December 31,
                                                       -----------------------     ---------------------------------------------
                                                                1998                       1997                    1996
                                                       -----------------------     ---------------------    --------------------
<S>                                                        <C>                          <C>                      <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                               $  14,341                    $ 23,778                 $ 13,841
   Adjustments to reconcile net income to net cash
     provided by operating activities:
       Depreciation and amortization                            3,862                       7,717                    6,739
       Loan fee amortization                                        6                          12                       10
   Extraordinary gain on extinguishments of debt                    -                           -                     (610)
   Changes in operating assets and liabilities:
       Deferred rent                                             (820)                     (1,330)                    (586)
       Other assets                                               (53)                     (1,221)                    (406)
       Accounts payable and accrued expenses                      131                        (160)                     353
       Other liabilities                                          331                       1,113                      907
                                                       -----------------------     ---------------------    --------------------
   Net cash provided by operating activities                   17,798                      29,909                   20,248
                                                       -----------------------     ---------------------    --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase and improvements to real estate                     (132)                     (17,251)                 (29,275)
   Tenant reimbursements for improvements                        822                            -                        -
                                                       -----------------------     ---------------------    --------------------
     Net cash provided by (used in) investing
       acitivities                                               690                      (17,251)                 (29,275)
                                                       -----------------------     ---------------------    --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net (repayments) borrowings on lines of credit             (1,277)                       2,415                    6,047
   Proceeds from mortgage notes payable                            -                        3,105                        -
   Principal payments on mortgage notes payable                 (686)                      (2,429)                  (1,563)
   Proceeds from mortgage notes payable (related             119,956                            -                        -
   Principal payments on notes payable (related               (1,975)                        (571)                    (504)
   Capital contributions                                           -                          755                   12,299
   Capital distributions                                    (140,225)                     (11,707)                  (6,846)
                                                       -----------------------     ---------------------    --------------------
     Net cash (used in) provided by financing
       activities                                            (24,207)                      (8,432)                   9,433
                                                       -----------------------     ---------------------    --------------------
     Net (decrease) increase in cash and cash
       equivalents                                            (5,719)                       4,226                      406
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                   5,719                        1,493                    1,087
                                                       -----------------------     ---------------------    --------------------
CASH AND CASH EQUIVALENTS, END OF YEAR                      $      -                     $  5,719                 $  1,493
                                                       =======================     =====================    ====================
Supplemental information:
     Cash paid for interest, net of amounts
       capitalized                                          $  1,731                     $  6,272                 $  6,278
                                                       =======================     =====================    ====================
Supplemental schedule of non-cash investing
  and financing activities:
     Assumption of lines of credit by Carl Berg             $ 36,676                            -                        -
                                                       =======================     =====================    ====================
     Non-cash transfers of construction-in-progress                -                     $  6,775                 $      75
                                                       =======================     =====================    ====================

</TABLE>




                   See notes to combined financial statements

                                     - 68 -
<PAGE>


                        THE BERG PROPERTIES (PREDECESSOR)
                     NOTES TO COMBINED FINANCIAL STATEMENTS
             (Dollars in thousands, except share and per share data)


1.  ORGANIZATIONS AND BUSINESS

ORGANIZATION:

     The Berg  Properties do not constitute a legal entity,  but rather,  were a
combination  of various  research and  development  properties  held by entities
controlled  by the Carl E.  Berg,  Clyde J.  Berg,  members  of their  immediate
families and certain  entities which they control (the "Berg  Group").  The Berg
Group has historically been engaged in developing, owning, operating and selling
income-producing  real  estate  primarily  in the region  surrounding  San Jose,
California.  In  addition  to its real  estate  operations,  the  Berg  Group is
involved with other  business  pursuits  including  technology  venture  capital
funding,  strategic  investment  and  business  development.   The  accompanying
financial  statements  reflect  only the  assets,  liabilities  and  results  of
operations of the Berg Properties.

BUSINESS:

     On September 2, 1997, the Berg Group  purchased  6,000,000  (200,000 giving
effect to a 1 for 30 reverse  stock split in November  1997) newly issued shares
of common stock of Mission West Properties,  Inc. (the  "Company"),  an American
Stock  Exchange  listed real estate  company (the  "Initial  Investment").  Upon
consummation of the Initial Investment,  the Berg Group beneficially owned 79.6%
of the voting securities of the Company. Subsequent to the Initial Investment, a
series of transactions were approved by the Company's shareholders that included
a 1 for 30 reverse stock split, a private  placement of 1,250,000  shares of the
Company's  common stock at $4.50 per share,  and the  adoption of the  Company's
stock option plan,  and a change in the  Company's  year end from November 30 to
December 31. The Company  also hired a new  management  team and issued  options
under the stock plan to key  employees  for the  purchase  of 755,000  shares at
$4.50 per share.  In March  1997,  one officer  exercised  an option for 200,000
shares of common  stock at $4.50 per  pursuant to a  restricted  stock  purchase
agreement.

     In May 1998, the Berg Group along with other certain parties,  entered into
an  acquisition  agreement,  providing,  among other  things,  for the Company's
acquisition  of  interests  as  the  sole  general  partner  in  four  operating
partnerships  which  hold the  Berg  Properties,  along  with  other  properties
previously  controlled by another Silicon Valley  developer.  The acquisition by
the company of its general partnership  interests became effective as of July 1,
1998 for accounting and reporting purposes.

