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, 1998

                                      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 Number)

  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:

       TITLE OF EACH CLASS                       NAME OF EACH EXCHANGE ON WHICH

  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
29,  1999,  as  reported  on the  American  Stock  Exchange,  was  approximately
$52,895,968.  As  of  March  29,  1999,  there  were  8,233,583  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  S-4  Registration  Statement  filed  on May 15,  1998  and  declared
      effective on November  23,  1998.  (Registration  No.  333-52835-99)  (the
      "Registration  Statement"),  and the  prospectus  dated  November 23, 1998
      filed pursuant to SEC Rule 424(b)(3),  which are incorporated by reference
      into Part I, Items 1 and 4.

      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.

      Form 8-K,  dated on December 30, 1998, to report the Company's  succession
      to the assets and  liabilities  of Mission West  Properties,  a California
      corporation.  This Form 8-K is incorporated by reference into Part I, Item
      1.

                      WHERE YOU CAN FIND MORE INFORMATION

This  annual  report  does not  contain  all the  information  set  forth in the
exhibits and schedules filed in accordance with the rules and regulations of the
SEC, and we are incorporating omitted information by this reference.  Statements
made in this annual report concerning the contents of any contract, agreement or
other document filed as an exhibit to the  registration  statement are summaries
of the terms of the contracts,  agreements or documents and are not  necessarily
complete.  You should read each exhibit for a more complete  description  of the
matters  involved.  The exhibits  filed with the SEC may be  inspected,  without
charge,  and copies may be obtained at  prescribed  rates,  at the SEC's  Public
Reference facility  maintained by the Room 450 Fifth Street,  N.W.,  Washington,
D.C.  20549.  The public may obtain  information  on the operation of the Public
Reference Room by Calling the SEC at 1-800-SEC-0330.  Reports,  proxy statements
and other  information about us filed with the SEC also are available at the web
site maintained by the SEC on the World Wide Web at http://witness.sec.gov.  and
may also be inspected at the offices of the American Stock Exchange,  86 Trinity
Place,  New York, New York,  and the Pacific  Exchange  Incorporation,  301 Pine
Street, San Francisco, California.

You also may request a copy of these  filings,  at no cost upon  written or oral
request by writing  or  telephoning  us at the  following  address or  telephone
number:  Mission  West  Properties,   Inc.,  10050  Bandley  Drive,   Cupertino,
California 95014; telephone: (408) 725-0700.

                                       ii

<PAGE>


                         MISSION WEST PROPERTIES, INC.


                         1998 FORM 10-K ANNUAL REPORT

                               Table of Contents


                             PART I
                                                                        PAGE NO.
Item 1.  Business                                                            1

Item 2.  Properties                                                         12

Item 3.  Legal Proceedings                                                  15

Item 4.  Submission of Matters to a Vote of Security Holders                15
         Executive Officers of the Registrant

                            PART II

Item 5.  Market for the Registrant's Common Equity and Related              16
         Stockholder Matters

Item 6.  Selected Financial Data                                            17

Item 7.  Management's Discussion and Analysis of Financial                  20
         Condition and Results of Operations

Item 8.  Financial Statements and Supplementary Data                        29

Item 9.  Changes in and Disagreements with Accountants on                   68
         Accounting and Financial Disclosure

                            PART III

Item 10. Directors and Executive Officers of the Registrant                 69

Item 11. Executive Compensation                                             71

Item 12. Security Ownership of Certain Beneficial Owners and Management     74

Item 13. Certain Relationships and Related Transactions                     76

                            PART IV

Item 14. Exhibits, Financial Statements, Schedules and Reports              79
         on Form 8-K

         Signatures                                                         81
                                      iii

<PAGE>



IN ADDITION TO THE HISTORICAL  INFORMATION  CONTAINED IN THIS ANNUAL REPORT, THE
FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING  STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES.  ACTUAL  RESULTS  COULD DIFFER  MATERIALLY  FROM THOSE  DISCUSSED
HEREIN.  FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT
ARE NOT LIMITED TO, THOSE  DISCUSSED IN PART I, ITEM 1 UNDER "RISK  FACTORS" AND
IN PART II, ITEM 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS."


                                    PART I

ITEM 1.    BUSINESS

ORGANIZATION AND GENERAL BUSINESS DESCRIPTION

Mission West  Properties,  Inc. (the  "Company")  is engaged in the  management,
leasing,  marketing,  development  and  acquisition  of R&D  office  properties,
primarily located in the "Silicon Valley" portion of the San Francisco Bay Area.
We currently  manage 71 properties  totaling  approximately  4.52 million square
feet through our controlling interest in four separate  partnerships in which we
are the sole general  partner.  For the year ending  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 December 1998, our predecessor  corporation Mission West Properties
(also referred to in this document as the "Company"),  reincorporated  under the
laws of the State of Maryland.  Our principal  executive  offices are located at
10050 Bandley Drive,  Cupertino,  California  95014, and our telephone number is
(408) 725-0700.

The operating  partnerships are engaged in the combined  operation and ownership
of our properties under the terms of an acquisition  agreement,  as amended, and
an agreement of limited partnership, which is identical in all material respects
for all four of the limited partnerships. 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,   acquisitions  of  additional
properties,  borrowing funds, raising new capital, leasing buildings, as well as
selecting and supervising all agents of the operating partnerships.

Through its authority to manage our business and affairs, our board of directors
directs the business of the operating partnerships.  The Berg Group members have
the right to nominate two  individuals for election to the board of directors as
long as the  members  of the Berg  Group and their  affiliates  (other  than the
Company and the operating  partnerships)  beneficially own, in the aggregate, at
least 15% of the  outstanding  shares of common stock on a  fully-diluted  basis
(including  all shares of common stock that could be acquired  upon the exercise
of all outstanding options to acquire voting stock of the Company, and all units
of limited partnership  interests in the operating  partnerships ("L.P.  Units")
exchangeable  or redeemable for common stock).  If the members of the Berg Group
and their affiliates  beneficially  own, in the aggregate,  less than 15% but at
least 10% of the common stock, on a fully-diluted  basis, the Berg Group members
have  the  right  to  nominate  one  individual  for  election  to the  board of
directors.  Notwithstanding  the  Company's  effective  control of the operating
partnerships,  the consent of the limited partners holding the right to vote, in
the  aggregate,  a majority of the total  number of L.P.  Units  outstanding  is
required  with respect to certain  significant  actions  involving the operating
partnerships.  See  "Risk  Factors--Control  of the  Company  and the  Operating
Partnerships by Mr. Berg and His Affiliates."

As of March 15, 1999, the operating  partnerships had an aggregate of 60,151,697
L.P. Units outstanding, of which 56,464,623 L.P. units were held by Carl E. Berg
and other members of the Berg Group.

BUSINESS AND STRATEGY

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
electronics industry in the area of Santa Clara County that has come to be known
as "Silicon Valley" (a term that now encompasses much of the southern portion of
the San  Francisco  Bay  Area).  Since  1972,  Mr.  Berg also has been  actively
involved in venture capital  investments in technology  companies in the Silicon
Valley.  Directly and through various venture capital partnerships,  he has made
early-round equity investments in more than 100 technology companies,  including
such companies as Amdahl Corporation, Sun Microsystems,  Inc., Integrated Device
Technologies,  Inc.,  Valence  Technology,  Inc.,  Iwerks  Entertainment,  Inc.,
On-Common Video,  Inc. and Videonics,  Inc. Mr. Berg has served on the boards of
directors of numerous  technology  companies  and  currently  serves on six such
boards.  These  activities  have  helped Mr.  Berg and the  Company to 

                                       1

<PAGE>

develop a detailed  understanding of the real estate  requirements of technology
companies,  to  acquire  valuable  market  information,  to  increase  its  name
recognition within the venture capital and entrepreneurial  communities,  and to
manifest its 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.

The business and portfolio of Silicon  Valley R&D  properties of the Company are
based upon the historical Berg & Berg business  strategy which  incorporates the
following elements:

o    STRONG GEOGRAPHIC AND INDUSTRY FOCUS. We focus our activities on addressing
     the facility requirements of  technology-oriented  companies in the Silicon
     Valley.  With  Silicon  Valley's  highly  educated  and skilled work force,
     recent  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 this focus has enabled Berg & Berg,  and now the Company,  to
     gain a thorough  understanding of the Silicon Valley real estate market, to
     anticipate trends in the market, to identify and concentrate its efforts on
     the most favorably located  sub-regions of the market and to take advantage
     of its experience and its extensive  contacts and relationships  with local
     government  agencies,  real estate brokers and  subcontractors,  as well as
     with tenants and prospective tenants.

o    LEAN,  EXPERIENCED MANAGEMENT TEAM. In part because of its primary focus on
     Silicon  Valley and the special  real  estate  requirements  of  technology
     tenants,  Berg & Berg was 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
     have  succeeded to Berg & Berg's  management  team.  These managers share a
     common approach to property development and management. We believe that the
     leanness,  experience  and  continuity  of this  management  team will also
     enable us to rapidly assess and respond to market  opportunities and tenant
     needs,  minimize  development and  construction  risks,  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 construction  which give us the ability 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.

o    MARKET AWARENESS AND SENSITIVITY.  We will continue to follow Berg & Berg's
     demand-driven  approach to the R&D  property  business in which we will use
     our in-depth  experience  and extensive  industry  contacts to identify the
     facility  requirements  of tenants  and  potential  tenants in the  Silicon
     Valley and its various sub-regions.

o    EMPHASIS  ON  GENERAL  PURPOSE  FACILITIES,   SINGLE  TENANT  PROJECTS  AND
     LONG-TERM TENANT  RELATIONSHIPS.  All of our properties are general purpose
     R&D  properties,  located in desirable  sub-regions of the Silicon  Valley.
     Such properties have been developed for, or leased to, single tenants, many
     of whom are large, publicly-traded electronics companies. Most of our major
     tenants have occupied their properties for many years pursuant to fully net
     leases  under  which the  tenant  pays all  operating  costs.  We intend to
     sustain  Berg  &  Berg's   practice  of  emphasizing   the  development  of
     single-tenant rather than multi-tenant  properties which has contributed to
     relatively  low  turnover  and high  occupancy  rates.  We believe that the
     relatively small number of tenants occupying our 71 properties allows us to
     efficiently  manage  the  properties  and serve  the  needs of our  tenants
     without the need for an extensive  in-house  staff or the  assistance  of a
     third-party management  organization.  In addition, this emphasis allows us
     to  pay  less  for  tenant   improvements  and  leasing   commissions  than
     multi-tenant,  high turnover property owners, and also reduces the time and
     expense  associated with obtaining  building  permits and other  government
     approvals.  We believe that the relatively stable,  extended  relationships
     which Berg & Berg has  developed  with its key  tenants  will be a valuable
     factor in the expansion of our business.

o    SOUND PROPERTY MANAGEMENT PRACTICES. Berg & Berg Enterprises, Inc. ("BBE"),
     an  affiliate  of  Carl E.  Berg,  has  provided  design  and  construction
     management  personnel  to Berg & Berg  in all  phases  of its  acquisition,
     development and property management businesses. We intend to make extensive
     use of BBE's  staff as we expect to retain  Berg & Berg's  focus on similar
     types of development  projects to more efficiently utilize these skills and
     experience.   For  each  property,   the  BBE  staff  develops  a  specific
     development,  marketing and property management program. It selects vendors
     and  subcontractors  on a competitive  bidding basis from a select group of
     highly  qualified firms with whom it maintains  ongoing  relationships  and
     carefully  supervises  their work.  We believe  that,  as a result of these
     sound  operating  practices,  Berg & Berg has  acquired  a  reputation  for
     completing its projects on time and within budget, which will benefit us as
     we acquire new properties under our existing land acquisition  arrangements
     with members of the Berg Group.

                                       2
<PAGE>

o    ACQUISITION OF NEW R&D PROPERTIES  FROM THE BERG GROUP.  We anticipate that
     most of our growth in the foreseeable future will come from the acquisition
     of new projects that are either currently under  development or planned for
     future  development  by the Berg Group.  The Pending  Projects  Acquisition
     Agreement  and the Berg  Land  Holdings  Option  Agreement  will  provide a
     substantial  number of new  acquisitions  for the Company over the next two
     years.  During 1999 and through  the second  quarter of 2000,  we expect to
     acquire a total of  approximately  1.4 million  additional  rentable square
     feet currently under development,  from members of the Berg Group under the
     terms of those two arrangements.

GROWTH OPPORTUNITIES UNDER EXISTING AGREEMENTS WITH CARL E. BERG AND HIS
AFFILIATES

In December  1998, we entered into the Pending  Projects  Acquisition  Agreement
with members of the Berg Group,  which permits us to acquire  approximately  one
million  additional  rentable  square feet upon the  completion and leasing of a
number of pending development  projects owned by them. The owners of the pending
development  projects  may obtain  cash or, at their  option,  L.P.  Units.  The
agreement  provides for the issuance of up to 33,919,072  L.P. Units in exchange
for the pending  development  projects,  of which  405,166 L.P.  Units have been
issued for new property to date.

o    The selling  Berg Group  members  and BBE will build and  deliver  each R&D
     property in the pending development projects to the operating  partnerships
     at an acquisition  value equal to the actual annual base rent divided by an
     agreed upon  capitalization  rate, minus the amount of debt encumbering the
     property.

o    The acquisition  value will be payable in L.P. Units at $4.50 per L.P. Unit
     or cash,  at the  option of the  sellers.  See-"Risk  Factors  -  Potential
     Conflicts of Interest with the Berg Group - Pending Development Projects."

o    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.  We and the operating  partnerships
     are not  otherwise  required  to  acquire  any of the  pending  development
     projects.

o    The sellers will make  customary  representations  and warranties as of the
     closing date.

o    Leases will be on commercially reasonable terms and conditions.

o    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.  See  "-  Risk  Factors-Potential
     Conflicts of Interest with the Berg Goup."

Additionally,  in December  1998, we entered into the Berg Land Holdings  Option
Agreement  under  which we have the  option to acquire  any future R&D  property
developments  on  approximately  162 net acres of Silicon  Valley  land owned by
certain members of the Berg Group.

o    The Berg Land Holdings Option  Agreement  provides that as long as the Berg
     Group members and their  affiliates own or have the right to acquire shares
     representing 65% of the common stock on a fully-diluted basis, we will have
     the  option to acquire  any  building  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 (i) the full construction cost of the building, plus (ii) 10% of
     (i),  plus  (iii)  the  acquisition  value  of  the  parcel  on  which  the
     improvements  were  constructed  (ranging  from  $8.50 to $20.00 per square
     foot),  plus (iv) 10% of (iii) from January 1, 1998 to the close of escrow,
     plus (v) interest at LIBOR plus 1.65% on the amounts  described in (i) from
     the date paid by the developer and ending at the close of escrow, minus the
     aggregate principal amount of all debt encumbering the acquired property.

o    The purchase price will be payable in cash,  unless otherwise agreed by the
     Berg Group  representatives.  We have the right to contribute such building
     to the operating  partnerships,  subject to any debt incurred in connection
     with the acquisition,  in exchange for additional  percentage  interests in
     the operating  partnerships  valued with reference to the market value of a
     share of common stock over the 30-trading day period preceding our exercise
     of the option.

o    We also must assume all assessments.

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

                                       3
<PAGE>

o    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.

The following table presents  certain  information  concerning  projects that we
have the right to acquire under the Pending Projects  Acquisition  Agreement and
the Berg Land Holdings Option Agreement.  The table includes only those projects
for which construction has commenced as of March 15, 1999.

<TABLE>
<CAPTION>

                                     
                                                       TOTAL
                                   APPROXIMATE      ANTICIPATED      ESTIMATED
                                  RENTABLE AREA     ACQUISITION     ACQUISITION
PROPERTY                          (SQUARE FEET)        DATE            COST
--------------------------------------------------------------------------------
                                                          (dollars in thousands)
<S>                               <C>          <C>                  <C>    
PENDING PROJECTS
Great Oaks                            54,996        April 1999       $  6,648
L'Avenida (4 buildings)              415,306          May 1999         93,808
L'Avenida (1 building)                99,694         July 1999         22,521
Richard Avenue                        58,740         July 1999          4,185
Automation (1 building)               80,640          May 1999          9,677
Automation (2 buildings)             141,696    September 1999         15,789
Automation (1 building)              114,028        April 2000         12,706
                                     -------                           ------
                        SUBTOTAL     965,100                         $165,334


BERG LAND HOLDINGS
Fontanosa                             77,000       August 1999       $  7,226
Hellyer/Branham                      311,000     February 2000         25,000
                                     -------                           ------
                        SUBTOTAL     388,000                         $ 32,226


TOTAL                              1,353,100                         $197,560
                                   =========                         ========
</TABLE>

The time required to complete the leasing of developments varies from project to
project. 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.  See "-Risk  Factors--Potential  Conflicts  of Interest  with the Berg
Group, and Item 7. Management's  Discussion and Analysis of Financial  Condition
and Results of Operations-Forward Looking Information."

                                       4

<PAGE>


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, Funds from Operations ("FFO") or available cash
for distribution.  See "Risk Factors--Real Estate Investment  Considerations and
--Uncertainties Regarding Distributions to Stockholders."

RECENT DEVELOPMENTS

On August 6, 1998,  Berg & Berg and  Microsoft  Corporation  signed a lease with
respect to an  approximate  515,000  square foot  complex to be  constructed  by
Microsoft on L'Avenida in Mountain View, California, which is one of the pending
development  projects.  Microsoft  controls the  construction  of this facility,
which is  scheduled to be completed  in phases  between  March and May 1999.  We
expect to acquire the R&D  properties to be built on the L'Avenida  site between
April and July 1999. Microsoft has signed a seven-year lease calling for a first
year's  rent of $2.95 per  square  foot per month with 4% annual  increases.  We
expect the acquisition  cost of the entire complex to total  approximately  $116
million and have not yet  determined  the means by which we will acquire and pay
for these properties.