2.  BASIS OF PRESENTATON AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF COMBINATION:

     The  financial  statements  have been  presented  on a combined  basis,  at
historical cost, because the Berg Properties were under the common management of
the Berg Group. All significant  intergroup  transactions and balances have been
eliminated in combination.

MANAGEMENT ESTIMATES:

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that may affect the reported  amounts of assets and liabilities and
disclosure of contingent  assets and  liabilities  at the dates of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting periods. Actual results could differ from those estimates.

REVENUE RECOGNITION:

     Rental  income is  recognized  on the  straight-line  method of  accounting
required by generally  accepted  accounting  principles under which  contractual
rent payment increases are recognized evenly over the lease term. The difference
between  recognized  rental  income and rental  cash  receipts  is  recorded  as
deferred rent on the balance sheet.  Certain lease agreements contain terms that
provide for additional  rents based on  reimbursement  of certain  costs.  These
additional rents are reflected on the accrual basis.

                                     - 69 -
<PAGE>
REAL ESTATE ASSETS:

     Real  estate  assets  are stated at the lower of cost or fair  value.  Cost
includes  expenditures  for  improvements or replacements  and the net amount of
interest cost associated with capital additions. Capitalized interest was $0 for
the six  months  ended  June 30,  1998 and  $257  and $459 for the  years  ended
December 31, 1997 and 1996 respectively.  Maintenance and repairs are charged to
expense as  incurred.  Gains and losses  from  sales are  included  in income in
accordance  with Statement of Financial  Accounting  Standards  ("SFAS") No. 66,
Accounting for Sales of Real Estate.

     The Company  reviews real estate assets for impairment  whenever  events or
changes in  circumstances  indicate that the carrying amount of an asset may not
be  recoverable.  If the  carrying  amount of the asset  exceeds  its  estimated
undiscounted  net cash flow before  interest,  the  Company  will  recognize  an
impairment loss equal to the difference between its carrying amount and its fair
value. If an impairment is recognized,  the reduced carrying amount of the asset
will be accounted  for as its new cost.  For a depreciable  asset,  the new cost
will be depreciated  over the asset's  remaining  useful life.  Generally,  fair
values are estimated  using  discounted  cash flow,  replacement  cost or market
comparison analyses. The process of evaluating for impairment requires estimates
as to future  events and  conditions,  which are  subject to varying  market and
economic factors. Therefore, it is reasonably possible that a change in estimate
resulting  from judgments as to future events could occur which would affect the
recorded  amounts of the  property.  As of December  31, 1998,  the  properties'
carrying values did not exceed the estimated fair values.

DEPRECIATION:

     Depreciation  is computed  using the  straight-line  method over  estimated
useful lives of 40 years for  buildings and  improvements,  and over the life of
lease terms which average 10 years for tenant improvements.

CASH AND CASH EQUIVALENTS:

     Cash and cash equivalents  include all cash and liquid  investments with an
original maturity date from date of purchase of three months or less.

DEFERRED COSTS AND OTHER ASSETS:

     Deferred costs and other assets include  external lease  acquisition  costs
which  are  capitalized  and  amortized  over the lives of the  related  leases.
Accumulated  amortization  related to these costs aggregated $1,709,  $1,353 and
$661 as of June 30, 1998, December 31, 1997 and 1996, respectively.

     Also  included in deferred  costs and other  assets are loan fees which are
stated  at cost and are  being  amortized  under a method  of  accounting  which
approximates the effective  interest method over the terms of the related notes.
Upon  refinancing,  property  disposition  or loan  termination,  such  fees are
directly written-off.  Accumulated  amortization related to loan fees aggregated
$204,  $198  and  $186  as of  June  30,  1998,  December  31,  1997  and  1996,
respectively.

INCOME TAXES:

     No federal or state income taxes are payable by the entities  which own the
Berg  Properties and none have been provided for in the  accompanying  financial
statements,  as such  properties  are owned by  partnerships  whose partners are
required  to  include  their  respective  share of  profits  and losses in their
individual tax returns.

CONCENTRATION OF CREDIT RISK:

     The Berg  Properties  are not  geographically  diverse,  and their  tenants
operate  primarily in the technology  industry.  Additionally,  because the Berg
Properties  are  leased  to 61  tenants,  default  by  any  major  tenant  could
significantly  impact the  results of the  combined  total.  One  tenant,  Apple
Computers, Inc., accounted for approximately 14.9% of the Berg Properties rental
revenues for the six months ended June 30,  1998,  with the next largest  tenant
accounting for 7.5% of total rental revenues.  However,  management believes the
risk of default is reduced  because of the critical  nature of these  properties
for ongoing tenant operations.

                                     - 70 -
<PAGE>
COMMITMENTS AND CONTINGENCIES:

     Members of the Berg Group and the entities  which hold the Berg  Properties
are party to litigation arising out of the normal course of business.  While the
ultimate results of any such lawsuits or other  proceedings  cannot be predicted
with  certainty,  management  does not  expect  that these  matters  will have a
material  adverse  effect on the  combined  financial  position  or  results  of
operations of the Berg Properties.