In  December  1998,  we  agreed to  acquire  two newly  constructed  R&D  office
properties  located on Richard  Avenue in Santa  Clara,  California  and Hellyer
Avenue in San Jose,  California  consisting of a total of approximately  163,000
square feet of rentable  space.  We acquired these  properties from Carl E. Berg
and other  members  of the Berg Group  under the  Pending  Projects  Acquisition
Agreement and the Berg Land Holdings  Option  Agreement.  We paid  approximately
$4.2 million for the Richard Avenue  property,  which consists of  approximately
53,000  rentable  square feet,  and  approximately  $9.5 million for the Hellyer
Avenue property,  which consists of approximately  110,000 rentable square feet.
Each property was acquired by a different operating  partnership.  In connection
with these acquisitions,  the two operating  partnerships  assumed total debt of
approximately  $9.6  million  and  issued a total of 672,064  L.P.  Units to the
sellers.  Each of such L.P. Units may be exchanged for shares of common stock in
the same manner as other L.P. Units held by the same limited partner.  The terms
of the acquisitions  were approved by the Independent  Directors  Committee.  We
agreed with the sellers of the properties to treat our acquisitions as effective
as of  September  1, 1998 with  respect  to the  Richard  Avenue  property,  and
November 1, 1998 with respect to the Hellyer Avenue property. We began recording
rental income from those properties as of their respective acquisition dates.

NON-COMPETITION ARRANGEMENTS

Mr. Berg has advised us of his  intention  to conduct  all of his  material  R&D
property investment and development activities through the Company,  except with
respect to the land holdings, which are subject to the Berg Land Holdings Option
Agreement,  and the  pending  development  projects,  which are  subject  to the
Pending  Projects  Acquisition  Agreement.  Accordingly,  under the  Acquisition
Agreement,  dated as of May 14,  1998,  as  amended,  Mr. Berg has agreed not to
directly  or  indirectly  acquire or  develop,  or  acquire an equity  ownership
interest in any entity that has or intends to acquire an  ownership  interest in
any real estate (with the  exception of minor  investments  not to exceed 10% of
the outstanding voting securities in publicly-traded companies) intended for R&D
property  development  or  similar  industrial  use  in  California,  Oregon  or
Washington  without first disclosing such investment  opportunity to the Company
and  making  such  opportunity  available  to the  Company  at the option of the
Independent  Directors Committee.  Generally,  Mr. Berg and the other Berg Group
members  are free to pursue  other  types of real  estate  activities  and other
business opportunities,  however. See "The Risk Factors--Potential  Conflicts of
Interest with the Berg Group."

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 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
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.  

                                       5
<PAGE>

In connection  with the ownership of the properties or the treatment or disposal
of hazardous or toxic substances, the Company may be liable for such costs.

Other  federal,  state  and local  laws  impose  liability  for the  release  of
asbestos-containing  materials  ("ACMs") into the air and require the removal of
damaged ACMs in the event of remodeling or  renovation.  We are aware that there
are 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, operating results or ability
to make distributions.

Groundwater  contaminated by chemicals used in various manufacturing  processes,
including  semiconductor   fabrication,   underlies  a  significant  portion  of
northeastern  Santa Clara  County,  where many of the  properties  are  located.
Certain of our tenants routinely handle hazardous  substances and wastes as part
of their operations on the properties.  Environmental  assessments have not been
conducted for most of the  properties and none have been conducted by us or Berg
& Berg since 1995.

Although the  environmental  investigations  conducted to date have not revealed
any environmental liability that we believe would have a material adverse effect
on our business,  assets or results of  operations,  and we are not aware of any
such liability, it is possible that there are material environmental liabilities
of which we are  unaware.  No  assurances  can be given  that (i)  future  laws,
ordinances, or regulations will not impose any material environmental liability,
or (ii) 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 the Company.

EMPLOYEES

As of March 30, 1999,  we employed 5 people,  all of whom work at our  executive
offices at 10050 Bandley Drive, Cupertino, California, 95014.

RISK FACTORS

THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS DEFINED
IN SECTION 27A OF THE  SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE
EXCHANGE  ACT OF 1934,  AS  AMENDED)  PERTAINING  TO,  AMONG OTHER  THINGS,  THE
COMPANY'S  FUTURE  RESULTS  OF  OPERATIONS,  CASH  AVAILABLE  FOR  DISTRIBUTION,
PROPERTY  ACQUISITIONS,  LEASE  RENEWALS,  INCREASES  IN BASE  RENT,  SOURCES OF
GROWTH,  PLANNED  DEVELOPMENT  AND  EXPANSION  OF  LEASED  PROPERTIES,   CAPITAL
REQUIREMENTS,  COMPLIANCE WITH  CONTRACTUAL  OBLIGATIONS  AND GENERAL  BUSINESS,
INDUSTRY AND ECONOMIC  CONDITIONS  APPLICABLE TO MISSION WEST  PROPERTIES,  INC.
THESE STATEMENTS ARE BASED LARGELY ON MANAGEMENT'S  CURRENT EXPECTATIONS AND ARE
SUBJECT TO A NUMBER OF RISKS AND  UNCERTAINTIES.  ACTUAL  RESULTS  COULD  DIFFER
MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS.  FACTORS THAT CAN CAUSE ACTUAL
RESULTS TO DIFFER  MATERIALLY  INCLUDE,  BUT ARE NOT LIMITED TO, THOSE DISCUSSED
BELOW.   READERS  ARE   CAUTIONED   NOT  TO  PLACE   UNDUE   RELIANCE  ON  THESE
FORWARD-LOOKING  STATEMENTS,  WHICH  SPEAK  ONLY  AS OF  THE  DATE  HEREOF.  THE
FOLLOWING  FACTORS  SHOULD BE  CONSIDERED  IN ADDITION TO THE OTHER  INFORMATION
CONTAINED HEREIN IN EVALUATING US AND OUR BUSINESS:

DEPENDENCE ON CARL E. BERG

We are  substantially  dependent  upon  the  leadership  of  Carl E.  Berg,  our
Chairman,  President  and Chief  Executive  Officer.  He 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. Some of these other interests
involve  investment  and  director  relationships  with a number  of  technology
companies,  including some of our tenants. We obtain valuable  information about
our markets and business opportunities from Mr. Berg's other activities.  Losing
Mr. Berg's  knowledge and abilities could have a material  adverse effect on our
business and the value of the common stock.

CONTROL OF THE COMPANY AND THE OPERATING PARTNERSHIPS BY MR. BERG AND HIS
AFFILIATES

OWNERSHIP  INTEREST.   The  Berg  Group  owns  limited   partnership   interests
representing  approximately 82.6% ownership of the operating  partnerships.  The
L.P.  Units  may  be  converted  into  shares  of  common  stock  under  certain
circumstances  which upon conversion would represent voting control the Company.
The Berg Group's  ability to exchange  their L.P. Units for common stock permits
them to exert  substantial  influence  over the  management and direction of our
corporation.

BOARD OF DIRECTORS REPRESENTATION.  The Berg Group has the right to nominate two
of our current five  directors for election to the board of directors as long as
they and their  affiliates  beneficially own at least 15% of the total number of
our  outstanding  securities,  including  all  securities,  such as L.P.  Units,
exchangeable  or redeemable  for common stock or any other voting stock.  If the
Berg Group's ownership  percentage falls below 15% but is at least 10%, the Berg
Group  has the  right to  nominate  one  person  for  election  to our  board 

                                       6

<PAGE>

of directors.  Their right to nominate directors may be considered to give the
Berg Group and Mr. Berg  substantial  control and influence  over the management
and direction of our corporation.

SPECIAL BOARD VOTING PROVISIONS.  Our governing corporate  documents,  which are
our  Articles  of  Amendment  and  Restatement  and  our  Bylaws,  also  provide
substantial control rights for Mr. Berg and the Berg Group. These rights include
a  requirement  that Mr. Berg or someone he has  designated  to replace him as a
director approve certain fundamental corporate actions,  including amendments to
our governing corporate  documents and any merger,  consolidation or sale of all
or substantially all of our assets or the assets of the operating  partnerships.
In addition,  our Bylaws provide that a quorum necessary to hold a valid meeting
of the board of directors  must include Mr. Berg or someone he has designated to
replace him as a director.  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.

LIMITED PARTNER APPROVAL RIGHTS. Mr. Berg and other limited partners,  including
other members of the Berg Group, also 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 general partner. Matters
requiring  approval of the holders of a majority of the L.P.  Units,  which must
include Mr. Berg,  include the  following:  (i) the amendment,  modification  or
termination  of the  partnership  agreement,  (ii) 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,  (iii) the  institution of any
proceeding for bankruptcy of the operating partnerships, (v) the transfer of any
general  partnership  interests in the operating  partnerships,  including (with
certain  exceptions)  transfers  attendant  to  any  merger,   consolidation  or
liquidation  of the Company,  (v) the admission of any  additional or substitute
general  partners in the  operating  partnerships;  and (vi) any other change of
control of the operating partnerships.  In addition, until the date on which the
Berg Group and their  affiliates own less than 15% of the outstanding  shares of
common  stock on a  fully-diluted  basis,  the consent of the  limited  partners
holding the right to vote, in the  aggregate,  a majority of the total number of
L.P. Units  outstanding is also required with respect to (i) the  liquidation of
the  operating  partnerships,  (ii)  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
L.P. Units; and (iii) issuance of limited partnership interests having seniority
as to distributions, assets and voting over the L.P. Units.