     Insurance policies currently maintained by the Berg Properties do not cover
damage  caused by seismic  activity,  although  they do cover  losses from fires
after an earthquake.

3.  DEBT

LINES OF CREDIT:

     Historically,  the Berg  Properties  have had  access to credit  facilities
entered  into by  members  of the Berg  Group.  Generally,  balances  under such
facilities  have been  allocated  to  entities  within the Berg  Group  based on
approximate  use  of  the  credit  facilities.  Borrowings  under  these  credit
facilities have been used to finance various ventures including  commercial real
estate  development and  acquisition,  including assets that are included in the
Berg  Properties,  technology  venture  capital  investments  and  other  assets
unrelated  to real  estate  which  have not  been  included  in these  financial
statements.

     Included in the  accompanying  financial  statements  is an  allocation  of
certain  lines of credit  with an  aggregate  borrowing  limit of  $130,000.  In
September  1998,  two lines of credit  aggregating  $30,000  were  retired.  The
remaining line of credit is collateralized  by certain Berg Properties.  Certain
members of the Berg Group are liable as guarantors under this line of credit.

     On June 30, 1998, all balances under the $100,000 line of credit  allocated
to the Berg  Properties  were assumed by Carl Berg and refinanced  with proceeds
from mortgage notes payable (related parties).  Aggregate borrowings outstanding
under the lines of credit  facilities at December 31, 1997 totaled  $99,192 with
$37,953 allocated to the Berg Properties.

MORTGAGE NOTES PAYABLE:

     The Mortgage  notes  payable  generally  require  monthly  installments  of
interest and principal over various terms extending through the year 2014.

MORTGAGE NOTES PAYABLE (RELATED PARTIES):

     The Berg Properties acquired new debt from Berg & Berg Enterprises, Inc. in
June of 1998  in  order  to  repay  amounts  previously  allocated  to the  Berg
Properties  under the lines of  credit as well as to fund  distributions  to the
Berg Group.  Total  distributions  to the Berg Group during the six months ended
June 30, 1998 were  $140,225,  of which  $119,956 was funded with  proceeds from
mortgage  notes payable  (related  parties).  Such debt was originally due March
1999,  and bears interest at a rate equal to that charged on the line of credit.
The Company has  received an  extension  from Berg & Berg  Enterprises,  Inc. to
December 1999.

     There is no set repayment plan associated with this debt; payments are made
to Berg & Berg Enterprises, Inc. on demand.

     In  connection   with  the  Company's   acquisition  of  the  sole  general
partnership  interests in the four operating  partnerships (See Note 1), certain
mortgage notes payable and portions of mortgage notes payable (related  parties)
were retired  subsequent to June 30, 1998 through a combination  of new debt and
equity.

                                     - 71 -
<PAGE>

     The  following  table  sets  forth  certain   information   regarding  debt
outstanding as of June 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>

                                                                                 Balance        Balance
Description                             Collateral Properties                    June 30,    Dec. 31, 1997     Matures       Rate
----------------------------------- ----------------------------------------- ------------- --------------- ------------- ----------
<S>                                <C>                                           <C>            <C>             <C>         <C>
LINES OF CREDIT:
Wells Fargo Bank                    2251 Lawson Lane, Santa Clara, CA                   -        $37,953         10/99         (1)
                                    3301 Olcott, Santa Clara, CA
                                    1230 & 1250 Arques, Sunnyvale, CA
                                    1135 Kern, Sunnyvale, CA
                                    405 Tasman, Sunnyvale, CA
                                    1190 Morse Avenue, Sunnyvale, CA
                                    450 National Avenue, Mountain View, CA
                                    10300 Bubb Road, Cupertino, CA
                                    10440 Bubb Road, Cupertino, CA
                                    10460 Bubb Road, Cupertino, CA
                                    20605-20705 Valley Green Dr, Cupertino, CA
                                    20400 Mariani, Cupertino, CA
                                    2033-2243 Samaritan Drive, San Jose, CA
                                    10500 De Anza Boulevard, Cupertino, CA

MORTGAGE NOTES                      2033-2043 Samaritan Drive, San Jose, CA       156,632              -          3/99         (1)
  (Related Parties)                 2133 Samaritan Drive, San Jose, CA
                                    2233-2243 Samaritan Drive, San Jose, CA