POTENTIAL CONFLICTS OF INTEREST WITH THE BERG GROUP

Mr.  Berg and other  members of the Berg  Group  possess  significant  rights to
influence  and control us and the operating  partnerships  and have a variety of
interests  that  may  not  be  consistent   with  the  interests  of  our  other
stockholders.  For example,  our headquarters are leased from an entity owned by
Mr.  Berg and other Berg Group  members,  and we pay them rent of  approximately
$7,000  per  month.  Although  Mr.  Berg has agreed to provide us with the first
opportunity to pursue R&D office property development and acquisition activities
in  Washington,  Oregon  and  California,  there  are  many  other  real  estate
activities and other business  activities that Mr. Berg and other members of the
Berg  Group are free to  pursue.  If we  decline  an  opportunity  that has been
offered to us, Mr. Berg may pursue it. This would reduce the amount of time that
he could  devote to our affairs and could  result in the  development  by him or
other Berg Group  members of  properties  that compete with our  properties  for
tenants. In general, we have agreed to limit the liability of Mr. Berg and other
members of the Berg Group to our corporation and stockholders arising from their
pursuit of these other opportunities. Mr. Berg and other Berg Group members have
agreed that all new  transactions  between us and any of them, or between us and
any entity in which they  directly  or  indirectly  own 5% or more of the equity
interests,  including  the  operating  partnerships  for this  purpose,  must be
approved by the Independent Directors Committee of our board of directors.  This
committee  currently consists of three directors who are independent of Mr. Berg
and the other members of the Berg Group.  See Part III, Item 10,  "Directors and
Executive Officers of the Registrant."

EXCLUDED PROPERTIES.  Mr. Berg and other members of the Berg Group have retained
certain R&D office properties in which we and the operating partnerships have no
ownership interests.  Under certain circumstances,  efforts of Mr. Berg to lease
these other properties may interfere with similar efforts on our behalf.

PENDING  DEVELOPMENT  PROJECTS.  Mr.  Berg and other  members  of the Berg Group
currently own four pending  development  projects  located in the Silicon Valley
that  represent  a  potential  total  of 11 R&D  office  properties  aggregating
approximately  965,000  rentable square feet. We and the operating  partnerships
have  agreed  under the terms of a Pending  Projects  Acquisition  Agreement  to
acquire  each of these  properties  from Mr. Berg and other  members of the Berg
Group as it is  completed  and leased.  The sellers may elect to receive cash or
L.P.  Units at a value of $4.50 per unit. As the current market price of a share
of common stock is $7.00, this valuation  represents a substantial discount from
the current  market value of the common stock that may be issued in exchange for
these L.P. Units. The terms of the Pending Projects  Acquisition  Agreement were
agreed  upon in May 1998 prior to the  re-commencement  of trading of our common
stock.  Mr. Berg and other members of the Berg Group currently have the right to
obtain as many as 33,513,906  additional  L.P. Units in exchange for the pending
development  projects.  They may elect to receive part of the  consideration  in
cash. In addition,  prior to the sale of any of these properties the sellers may
place  debt on the  property  that we and the  operating  partnerships


                                       7
<PAGE>

would be required to assume.  The amount of any  assumed  debt would  reduce the
value of the acquired property in determining the amount of other  consideration
in the form of cash or L.P. Units payable to the sellers, however. The rights of
Mr. Berg and other Berg Group  members  under the Pending  Projects  Acquisition
Agreement  permit  them  to  acquire  substantial  additional  interests  in the
operating partnerships and, in the event of any exchange of their L.P. Units for
common stock, in the Company, as well.

BERG LAND  HOLDINGS.  Mr.  Berg and other  members  of the Berg  Group  also own
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.  Mr. Berg and the other Berg Group members are
not obligated to exercise  certain  options they hold to acquire the  properties
that are  subject  to the  agreement.  As a result,  we may lose the  ability to
expand our  portfolio  of  properties  and to  increase  our income  through the
acquisition  of those  properties.  In  addition,  we have agreed to pay a fixed
amount plus additional  charges for any of the properties that we do acquire and
must pay the acquisition  price in cash unless  otherwise agreed by the sellers.
At the time of acquisition,  these  properties may be encumbered by debt that we
or the  operating  partnerships  will be required to assume.  An increase in our
indebtedness could materially adversely affect our financial condition,  results
of operations or ability to make cash  distributions  to our  stockholders.  See
"--Real   Estate   Investment   Considerations,"    "--Uncertainties   Regarding
Distributions to Stockholders."  The exercise of our options under the Berg Land
Holdings Option  Agreement is subject to approval by the  Independent  Directors
Committee of our board of directors.

TAX  CONSEQUENCES OF SALE OF PROPERTIES.  Many of our properties have unrealized
taxable gain,  which, if sold,  could create adverse income tax consequences for
limited partners of the operating partnerships. Mr. Berg, Clyde J. Berg and John
Kontrabecki  have the right to prevent us and the  operating  partnerships  from
selling  or  transferring   properties  which  they  designate  in  any  taxable
transaction for a period of ten years. As a result,  our  opportunities  to sell
those  properties may be limited.  If we need to sell any of those 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.

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 the
terms of other  material  agreements  in which we have acquired our interests in
the operating  partnerships and the properties  formerly  controlled by Mr. Berg
and  members  of the  Berg  Group  were  not  determined  through  arm's  length
negotiations.  In  addition,  Mr.  Berg and  representatives  of the Berg  Group
sitting on our board of directors  may be subject to conflicts of interest  with
respect  to their  obligations  as our  directors  to  enforce  the terms of the
partnership agreement of each operating partnership when it conflicts with their
personal  interests.  In addition,  the terms of our  Articles of Amendment  and
Restatement  and Bylaws were not determined  through arm's length  negotiations.
Some of these terms are not as favorable as those that could have been  obtained
through arms'-length negotiations.


RELATED  PARTY DEBT.  We are liable for a loan of  approximately  $20.8  million
payable to Berg & Berg  Enterprises,  Inc., which is a member of the Berg Group.
This loan is secured by three of our properties  and initially  matured in March
1999,  but has been extended  until December 1999 by agreement with Berg & Berg,
Enterprises,  Inc..  We  believe  that we will be able to repay  that  loan with
proceeds of our  existing  line of credit or other  sources of working  capital.
Effective  September  30,  1998,  we assumed a $100  million line of credit with
Wells Fargo Bank N.A.  previously  provided to and  guaranteed by the members of
the Berg Group,  which is secured by 14 of our properties.  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,  which  totaled  approximately  $27.2  million  as of
December 31, 1998.  The Berg Group  members  continue to be liable as guarantors
under the line of credit,  which  expires in October  1999.  If we are unable to
repay our debts to BBE or Wells Fargo Bank when due, however,  Mr. Berg or other
Berg Group members, in addition to the lenders, could take action to enforce our
payment obligations. On December 28, 1998, our board of directors, acting for us
in our capacity as the general  partner of each of the  operating  partnerships,
declared a cash  distribution to all partners.  The total  distributions of $9.6
million  to Mr.  Berg and other  Berg  Group  members  were  loaned  back to the
operating  partnerships in lieu of having them draw  additional  funds under the
line of credit.  These  loans bear  interest  at an annual rate equal to that as
charged  under the Wells Fargo Bank line of credit.  Mr. Berg or any of the Berg
Group  members who have loaned  these funds to the  operating  partnerships  may
request their  repayment at any time. Such requests might be made when we or the
operating  partnerships do not have sufficient  funds  available.  In that case,
they would have the right to take legal  action to  enforce  our  obligation  to
repay the requested amounts.

CHANGES IN POLICIES 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 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 operation,  and ability to make cash
distributions to our stockholders.

                                       8

<PAGE>


ANTI-TAKEOVER PROVISIONS

Provisions  of our Articles of Amendment  and  Restatement  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  holders of
common stock or otherwise be in their best interests.

REAL ESTATE INVESTMENT CONSIDERATIONS

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   generated  by  our
properties,  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 over  supply  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.  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  cause a reduction  in revenue from the  investment.
Income from  properties  and real estate values also is 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.

Our  properties  and an  investment  in our common  stock are also  subject to a
number of specific risks, including the following:

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

o    All of our  properties  are  located  in the  southern  portion  of the San
     Francisco Bay Area commonly  referred to as "Silicon  Valley".  The Silicon
     Valley economy has been strong for the past five years but future increases
     in values and rents for our  properties  depend to a significant  extent on
     the health of this region's economy.  Recent trends suggest that the supply
     of R&D office space  available  for rent has  increased and that the demand
     for such space in Silicon  Valley has declined from near zero vacancy rates
     earlier in 1998 and late 1997.  

o    We might lose key tenants.  Most of our  properties  are occupied by single
     tenants,  many of whom are large,  publicly-traded  electronics  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.

o    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.

o    We intend to engage in additional real estate  acquisition and development.
     These activities involve significant risks in addition to those relating to
     the  ownership  and  operation of existing,  fully-leased  properties.  For
     example,  required  approvals may not be obtained or may take more time and
     resources  to obtain than  expected,  construction  may not be completed on
     schedule or on budget, and the properties may not achieve  anticipated rent
     or occupancy  levels.  Such activities also depend upon the availability of
     financing on terms that do not adversely  impact our operating  results and
     our ability to make distributions to our stockholders.

o    Our properties are subject to substantial indebtedness. If we are unable to
     make required mortgage  payments,  a loss could be sustained as a result of
     foreclosure on our properties by the mortgagee. We have adopted a policy of
     maintaining  a  consolidated  ratio of debt to total market  capitalization
     (which  includes  for this  purpose the value of all shares of common stock
     exchangeable at any time for outstanding L.P. Units) 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.

o    Our properties may expose us to liabilities under applicable  environmental
     and health and safety laws.

o    We may sustain uninsured losses with respect to some of our properties.

o    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,  or
     properties that we may acquire in the future,  we could lose our investment
     in those  properties  and our financial  condition,  operating  results and
     ability  to make  distributions  to our  stockholders  could be  materially
     adversely affected.