MORTGAGE NOTES:
Great West Life & Annuity Insurance
   Company                          6320 San Ignacio Ave., San Jose, CA             7,804          7,872          2/04          7%
Great West Life & Annuity Insurance
   Company                          6385 San Ignacio Ave, San Jose, CA              3,723          3,755          5/04          7%
                                    6540 Via del Oro, San Jose, CA
Great West Life & Annuity Insurance
   Company                          1170 Morse Ave., Sunnyvale, CA                  1,969          1,986          5/04          7%
National Electrical Contractors
   Association Pension Benefit
   Trust Fund                       2251 Lawson Lane, Santa Clara, CA               4,692          4,820          1/09       9.75%
Prudential Capital Group            1230 E. Arques, Sunnyvale, CA                   1,110          1,147         11/07          9%
Prudential Capital Group            20605-20705 Valley Green Dr, Cupertino, CA      3,158          3,250         10/98        8.5%
Prudential Capital Group            20400 Mariani, Cupertino, CA                    2,095          2,154          3/09       8.75%
Prudential Capital Group            1250 E. Arques, Sunnyvale, CA                   2,184          2,312         11/99        9.5%
New York Life Insurance Company     10440 Bubb Road, Cupertino, CA                    441            452          8/09       9.63%
Home Savings & Loan Association     10460 Bubb Road, Cupertino, CA                    547            569          1/07        9.5%
Amdahl Corporation                  3120 Scott, Santa Clara, CA                     7,040          7,132          3/14       9.42%
Citicorp U.S.A. Inc.                2800 Bayview Drive, Fremont, CA                 3,105          3,105          4/00         (2)
                                                                              ------------- ---------------
MORTGAGE NOTES TOTAL                                                               37,868         38,554
                                                                              ============= ===============
</TABLE>

(1)  The lesser of (a) the Wells  Fargo prime rate in effect on the first day of
     each calendar month;  (b) LIBOR plus 1.65%;or (c) the Wells Fargo Purchased
     Funds Rate quoted on the first day of each calendar  month plus 1.65%.  The
     average  rates for the six months  ended June 30,  1998 and the years ended
     December 31, 1997 and 1996 were 7.24%, 7.25% and 7.04%, respectively.

(2)  One month LIBOR plus 1.625% adjusted monthly.

                                     - 72 -
<PAGE>



     Principal payments on outstanding borrowings as of June 30, 1998 are due as
follows:
<TABLE>
<CAPTION>



               Mortgage Notes
                  Payable            Mortgage Notes
              (Related Parties)         Payable               Total
              -----------------     ----------------    -------------------
<S>              <C>                    <C>                <C>
1998                     -               $ 3,778            $  3,778
1999              $156,632                 1,325             157,957
2000                     -                 4,552               4,552
2001                     -                 1,580               1,580
2002                     -                 1,726               1,726
Thereafter               -                24,907              24,907
              -----------------     ----------------    -------------------
                  $156,632               $37,868            $194,500
              =================     ================    ===================
</TABLE>


4.  FAIR VALUES OF FINANCIAL INSTRUMENTS

     The Berg Properties'  financial  instruments include receivables,  payables
and debt.  Considerable  judgment  is required  in  interpreting  market data to
develop estimates of fair value. Accordingly, the estimates presented herein are
not  necessarily  indicative  of the amounts that the Company could realize in a
current  market  exchange.  The  use  of  different  market  assumptions  and/or
estimation  methodologies may have a material effect on the estimated fair value
amounts.

     Based on  borrowing  rates  currently  available  to the  Berg  Properties,
management has estimated that mortgage notes payable with an aggregate  carrying
value of $37,868 have an estimated  aggregate  fair value of $37,531 at June 30,
1998.  Receivables  and payables are carried at amounts  that  approximate  fair
value due to their short-term maturities.

5.  RELATED PARTY TRANSACTIONS

     The Berg  Properties are held by  partnerships  that have received  certain
management  services and financing from members of the Berg Group to the benefit
of the  partnerships  and the  properties.  Such services have included  general
operating expenses,  office space, and administrative and technical  assistance.
The  partnerships  have  reimbursed  the  Berg  Group  members  for the  cost of
providing  such  services  and  property  management  services  on a fee  basis.
Expenses  related to the properties for general and  property-specific  services
paid to  related  parties  aggregated  $645,  $1,050 and $827 for the six months
ended  June  30,  1998  and for the  years  ended  December  31,  1997  and1996,
respectively.

     Included in the financing  described in Note 3, certain affiliated entities
have extended funds to the partnerships which own the properties.  These amounts
are included in mortgage notes payable (related parties) on the combined balance
sheet.  Such amounts are due upon demand and accrue  interest at a rate equal to
that charged on the credit  facilities and interest incurred on such advances is
included in interest  expense  (related  parties) in the combined  statements of
operations.

6.  OPERATING LEASES

     The Berg  Properties are leased to tenants under net operating  leases with
initial  terms  extending  to  the  year  2008.  Future  minimum  rentals  under
non-cancelable operating leases, excluding tenant reimbursements of expenses, as
of June 30, 1998, are approximately as follows:
<TABLE>
<CAPTION>
<S>                                 <C>

                    1998            $ 22,065
                    1999              43,585
                    2000              38,867
                    2001              33,960
                    2002              27,296
                    Thereafter        41,851
                                  -------------
                                    $207,624
                                  =============
</TABLE>

                                     - 73 -
<PAGE>

     Minimum  rental  revenues,  as presented  for the six months ended June 30,
1998 and for the years ended December 31, 1997, and 1996, contain  straight-line
adjustments for rental revenue  increases in accordance with generally  accepted
accounting principles. The aggregate rental revenue increases resulting from the
straight-line  adjustments  for the six months  ended June 30,  1998 and for the
years ended December 31, 1997 and 1996 were $820, $1,301 and $586, respectively.

                                     - 74 -
<PAGE>





                      Report of Independent Accountants on
                          Financial Statement Schedule

To members of the Berg Group

Our audits of the combined financial  statements of the Berg Properties referred
to in our report  dated  January 29,  1999,  included in this report of the Berg
Properties in this Form 10-K of Mission West Properties,  Inc., also included an
audit of the combined  financial  statement  schedule listed in Item 14(a)(2) of
this Form 10-K.  In our opinion,  this  financial  statement  schedule  presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related combined financial statements.

PricewaterhouseCoopers LLP

San Francisco, California
January 29, 1999

                                     - 75 -
<PAGE>



                        The Berg Properties (predecessor)
                                  Schedule III
                    Real Estate and Accumulated Depreciation
                                December 31, 1997
                               -----------------
<TABLE>
<CAPTION>


                                                                                          Cost
                                                          Initial Cost                Capitalization
                                             ---------------------------------------  Subsequent to
                                                             Shell        Tenant       Acquisition/
Building               Sq. Ft.  Encumbrance     Land      Improvements  Improvements   Improvement
-------------------   --------  -----------  -----------  ------------  ------------  ------------
<S>                   <C>                   <C>           <C>           <C>          <C>
6850 Santa Teresa       30,000               $  105,060    $  317,106    $  188,211             0
6331 San Ignacio       131,250                  122,928     1,127,074       705,238   $ 3,964,830
6341 San Ignacio        95,040                  122,928     1,127,074       705,238      (117,704)
75 E. Trimble           93,984                  960,000     1,150,928       955,299     2,168,521
1170 Morse              34,750  $1,986,001       48,685       909,965       793,345       800,000
6540 Via Del Oro        31,800   1,877,772       80,772       334,458       303,990             0
6385-6387 San Ignacio   34,800   1,877,772       88,923       365,741       332,669             0
1212 Bordeaux           71,800   4,000,000    1,102,092        46,500       180,950     5,079,735
150-160 Great Oaks      52,000                  187,425       572,879       912,960        75,439
140 Great Oaks          52,259                  187,425       572,879       543,286       445,113
6311 San Ignacio        30,000                   60,461       289,440       274,346         2,559
6321 San Ignacio       103,894                  191,461       916,560       868,761     2,233,199
6320 San Ignacio       157,092   7,871,793      178,414     1,920,012     1,062,547     1,355,351
2610 N. First St.       77,547                  639,999     1,435,464       985,593       879,605
2033-43 Samaritan       75,168                  409,321       912,880     2,792,320       236,712
2133 Samaritan          80,000                  435,634       971,583     2,971,817         2,887
2233-43 Samaritan       79,924                  435,220       970,640     2,968,994         2,884
3236 Scott              54,672   7,504,850    1,457,273       724,086     1,388,005       700,000
1810 McCandless         39,800                  564,762       784,519       784,519         7,716
1740 McCandless         51,602                  732,232     1,017,155     1,017,155         5,951
1680 McCandless         73,253                  990,398             0             0     3,562,232
1600 McCandless         40,970                  581,364       807,582       807,582         6,126
1500 McCandless         42,700                  605,913       841,683       841,683         6,565
1450 McCandless         45,312                  606,086             0             0     2,136,034
1350 McCandless         46,272                  593,511             0             0     2,206,705
1325 McCandless         77,568                1,027,019             0             0     3,574,201
1425 McCandless         38,579                  549,423       763,211       763,211         5,790
1525 McCandless         28,655                  406,614       564,834       564,834         4,285
1575 McCandless         33,263                  472,002       655,665       655,665         4,974
1625 McCandless         33,625                  477,139       662,801       662,801         5,027
1745 McCandless         35,731                  507,023       704,313       704,313         5,342
1765 McCandless        118,708                1,532,956             0             0     5,018,826
1600 Memorex Drive     109,666                1,000,000       875,000       875,000           559
4949 Hellyer           200,484                1,986,336     4,585,362     4,735,026       (10,000)
2001 Logic              72,426                1,007,959     1,440,000     1,277,443             0
2251 Lawson            125,000   4,820,216      998,430     2,163,118     2,369,128         8,000
1230 Arques             60,000   1,147,269       49,867       721,721       624,669       156,112
450-460  National       36,100                   29,161       219,655       234,550        85,347
1135 Kern Avenue        18,300                   65,306       126,199       151,631        69,584
10300 Bubb              23,400                   94,336       152,665       153,488       185,899
20400 Mariani          105,000   2,153,993      596,259       956,846     1,139,174             0
3301 Olcott             64,500                  576,082       643,859       586,689       838,046
1250 Arques            200,000   2,311,583      413,831     1,432,307     2,359,186       366,506
10500 De Anza          211,000  16,000,000    1,498,500     5,086,027     7,200,447             0
20605-705 Valley Green 142,000   3,250,320      532,821     1,644,011     2,178,848       636,776
1190 Morse/405 Tasman   28,350                   49,231       263,040       249,865       136,082
10440 Bubb              19,500     452,335       55,493       292,807       494,892       136,061
10460 Bubb              30,460     568,721      175,162       364,464       219,312       136,861
3120 Scott              75,000   7,131,711      350,574     3,387,720     3,074,872       900,100
3501 W Warren Bld       67,864   4,902,185    1,436,890     1,813,361     1,789,802       (15,482)
48800 Milmont           53,000   3,170,096    1,052,190     1,158,065     1,172,833         9,430
4750 Patrick Henry      65,780   2,375,884    1,163,575     1,146,854     1,147,020             0
10401 Bubb              20,330                   95,966       132,403       208,010             0
2800 Bayview            59,736   3,105,000      737,855     1,734,146             0             0
                     ---------  -----------  -----------  ------------  ------------  ------------
Subtotal             3,779,914 $76,507,501  $30,426,287   $51,806,662   $57,977,217   $38,018,786
                     =========  ===========  ===========  ============  ============  ============
</TABLE>