                                       9
<PAGE>

FEDERAL INCOME TAX RISKS

FAILURE TO QUALIFY AS A REIT. We intend to elect to be taxed as a REIT under the
federal income tax laws for the year ending  December 31, 1999. To maintain that
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.  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.

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, we are
subject to certain  restrictions  on the  percentage  of the total  value of our
stock that may be owned by five or fewer individuals which may not exceed 50% as
determined  under  federal  income  tax laws.  Our  Articles  of  Amendment  and
Restatement  generally prohibit the direct or indirect ownership of more than 9%
of our common stock by any  stockholder.  This limit excludes the members of the
Berg  Group,  who have an  aggregate  ownership  limit of 20%. In  addition,  as
permitted by our Articles of Amendment and  Restatement,  our board of directors
recently  provided an exception to two other  stockholders  that permits them to
collectively own, directly or indirectly,  up to 19.4% of our common stock on an
aggregate basis, subject to the terms of an ownership limit exemption agreement.
In general,  our Articles of Amendment and Restatement  prohibit the transfer of
shares  which  result in a loss of our REIT  qualification  and provide that any
such transfer or any other  transfer  which causes a  stockholder  to exceed the
ownership limit will be subject to mandatory forfeiture provisions.

UNCERTAINTIES REGARDING DISTRIBUTIONS TO STOCKHOLDERS

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 directly or through the operating
partnerships  to  borrow  funds  on a  short-term  basis  to meet  our  intended
distribution policy.

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

o     The amount of cash available for distribution;
o     The operating partnerships' financial condition;
o     Any decisions by the board of directors to reinvest funds rather than to
        distribute such funds;
o     The operating partnerships' capital expenditures;
o     The effects of new property  acquisitions,  including acquisitions under
        our existing agreements with members of the Berg Group.
o     The annual distribution requirements under the REIT provisions of the
        federal income tax laws; and
o     Other factors as our board of directors deems relevant.

There is no assurance that we will be able to meet or maintain our intended cash
distribution policies.

OUR OBLIGATION TO PURCHASE TENDERED L.P. UNITS

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 L.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. Upon the
exercise  of any such  right by a limited  partner,  we will have the  option to
purchase the tendered L.P.  Units with  available  cash,  borrowed  funds or the
proceeds of an offering of newly issued shares of common stock. These put rights
become  exercisable  on December 29, 1999, 


                                       10
<PAGE>

and are available once a year for a maximum of one-third of the eligible limited
partners'  total  L.P.  Units.  If the total  purchase  price of the L.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 L.P. Units to be acquired from each tendering  limited partner so that
the total  purchase  price does not exceed $1 million  dollars.  The exercise of
these put  rights  may  reduce  the  amount of cash  that we have  available  to
distribute to our stockholders.

SHARES ELIGIBLE FOR FUTURE SALE

We cannot  predict the  effect,  if any,  that future  sales of shares of common
stock,  or the  availability  of shares for future sale, will 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 L.P. Units for shares of common stock pursuant to their exchange
rights,  or may be sold by the Company to raise funds  required to purchase such
L.P. Units if the limited  partners elect to tender L.P. Units to us using their
put rights.  In addition,  stockholders of the Company currently may resell more
than 8 million  shares of common  stock  under two  currently  effective  resale
prospectuses and such offers may adversely affect the market price of the common
stock.  Subject to certain  rights  that we possess to halt  offers and sales of
shares of common stock under those prospectuses under certain circumstances,  we
intend to maintain the effectiveness with the SEC of the registration statements
under  which  these  shares are  offered  for sale with the SEC until the end of
December 1999.

MARKET INTEREST RATES MAY HAVE AN EFFECT ON THE VALUE OF OUR PUBLICLY TRADED
SECURITIES

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,  result in
more funds available for us to distribute,  and, in fact,  would likely increase
our borrowing costs and potentially  decrease funds available for  distribution.
Thus,  the higher  market  interest  rates could  cause the market  price of our
common stock to go down.

                                       11
<PAGE>


ITEM 2.    PROPERTIES

The following table sets forth certain information relating to the properties of
Mission West Properties, Inc. as of December 31, 1998.

<TABLE>
<CAPTION>

                                                                            
                                         Percentage                                                               
                                           Leased        Average                                     Major                       
Property                        Sq. Ft.    as of          1998                                      Tenants       1998       
                      No. of      of     December 31,   Economic              Major                 Rentable    Annualized  
                     Buildings  Project     1998       Occupancy(1)          Tenants                 Sq. Ft.     Rent (2)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                    <C>   <C>            <C>           <C>        <C>                            <C>          <C>
10401 Bubb(3)           1       20,330      100%          100%       Celerity Systems                20,330         $378,138
                                                    
2001 Logic              1       72,426      100%          100%       Motorola                        72,426       $1,294,977
                                                       
45700 Northport Loop    1       47,570      100%          100%       Philips Electronics             47,570         $669,960
East                                   

45738 Northport Loop    1       44,256      100%          100%       EIC Corporation                 44,256         $519,651
West                                    

4050 Starboard          1       52,232      100%          100%       Flash Electronics, Inc.         52,232         $752,141
Drive                                             
                                           
3501 W. Warren          1       67,864      100%          100%       Alcatel Comptech, Inc.          51,864       $1,077,426
Avenue-46600                               
Fremont Blvd.                             

48800 Milmont           1       53,000      100%          100%       Premisys Communications         53,000         $580,842
Drive                                          

4750 Patrick            1       65,780      100%          100%       Cisco Systems, Inc.             65,780        $907,764
Henry                                                
                                           
4949 Hellyer            1      200,484      100%          100%       Cisco Systems, Inc.            200,484       $2,033,580
Avenue                                         

Triangle Technology     7      416,527      100%          100%                                                    $4,554,186     
Park (4)                                                             Intevac Corporation            167,063    
                                                                     SDL, Inc.                      102,150
                                                                     Maxell Corporation              63,812

5850-5870 Hellyer       1      109,715      100%          100%                                                      $404,392
                                                                     Clear Logic, Inc.               64,805     
                                                                     Gadzoox Networks, Inc.          44,910

2251 Lawson             1      125,000      100%          100%       Amdahl Corporation             125,000       $1,169,450    

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

1250 Arques             4      200,000      100%          100%       Amdahl Corporation             200,000         $755,923   

3120 Scott              1       75,000      100%          100%       Amdahl Corporation              75,000       $1,157,085   

20400 Mariani           1      105,000      100%          100%       Behring Diagnostic             105,000       $1,008,000  

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

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

10300 Bubb              1       23,400      100%          100%       Apple Computer, Inc.            23,400         $365,040 

10440 Bubb Road         1       19,500      100%          100%       Linotext Digital Color          19,500         $251,550 

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

1135 Kern               1       18,300      100%          100%       Davicom Semiconductor, Inc.     18,300         $237,492
Avenue                                         

1190 Morse/405          1       28,350      100%          100%       Coptec West                     28,350         $320,352
Tasman                                                        

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       $1,076,247
                                     
2800 Bayview            1       59,736      100%          100%       Concept System Design, Inc.     59,736         $623,605   
                                           
6850 Santa Teresa       1       30,000      100%          100%       Magnex Corporation              30,000         $213,528   

                                       12

<PAGE>

140-150 Great           2      104,349      100%          100%                                                      $822,602     
Oaks-6781 Via                                                        Atcor Corporation               52,000                  
Del Oro                                                              GSS/Array Technology            30,549         
                                                                          

6540-6541 Via Del Oro   2       66,600      100%          100%                                                      $598,966 
6385-6387 San Ignacio                                                Exsil Incorporated              20,076 
                                                                     Alcatel Network Systems, Inc.   17,400
                                                                     Modutek Corporation             17,400
  
6311-6351 San Ignacio   5      360,254      100%          100%                                                    $3,604,218
                                                                     On Command Video               131,320 
                                                                     Sequel, Inc.                    66,042  
                                                                     Avnet, Inc.                     53,494
                                                                     Photon Dynamics                 50,400       
                                                                     Teledex                         30,000    

6320-6360 San Ignacio   1      157,292      100%          100%                                                    $1,499,456
                                                                     Bell Sports, Inc.               63,638  
                                                                     Delrina/Symantec Corporation    45,000       

2610 N. First St.       2      170,810      100%           99.7%                                                  $2,009,736
&75 E.Trimble                                                        Comerica Bank                   93,984 
                                                                     County of Santa Clara           63,310      

2033-2243 Samaritan     3      235,122      100%          100%  
                                                                     Condor Systems                 110,490       $2,891,416    
                                                                     Texas Instruments               48,667      