<PAGE>

<TABLE>
<CAPTION>


                                Gross Amount at Which
                              Carried at Close of Period
                       -----------------------------------------
                                        Shell &       Tenant                      Accumulated      Date of
Building                   Land      Improvements  Improvements       Total       Depreciation    Completion
-------------------    ------------  ------------  -------------  -------------  --------------  ------------
<S>                    <C>           <C>            <C>           <C>            <C>                <C>
6850 Santa Teresa       $  105,060    $  317,106     $  188,211    $   610,377    $  (509,475)       1979
6331 San Ignacio           122,928     1,356,086      4,441,056      5,920,070     (2,587,448)       1980
6341 San Ignacio           122,928       981,548        733,060      1,837,536     (1,155,158)       1980
75 E. Trimble              960,000     1,150,928      3,123,820      5,234,748     (2,054,859)       1981
1170 Morse                 48,685        909,965      1,593,345      2,551,995     (1,257,784)       1980
6540 Via Del Oro           80,772        334,458        303,990        719,220       (564,532)       1980
6385-6387 San Ignacio      88,923        365,741        332,669        787,333       (617,790)       1980
1212 Bordeaux           1,102,092        530,517      4,776,668      6,409,277     (1,474,232)       1984
150-160 Great Oaks        187,425        572,879        988,399      1,748,703     (1,263,387)       1982
140 Great Oaks            187,425        572,879        988,399      1,748,703     (1,264,760)       1982
6311 San Ignacio           60,461        289,629        276,716        626,806       (494,691)       1981
6321 San Ignacio          191,461      1,120,216      2,898,304      4,209,981     (1,956,235)       1981
6320 San Ignacio          178,414      1,920,011      2,417,899      4,516,324     (2,496,504)       1982
2610 N. First St.         639,999      1,435,464      1,865,198      3,940,661     (2,344,027)       1981
2033-43 Samaritan         409,321        912,880      3,029,032      4,351,233     (2,689,750)       1984
2133 Samaritan            435,634        971,583      2,974,704      4,381,921     (2,863,030)       1984
2233-43 Samaritan         435,220        970,640      2,971,878      4,377,738     (2,769,310)       1984
3236 Scott              1,457,273        724,086      2,088,005      4,269,364     (2,041,780)       1981
1810 McCandless           564,762        787,362        789,392      2,141,516       (322,450)       1995
1740 McCandless           732,232      1,019,348      1,020,913      2,772,493       (260,940)       1995
1680 McCandless           990,398      1,721,342      1,840,890      4,552,630       (541,969)       1996
1600 McCandless           581,364        809,839        811,451      2,202,654       (266,610)       1995
1500 McCandless           605,913        844,216        845,715      2,295,844       (277,866)       1995
1450 McCandless           593,511      1,057,469      1,091,140      2,742,120       (345,049)       1995
1350 McCandless           606,086      1,079,873      1,114,257      2,800,216       (352,358)       1996
1325 McCandless         1,027,049      1,738,889      1,835,282      4,601,220       (612,079)       1997
1425 McCandless           549,423        765,344        766,868      2,081,635       (261,180)       1995
1525 McCandless           406,614        566,413        567,540      1,540,567       (193,498)       1995
1575 McCandless           472,002        657,498        658,806      1,788,306       (224,614)       1995
1625 McCandless           477,139        664,653        665,976      1,807,768       (227,058)       1995
1745 McCandless           507,023        706,281        707,687      1,920,991       (241,280)       1995
1765 McCandless         1,532,956      2,627,962      2,390,864      6,551,782       (812,926)       1997
1600 Memorex Drive      1,000,000        875,000        875,559      2,750,559       (704,447)       1995
4949 Hellyer            1,986,336      4,575,362      4,735,026     11,296,724     (1,399,886)       1995
2001 Logic              1,007,959      1,440,000      1,277,443      3,725,402       (779,626)       1992
2251 Lawson               998,430      2,163,118      2,377,128      5,538,676     (3,831,224)       1979
1230 Arques                49,867        805,423        697,079      1,552,369     (1,373,925)       1977
450-460  National          29,161        240,292        299,260        568,713       (568,713)       1973
1135 Kern Avenue           65,306        126,199        221,215        412,720       (391,853)       1973
10300 Bubb                 94,336        152,665        339,387        586,388       (478,274)       1972
20400 Mariani             596,259        956,846      1,139,174      2,692,279     (2,060,466)       1978
3301 Olcott               576,082        633,859      1,434,735      2,644,676     (1,225,375)       1977
1250 Arques               413,831      1,570,769      2,587,230      4,571,830     (4,359,010)       1974
10500 De Anza           1,498,500      5,086,027      7,200,447     13,784,974    (13,293,962)       1981
20605-705 Valley Green    532,821      1,644,011      2,815,624      4,992,456     (3,853,122)       1975
1190 Morse/405 Tasman      49,231        327,704        321,283        698,218       (602,821)       1976
10440 Bubb                 55,493        366,034        557,726        979,253       (787,043)       1979
10460 Bubb                175,162        418,778        301,859        895,799       (698,076)       1976
3120 Scott                350,574      3,377,720      3,984,972      7,713,266     (5,032,610)       1983
3501 W Warren Bld       1,436,890      1,847,476      1,740,205      5,024,571       (351,697)       1997
48800 Milmont           1,052,190      1,158,065      1,182,263      3,392,518       (316,976)       1996
4750 Patrick Henry      1,163,575      1,146,854      1,147,020      3,457,449       (425,734)       1996
10401 Bubb                 95,966        132,403        208,010        436,379       (405,719)       1972
2800 Bayview              737,855      1,734,146              0      2,472,001       (437,151)       1994
                       -----------  -------------  -------------  -------------  -------------
Subtotal              $30,426,317    $61,261,856    $86,540,779   $178,228,952    $78,077,441
                       ===========  =============  =============  =============  =============

</TABLE>
                                     - 76 -
<PAGE>


                        The Berg Properties (Predecessor)
                                  Schedule III
                    Real Estate and Accumulated Depreciation
                                December 31, 1997
                             (Dollars in thousands)
                                   ----------

Summary of activity for real estate and accumulated depreciation is as follows:
<TABLE>
<CAPTION>

                                                                               December 31,
                                                        -----------------------------------------------------------
                                                              1997                 1996                 1995
                                                        -----------------    -----------------    -----------------
<S>                                                        <C>                  <C>                  <C>
Real estate:
   Balance at beginning of year                             $154,999             $133,014             $120,382
   Improvements and acquisition/development of real           23,230               22,775               35,910
   Disposal of real estate                                         -                 (790)             (23,278)
                                                        -----------------    -----------------    -----------------
     Balance at end of year                                 $178,229             $154,999             $133,014
                                                        =================    =================    =================

Accumulated depreciation:
   Balance at beginning of year                              $71,064              $64,857              $66,174
   Depreciation expense                                        7,013                6,387                6,132
   Disposal of real estate                                         -                 (180)              (7,449)
                                                        -----------------    -----------------    -----------------
     Balance at end of year                                  $78,077              $71,064              $64,857
                                                        =================    =================    =================


</TABLE>
                                     - 77 -

<PAGE>





ITEM 9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

The Company changed its independent auditors on March 12, 1998 as set forth in a
report on Form 8-K dated March 13, 1998,  which is  incorporated  herein by this
reference.

                                     - 78 -
<PAGE>


                           PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The response to this item is  incorporated by reference from the sections titled
"Directors  and Executive  Officers"  and "Section  16(a)  Beneficial  Ownership
Reporting  Compliance" in the  registrant's  proxy statement for its 2000 Annual
Meeting of Stockholders.

ITEM 11.  EXECUTIVE COMPENSATION

The response to this item is  incorporated  by reference from the section titled
"Executive Compensation" in the registrant's proxy statement for its 2000 Annual
Meeting of  Stockholders,  excluding,  however,  the section  titled  "Executive
Compensation - Performance Graph," "Executive Compensation - Report on Executive
Compensation by the  Compensation  Committee of the Board of Directors," none of
which are incorporated by reference in response to this item.

                                     - 79 -

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The response to this item is  incorporated  by reference from the section titled
"Share Ownership" in the registrants proxy statement for its 2000 Annual Meeting
of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The response to this item is  incorporated  by reference from the section titled
"Certain  Relationships  and  Related  Transactions"  in the  registrants  proxy
statement for its 2000 Annual Meeting of Stockholders.