1170 Morse              1       34,750      100%          100%       CA Parkinsons Foundation        34,750         $378,664   
                                           

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      706,367       97.1%         99.7%                                                  $8,597,240  
Park (5)                                                             Larscom, Inc.                  118,708       
                                                                     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         $697,560     

1650 Richard  Ave.      1       52,800      100%          100%       Forward Technology              52,800         $335,004
                       --    -----------                                                                          ------------
TOTAL                  71    4,518,688                                                                           $51,303,518
                       ==    ===========                                                                          ============
</TABLE>

(1) Average Economic  Occupancy is calculated by taking the 1998 annualized rent
for the  subject  property,  deducting  the  monthly  rent that  could have been
received for the vacant space,  and dividing by the 1998  annualized  rent.  The
amount of rent that could have been  received for the vacant space is determined
by using the same  monthly  rent that was  ultimately  received  for the  vacant
space. 
(2)  Annualized  rents  are  calculated  by  taking  the  rents for the last two
quarters of 1998 and multiplying them by two. 
(3) This property is owned through a joint venture in which the Company, through
the operating partnerships, owns an 83.3% interest.
(4) One of the  buildings is owned through a joint venture in which the Company,
through  a  joint   venture  in  which  the  Company,   through  the   operating
partnerships, owns a 75% interest.
(5) A lease for 42,700  square feet of space  expired on February 28,
1999 and is vacant as of March 15,  1999.  The lease for 20,330  square  feet of
space had  expired  and the space was vacant as of December  31,  1998,  but has
subsequently been leased with a commencement date of March 1, 1999.

                                       13

<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 1999,  assuming that none of
the tenants exercise existing renewal options or termination rights.

<TABLE>
<CAPTION>                                   
                                                                 Percentage of 
 Year of    Number of   Rentable Square     1999 Annual        Annual Base Rent       
  Lease      Leases     Feet Subject to   Base Rent Under       Represented by                               
Expiration  Expiring    Expiring Leases  Expiring Leases(1)   Expiring Leases(2)
--------------------------------------------------------------------------------
<S>           <C>        <C>               <C>                     <C>  
  1999         10          255,164         $ 3,363,000               6.24%

  2000         17          609,625           7,332,544             13.61%

  2001         20          475,391           5,235,229              9.72%

  2002         20        1,117,201          15,271,604             28.34%

  2003         11          506,618           5,680,216             10.54%
 
  2004         14          922,058          10,024,998             18.60%

  2005          3          157,285           2,058,126              3.82%

  2006          1           93,984           1,060,144              1.97%

  2007          4          256,362           2,670,371              4.96%

  2008 &        1          125,000           1,186,886              2.20%
thereafter
              ---        ---------         -----------             -------
              101        4,518,688         $53,883,118             100.00%
              ===        =========         ===========             ======= 
</TABLE>

(1) The base rent for leases  expiring in 1999 is based on January  1999 monthly
rents  multiplied by 12. Base rent for all leases  expiring after 1999 are based
upon scheduled 1999 annual rents.  
(2) Based upon 1999 annual rents as discussed in note (1).

                                       14

<PAGE>


ITEM 3.    LEGAL PROCEEDINGS

Neither the Company,  the operating  partnerships nor the properties are subject
to any material  litigation  nor, to our knowledge,  is any material  litigation
threatened  against the Company,  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

We held a special  meeting of the  shareholders  of Mission West  Properties  on
December 29, 1998. At the special meeting, the following matters were voted upon
by the holders of outstanding  shares of common stock,  and with respect to each
matter,  the number of votes for and against and the number of  abstentions  and
broker non-votes are set forth below. (See the Proxy  Statement/Prospectus filed
on  November  20,  1998  as  part  of  the  Registration  Statement,   which  is
incorporated by reference into this Item 4.)

o    Approval of proposed private  placement of 6,495,058 shares of common stock
     for $4.50 per share. There were 1,570,785 votes for the proposal,  29 votes
     against the proposal,  34  abstentions  and not more than 109,336 broker or
     other shareholder non-votes.

o    Ratification  and approval of our  acquisition of the sole general  partner
     interest  representing   approximately  12.11%  of  the  total  partnership
     interests in each of the operating  partnerships owning  approximately 4.34
     million rentable square feet of leased  commercial R&D buildings,  in which
     the  principal  limited  partners  are  Carl E.  Berg  and  certain  of his
     affiliates, pursuant to the terms of the Acquisition Agreement, dated as of
     May 14, 1998 and an Amendment to Acquisition  Agreement,  effective July 1,
     1998.  There were  1,570,795  votes for the proposal,  16 votes against the
     proposal,  37  abstentions  and not  more  than  109,336  broker  or  other
     shareholder non-votes.

o    Approval  of our  acquisition  of the  right to  acquire,  certain  pending
     commercial  R&D building  developments  consisting  of  approximately  1.02
     million  rentable  square feet from Mr. Berg and certain of his  affiliates
     under the terms of the Pending Projects Acquisition  Agreement.  There were
     1,570,795  votes  for the  proposal,  16 votes  against  the  proposal,  37
     abstentions  and  not  more  than  109,336  broker  or  other   shareholder
     non-votes.

o    Approval of our  acquisition of an option to acquire future  commercial R&D
     building developments on land currently held by Mr. Berg and certain of his
     affiliates  under  the terms of the Berg Land  Holdings  Option  Agreement.
     There were 1,570,805 votes for the proposal,  3 votes against the proposal,
     37  abstentions  and not more  than  109,339  broker  or other  shareholder
     non-votes.

o    Approval of the  issuance of up to  93,398,705  shares of common stock upon
     the future  redemption  or exchange of  93,398,705  L.P.  Units,  including
     33,919,072  L.P.  Units  issuable  upon  the  acquisition  of  the  pending
     development  projects from Mr. Berg and certain of his affiliates under the
     terms of the Pending Projects Acquisition  Agreement.  There were 1,570,792
     votes for the proposal,  19 votes against the proposal,  34 abstentions and
     not more than 109,339 broker or other shareholder non-votes.

o    Approval of a proposal to  reincorporate  Mission West Properties under the
     laws of the State of  Maryland  through a merger  with and into its  wholly
     owned subsidiary Mission West Properties,  Inc. and to approve the adoption
     of the Merger Agreement and Plan of Merger.  There were 1,570,792 votes for
     the proposal,  19 votes against the proposal,  28 abstentions  and not more
     than 109,345 broker or other shareholder non-votes.


                                       15
<PAGE>




                                    PART II

ITEM 5.  MARKET FOR REGISTRANTS' 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 following are the high and low sales prices, by quarter, of the common stock
for the two most recent fiscal years as adjusted to give  retroactive  effect to
the 1 for 30 reverse stock split which was effective as of November 10, 1997:

<TABLE>
<CAPTION>

                                     1998                     1997
                            ---------------------     ---------------------
                             High(1)      Low(1)        High         Low
                            ---------   ---------     ---------   ---------
            <S>                <C>         <C>         <C>          <C>   
            1st Quarter(2)     N/A         N/A         397 1/2      56 1/4(3)
            2nd Quarter        N/A         N/A         112 1/2      52 1/2
            3rd Quarter        N/A         N/A         153 3/4      93 3/4
            4th Quarter(4)     11          6 1/2       136 7/8      93 3/4
</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  In 1997,  we changed  our fiscal year end from  November  30 to December  31.
   Thus, the first quarter of 1997 includes December 1996.
3  During the first fiscal  quarter in 1997 (on February  27,  1997),  we paid a
   $9.00 special dividend ($270 adjusted to give retroactive effect to the 1 for
   30 reverse stock split).
4  During the fourth  quarter of 1998,  amounts  shown reflect high and low upon
   commencement of trading.
5  During the fourth  fiscal  quarter in 1997 (on October 21,  1997),  we paid a
   $3.30 special dividend ($99 adjusted to give retroactive  effect to the 1 for
   30 reverse stock split).


As of March 15, 1999, the approximate  number of holders of record of the common
stock was 408.  We  declared  and paid a special  dividend of $9.00 per share on
February  27,  1997.  Another  special  dividend  of $3.30 per share was paid on
October 21, 1997. We paid no dividends during 1998.

The closing price of our common stock on December 31, 1998 was $6 3/4 per share.

RECENT SALES OF UNREGISTERED SECURITIES

In December 1998, we issued  6,495,058 shares of common stock at $4.50 per share
to accredited  investors subject to the terms of two Stock Purchase  Agreements,
each dated as of May 4, 1998,  relying on exemptions from registration under the
Securities  Act of 1933  provided by Rule 506 of  Regulation  D. We received the
aggregate  consideration  of  approximately  $28.3 million in cash. Of the total
number of shares sold in the private  placements,  5,800,000 shares were offered
in a placement  managed by Ingalls & Snyder LLC for which  purchasers  agreed to
pay a  placement  fee off $.05 per  share to  Ingalls  & Snyder  LLC.  We had no
liability for the placement  fee. In addition,  200,000 of the total shares were
issued to John Moran in payment  for  services  rendered  related to our capital
formation efforts in assisting us to obtain such equity financing.