                                     - 80 -

<PAGE>




                            PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

Exhibits required by Item 601 of Regulation S-K.
<TABLE>
<CAPTION>

                                  EXHIBIT INDEX

<S>               <C>
3.2.1+             Articles of Amendment and Restatement of Mission West Properties, Inc.
3.2.2+             Restated Bylaws of Mission West Properties, Inc.
10.1.1**           Amended and Restated Agreement of Limited Partnership of Mission West Properties, L.P.
10.1.2**           Amended and Restated Agreement of Limited Partnership of Mission West Properties, L.P. I
10.1.3**           Amended and Restated Agreement of Limited Partnership of Mission West Properties, L.P. II
10.1.4**           Amended and Restated Agreement of Limited Partnership of Mission West Properties, L.P. III
10.2**             Exchange Rights Agreement between Mission West Properties and the Limited Partners
10.3.1*            1997 Stock Option Plan
10.3.2*            Form of Incentive Stock Option Agreement
10.3.3*            Form of Non-statutory Stock Option Agreement
10.3.4*            Form of Directors Stock Option Agreement
10.4.1*            Acquisition Agreement, sated as of May 14, 1998, among Mission West Properties, certain partnerships
10.4.2*            Amendment of Acquisition Agreement, dated as of July 1, 1998
10.4.3*            Form of Partnership Interest Purchase Demand Note
10.5.1*            Stock Purchase Agreement dated as of May 4, 1998, between Mission West Properties and the purchasers of
10.5.2*            Stock Purchase Agreement dated as of May 4, 1998 between Mission West Properties and the purchasers of
10.5.3**           Form of Registration Rights Agreement for purchasers, who acquired shares of Common Stock under the May
10.6**             Pending Projects Acquisition Agreement among Mission West Properties, the Operating Partnership and the
10.7**             Berg Land Holdings Option Agreement between Mission West Properties and certain members of the Berg
10.8*              Berg & Berg Enterprises, Inc. Sublease Agreement
10.9++             Amended and Restated Stock Option Agreement fro Michael J. Anderson (200,000 shares of Common Stock)
10.10*             Restricted Stock Purchase Agreement for Michael J. Anderson (200,000 shares of Common Stock)
10.11*             Promissory Note from Michael J. Anderson
10.12*             Lease Agreement with Apple Computer, Inc.
10.13*             Lease Agreement with Cisco Systems, Inc,
10.14*             Lease Agreement with Amdahl Corporation
10.15*             Prudential Promissory Note
10.16*             Prudential Deed of Trust
10.17*             Prudential Certificate Regarding Distribution
10.18*             Prudential Guaranty
10.19+             Waiver Agreement
10.20**            Ownership Limit Exemption Agreement dated December 29, 1999 between Mission West Properties and Dan and
10.21x             Lease Agreement with Microsoft Corporation
10.22x             Contribution Agreement


                                     - 81 -
<PAGE>
10.23xx            Assumption Agreement for Wells Fargo Line of Credit
10.24xx            Form of secured note payable to the Berg Group
10.25xx            Form of deed of trust granted to the Berg Group
10.26xx            Supplemental Agreement among Mission West Properties, Inc., Carl E. Berg and Clyde J. Berg
10.27              Revolving Credit -Secured Promissory Note
10.28              Deed of Trust Securing Promissory Note
21.1++             Subsidiaries of the Registrant
23.1               Consent of PricewaterhouseCoopers LLP
23.2               Consent of PricewaterhouseCoopers LLP
24.1xx             Powers of Attorney (included in the signature page on page ___ of this report)
27.1               Financial Data Schedule
</TABLE>


*    Incorporated  herein  by  reference  to the  same-numbered  exhibit  to the
     Company's  Registration  Statement  on Form S-4  filed on May 15,  1998 and
     declared  effective  on  November  23,  1998.

**   Incorporated  herein  by  reference  to the  same-numbered  exhibit  to the
     Company's  Post-effective Amendment No. 1 to Registration Statement on Form
     S-4  filed  on  Form  S-3  on  February  11,  1999.  (Commission  File  No.
     333-52835-99).

+    Incorporated herein by reference to the same-numbered  exhibit to Amendment
     No. 4 to the Registration  Statement on Form S-4 filed on November 16, 1998
     and declared effective on November 23, 1998.

++   Incorporated herein by reference to the same-numbered exhibit to the annual
     report on Form 10-K for 1998 filed on March 31, 1999

x    Incorporated  herein by reference to the  same-numbered  exhibit to current
     report on Form 8-K filed on May 14, 1999 (Commission File No. 000-25235)

xx   Incorporated  herein  by  reference  to the  same-numbered  exhibit  to the
     Registration  Statement on Form S-11 filed on June 8, 1999 (Commission File
     No. 333-80203)

     (b) Reports on Form 8-K.

     The  registrant  has not  filed any  reports  on Form 8-K  during  the last
     quarter of the period covered by this report.


                                     - 82 -
<PAGE>


                                   SIGNATURES

Pursuant  to the  requirements  of the  Section  13 or 15(d)  of the  Securities
Exchange  Act of 1934,  the  registrant  and has duly  caused  this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.

                                                   MISSION WEST PROPERTIES, INC.

Date: March 30, 2000                               By: /s/  CARL E. BERG
                                                       -----------------
                                                      Carl E. Berg
                                                      Chairman of the Board,
                                                      Chief Executive Officer,
                                                      President and Director


KNOW ALL PERSONS BY THESE  PRESENTS,  that each person whose  signature  appears
below constitutes and appoints Carl E. Berg his true and lawful attorney-in-fact
with the power of  substitution,  to sign any  amendments to this Report on Form
10-K  and to file the  same,  with  exhibits  thereto  and  other  documents  in
connection  therewith,  with the  Securities  and  Exchange  Commission,  hereby
ratifying and confirming all that each of said  attorney-in-fact,  or his or her
substitute, may do or choose to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.

Signature                          Title                         Date

/s/  CARL E. BERG                  Chief Executive Officer,      March 30, 2000
-------------------------------    President and Director
Carl E. Berg                       (Principal Financial
                                   and Accounting Officer)

/s/  JOHN BOLGER
-------------------------------    Director                      March 30, 2000
John Bolger


/s/  WILLIAM A. HASLER             Director                      March 30, 2000
-------------------------------
William A. Hasler


/s/  LAWRENCE B. HELZEL            Director                      March 30, 2000
-------------------------------
Lawrence B. Helzel

                                     - 83 -