                                       16

<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA

The following  table sets forth selected  historical  financial  information for
Mission West Properties,  Inc. 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
                                               Year        Month             Year Ended December 31,
                                              Ended        Ended
                                             December     December
                                                31,         31,
                                             -------      -------      ----------------------------------
                                               1998        1997         1997     1996      1995      1994
                                              ------      ------       ------   ------    ------    ------
                                                                   (dollars in thousands)
<S>                                      <C>             <C>          <C>       <C>       <C>      <C>
OPERATING DATA:                                                  
Revenue:  
  Rental revenues                            $27,285                   $1,376   $7,065    $7,146   $ 6,637      
  Tenant reimbursements                        4,193                        -        -         -         -
  Other                                          278      $   27          359      348       380       564        
                                             -------     -------       ------   ------    ------   -------
Total revenues                                31,756          27        1,735    7,413     7,526     7,201               
                                             -------     -------       ------   ------    ------   -------
Expenses:
  Property operating and maintenance                                      
    and real estate taxes                      4,821           -          246    1,643     1,783     1,991     
  Interest                                     4,685           -          425    3,045     3,435     3,088
  Interest (related parties)                   3,511           -            -        -         -         -
  General and administrative expenses          1,501         139        1,467      991       945     1,200
  Depreciation and amortization                5,410           -          246    1,369     1,352     1,472
                                             -------     -------       ------   ------    ------    -------
                                              19,928         139        2,384    7,048     7,515     7,751
                                             -------     -------       ------   ------    ------    -------
  Income (loss) before gain on sale of real
    estate assets, minority interest         
    and income taxes                          11,828       (112)        (649)      365        11      (550)
  Gain (loss) on sale                              -                    4,736     (306)       76     1,867      
  Provision for estimated loss on real             
    estate                                         -           -            -        -         -    (5,200)
                                             -------     -------       ------   ------    ------    -------  
  Income (loss) before minority interest   
    and income taxes                          11,828        (112)       4,087       59        87    (3,883)      
  Minority interest                           12,049           -            -        -         -         -
                                             -------     -------       ------   ------    ------    -------
  (Loss) income before income taxes             (221)       (112)       4,087       59        87    (3,883)
  (Benefit) provision for income taxes             -         (38)       1,043       24        35    (1,500)
  Cumulative effect of change in accounting        -           -            -        -         -       440                    
                                             -------     -------       ------   ------    ------   -------
    Net income                               $  (221)     $  (74)      $3,044   $   35    $   52   $(1,943)     
                                             ========    ========      =======  =======   =======   =======

  Basic income (loss) per share (1)          $  (.13)     $ (.05)      $18.48   $  .77    $ 1.12   $ 39.65  
  Diluted income (loss) per share (1)        $  (.13)     $ (.05)      $18.48   $  .72    $ 1.06   $ 39.69

  PROPERTY AND OTHER DATA (2):

  Total properties, end of period                 71
  Total square feet, end of period             4,519
  Average monthly rental revenue               $1.01         
    per square foot(3)
  Occupancy at end of period                     99%

FUNDS FROM OPERATIONS (2)(4)(5):             $17,196

  Cash flow from operations                  $16,264       $(46)      $(1,000)  $1,221      $598    $2,450
  Cash flow from investing                      (118)          -       46,198    2,528       191       492
  Cash flow from financing                   (21,469)        150      (42,844)  (1,204)   (2,415)   (1,556)

                                                                 December 31,
-------------------------------------------------------------------------------------------------------------
                                               1998        1997        1996      1995      1994
                                             -------     -------      ------    ------    ------
BALANCE SHEET DATA(6):                                      (dollars in thousands)

  Real estate assets, net of                $516,029           -     $46,285   $47,597   $49,612           
    accumulated depreciation
  Total assets                              $519,866       5,763      46,324    47,570    50,963              
  Debt                                       184,389           -      30,753    31,967    34,382  
  Debt - related parties                      20,752           -           -         -         -
  Total liabilities                          213,234         552      32,142    33,433    36,243
  Minority interest                          273,379           -           -         -         -
  Stockholders' equity                        33,253       5,211      14,182    14,137    14,720

  Common stock outstanding                 8,218,594   1,501,104      45,704    45,624    48,957
  LP Units issued and outstanding         60,151,697           -           -         -         -
</TABLE>

                                       17
<PAGE>

(1)As adjusted for the 1 for 30 reverse stock split.
(2)Property and other data and FFO shown only as of December 31, 1998.
(3)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.
(4)Asdefined  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 "Distribution Policy."
(5)Through  one of the  operating  partnerships,  we own 75% of one of the joint
     ventures and an 83.33% interest in the other joint venture.  For the period
     from July 1, 1998 through December 31, 1998, the amounts of net income from
     those joint ventures  attributable  to the minority  interests held outside
     the operating partnerships totaled $0.042 million. This amount has not been
     added back in the determination of FFO on a fully-diluted basis.
(6)Balance sheet information for 1997 is shown as of December 31, 1997.

                                       18
<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>

                                      Berg Properties (Predecessor)
------------------------------------------------------------------------------------------------------------
                                               Six
                                              Months
                                              Ended                      
                                               June
                                                30,                       Year Ended December 31,
                                             -------     ---------------------------------------------------
                                               1998           1997      1996       1995      1994      1993
                                             -------        -------    ------     ------    ------    ------
                                                                  (dollars in thousands)
<S>                                        <C>            <C>        <C>        <C>       <C>      <C>
OPERATING DATA:
Revenue:
  Rental revenues                            $22,341        $40,163   $28,934    $23,064   $25,186   $25,620
  Tenant reimbursements                        3,826          6,519     3,902      4,193     3,190     3,486                        
                                             -------        -------   -------    -------   -------   -------
    Total revenue                             26,167         46,682    32,836     27,257    28,376    29,106        
                                             -------        -------   -------    -------   -------   -------

Expenses:
  Operating expenses                           2,088          3,741     1,906      2,032     1,355     1,129              
  Real estate taxes                            2,126          4,229     3,750      3,595     2,716     3,116
  Management fee                                 645          1,050       827        654       739       994
  Interest(related parties)                       61            248       293        357       329        45
  Interest                                     3,044          5,919     6,090      6,190     8,222     9,054
  Depreciation and amortization                3,862          7,717     6,739      6,323     6,851     7,156       
                                             -------        -------   -------    -------   -------   -------
                                              11,826         22,904    19,605     19,151    20,212    21,494        
                                             -------        -------   -------    -------   -------   -------
Income before gain on sale of real
  estate and extraordinary item               14,341         23,778    13,231      8,106     8,164     7,612
Gain on sale                                      -              -         -      20,779        -         -       
                                             -------        -------   -------    -------   -------   -------
Income before extraordinary item              14,341         23,778    13,231     28,885     8,164     7,612
Extraordinary item                                -              -        610      3,206        -      1,766
                                             -------        -------   -------    -------   -------   -------
  Net income                                 $14,341        $23,778   $13,841    $32,091    $8,164    $9,378
                                             =======        =======   =======    =======   =======   =======

PROPERTY AND OTHER DATA:
Total properties, end of period                   58             58        53         50        41        40
Total square feet, end of period               3,779          3,779     3,392      3,195     2,856     2,796
Average monthly rental revenue           
  per square foot(1)                           $0.99          $0.86     $0.78      $0.71     $0.96     $0.84
Occupancy at end of period                       100%          97.7%     91.9%      87.4%     80.3%     89.6%


FUNDS FROM OPERATIONS(2)                     $18,203        $31,495   $19,970    $14,429   $15,015   $14,768

Cash flow from operations                    $17,798        $29,909   $20,248    $16,392   $16,518   $18,480
Cash flow from investing                         690        (17,251)  (29,275)    (6,353)   (5,003)   (3,248)
Cash flow from financing                     (24,207)        (8,432)    9,433    (10,013)  (12,093)  (13,599)


                                                                             December 31,
                                             June 30,       ------------------------------------------------
                                               1998          1997      1996       1995      1994      1993
                                             -------        -------   -------    -------   -------   -------
BALANCE SHEET DATA:                                                (dollars in thousands)

Real estate assets, net of
  accumulated depreciation                  $ 95,600       $100,152   $90,710    $72,319   $62,450  $ 61,610
Total assets                                 104,546        113,950    97,651     73,730    59,957    64,516
Debt                                          37,868         76,507    73,416     69,543    79,594   100,126
Debt - related parties                       156,632          1,975     2,546      3,051     2,889     1,433
Total liabilities                            200,779         84,299    80,826     76,199    83,720   104,117
Partners' (deficit) / equity                 (96,233)        29,651    16,825     (2,469)  (23,763)  (39,601)
                               
</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 the Company's
   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 the Company defines FFO. See "Distribution Policy."


                                       19
<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  BELOW  UNDER THE  SUB-HEADING,
"FORWARD-LOOKING INFORMATION."

OVERVIEW

Our original  predecessor was formed in 1969 as Palomar  Mortgage  Investors,  a
California  business trust. It operated as a REIT,  investing primarily in short
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 July  1996,  we  entered  into an  agreement  to sell all of our real  estate
assets.  That  agreement was  subsequently  terminated  and  replaced,  as was a
subsequent agreement.  On December 6, 1996, we entered into an agreement to sell
all of our real estate assets to Spieker  Properties,  L.P. for $50.5 million in
cash.

On February 4, 1997,  we declared a special  dividend of $9.00 per share payable
on February  27, 1997 to all  shareholders  of record as of February  19,  1997.
After the sale of assets and the  payment of the  dividend to  shareholders,  we
retained only nominal assets.  The board of directors and management  considered
available  strategic  alternatives  for the remaining  corporate  entity.  Those
alternatives included possible business or asset acquisitions or combinations, a
sale of the corporate entity, and outright liquidation.

Subsequently,  we accepted a proposal by Carl E. Berg to acquire  control of the
corporation  as a vehicle to acquire  office/R&D  real  estate,  or interests in
entities  owning such real  estate  from Mr. Berg and the Berg Group,  including
BBE. On May 27, 1998, we entered into a Stock  Purchase  Agreement with BBE, and
transferred  most  of its  share  purchase  rights  to  unaffiliated  accredited
investors as of August 4, 1997. A special meeting of the shareholders of Mission
West  Properties  was held on  August  5,  1997,  at  which  they  approved  the
transaction.  The  transaction was completed on September 2, 1997, at which time
all of our  existing  officers  and  directors  resigned,  and BBE and the other
investors acquired a 79.6% controlling ownership position as a group.

On  October  20,  1997,  we paid a  further  distribution  of $3.30 per share to
shareholders  of record as of August 28, 1997, from available cash including $.9
million  received  in  the  September  1997  transaction.   No  portion  of  the
distribution  was  paid on  shares  acquired  by BBE and  its  co-investors.  In
connection with that distribution, the American Stock Exchange halted trading of
the common stock at the opening of trading on October 20, 1997.

To increase  the price per share of the common  stock,  raise funds and increase
assets and shareholders' equity, at a special meeting of shareholders of Mission
West Properties held on November 10, 1997, the shareholders  approved a 1 for 30
reverse  stock split and the sale of  1,250,000  newly  issued  shares of common
stock at $4.50 per share in a private  placement  offering.  We  completed  that
transaction  as of November  12,  1997.  Also in November  1997,  we changed our
fiscal year end to December 31.

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  shareholder  approval.  Effective July 1, 1998, we
consummated our  acquisition of the general  partner  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").  All limited  partnership  interests in the
operating   partnerships   were  converted  into   59,479,633  L.P.  Units  upon
consummation  of the  acquisition.  In the  aggregate,  L.P.  Units  represented
ownership of approximately 87.89% of the operating partnerships  commencing July
1, 1998.  Each L.P. Unit may be exchanged for one share of common stock pursuant
to certain exchange rights.

At December 31, 1998,  the  outstanding  balance under the Demand Notes owed the
operating  partnerships by the Company was $2,005.  The Demand Notes, along with
the  interest  expense  (interest  income  to the  operating  partnerships),  is
eliminated in consolidation and is 

                                       20

<PAGE>

not included in the corresponding  line items
within the  consolidated  financial  statements.  However,  the interest  income
earned by the operating partnerships (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
attributable  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 shareholders.

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 resulting in
aggregate  proceeds,  net of fees and offering  costs,  of  approximately  $27.8
million. All of the proceeds 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 Carl E. Berg and other members
of the Berg Group.

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.
Accordingly, shares of the former company, Mission West Properties, a California
corporation  (no par value),  which were  outstanding at December 30, 1998, have
been  converted into shares of our common stock ($.001 par value per share) on a
one-for-one basis.

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, which are the operating partnerships,  respectively.  This
represents a 12.02% general partnership interest in the operating  partnerships,
taken as a whole, on a weighted average basis.

We intend to elect and qualify to be taxed as a REIT commencing with the taxable
year ending December 31, 1999.

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

RESULTS OF OPERATIONS

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

Acquisition of the general partnership  interests in the operating  partnerships
effective July 1, 1998 substantially  altered our operations.  As a consequence,
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.

The  acquisition  of  the  general   partnership   interests  in  the  operating
partnerships 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 to
December 31, 1998,  and our results of operations for the period from January 1,
1998 through  December 31, 1998.  Therefore,  the results of operations  for the
year ended December 31, 1998 include only six months of activity for our current
real estate operations.

For the year ended  December 31,  1998,  rental  revenues  from real estate were
approximately $27.3 million, which included an adjustment for straight-line rent
of approximately  $1.6 million.  Tenant  reimbursements  were $4.2 million,  and
other income,  including  interest,  totaled  approximately $0.3 million.  Total
expenses  for 1998  reached  almost $20 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  $12.05  million,
resulting in a consolidated net loss of $.221 million 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, the Company received $50.5 million in cash, from which we repaid all
debt  encumbering the properties  (thus,  the elimination of all future interest
expense) and paid a majority of the related  transaction and 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.

                                       21

<PAGE>

We declared and paid a special  dividend of $9.00 per share to  shareholders  in
February 1997. That dividend  represented the available  portion of the proceeds
from the sale of the  nine  properties.  Additionally,  we  declared  and paid a
special cash  distribution  of $3.30 per share that was paid to  shareholders in
October 1997.

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

COMPARISON OF THE  THIRTEEN-MONTH  PERIOD ENDED  DECEMBER 31, 1997 TO THE FISCAL
YEAR ENDED NOVEMBER 30, 1996

During the month ended December 31, 1997, we held minimal assets, primarily cash
and cash  equivalents  obtained from sales of common stock and held as temporary
investments.  We recognized  interest  income in the amount of $.027 million and
general and  administrative  expenses of $.139  million  resulting in a net loss
before  income tax benefit of $1.12  million for the month  ended  December  31,
1997.  During the 12-month  period  ended  November  30,  1997,  our  activities
consisted  of selling our existing  portfolio of real estate,  paying our debts,
making  distributions to shareholders and raising additional capital through the
sale of common stock to BBE and its  co-investors.  During  fiscal year 1996, we
continued to focus  operating  efforts on managing our real estate  portfolio of
eleven operating projects;  no properties were sold and no development  occurred
during the year.  In addition  to managing  the  portfolio,  we entered  into an
agreement to sell the portfolio in July 1996.  Thereafter  our efforts  involved
winding up our real estate  operations until its transactions with Mr. Berg, BBE
and other investors in 1997.

CHANGES IN FINANCIAL CONDITION

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,   the  financial  statements  of  the  Company
consolidate  the financial  position and results of the operating  partnerships,
effective  as of July 1, 1998.  Accordingly,  through  our  general  partnership
interests,  we own,  operate and manage 71  properties  representing  a total of
approximately 4.52 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   million   (the   "Prudential   Loan").   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  space,  all of  which  are  owned  by  the  operating
partnerships.  The loan bears interest at a fixed rate of 6.56% per annum and is
payable in monthly  installments  of  approximately  $.83 million which includes
principal (based upon a 30 year amortization) and interest.  The net proceeds of
the loans were used to pay off  approximately  $14.22  million of mortgage notes
payable  with the  remaining  amount  used to reduce the  outstanding  principal
balance owed under the mortgage notes payable (related parties).

On September 30, 1998, the operating  partnerships  assumed lines of credit with
Wells Fargo Bank, N.A from the Berg Group.  The Wells Fargo line matures October
1999 and bears  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 with  availability  of $72.8 million.

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.

Additionally, on December 29, 1998, we completed the sale of 6,295,058 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 us, net of a fees
and offering costs, was approximately  $27.8 million.  The proceeds were used to
pay  outstanding  amounts under the Demand Notes.  Of the total number of shares
sold in the this  transaction,  5,800,000  shares  were  offered in a  placement
managed by Ingalls & Snyder LLC ("Ingalls & Snyder"). John Moran, a principal of
Ingalls &  Snyder,  received  200,000  shares of  common  stock in  payment  for
services rendered in connection with the placement of such shares.

On March 30, 1998 Michael J. Anderson,  our Vice  President and Chief  Operating
Officer, purchased 200,000 shares of common stock at $4.50 per share in exchange
for a $.9 million  note  payable to us. The note is a full  recourse  promissory
note bearing interest at 5.59% and is  collateralized by a pledge of the shares.
Interest is payable annually and principal is due March 30, 2003.  Additionally,


                                       22
<PAGE>

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.


DECEMBER 31, 1997 COMPARED WITH NOVEMBER 30, 1996

Nearly all changes in our financial  position during 1997 resulted from the sale
of our real estate portfolio. Proceeds from the sale of the properties were used
to pay all debt and a substantial  portion of all other liabilities,  as well as
the special $9.00 per share  distribution  to  shareholders in February 1997. In
addition,  the board of directors  declared a special  distribution of $3.30 per
share which was paid in October 21, 1997.

In connection with the January 1997 sale of real estate, vesting was accelerated
to permit the exercise of stock  options for the purchase of 451 shares.  During
February  1997,  all vested stock  options,  totaling  5,400  shares,  also were
exercised by option holders.  Total exercise proceeds to us from all such option
exercises  were  approximately  $0.73  million  and  were  recognized  on a "net
exercise" basis. Certain unvested options were canceled in March 1997.

We completed the sale of 200,000 newly issued shares of common stock  subsequent
to August 31,  1997.  The $0.9  million of proceeds  were  received on August 5,
1997,  and  initially  classified as a liability  until  completion of the sale,
which occurred on September 2, 1997.

LIQUIDITY AND CAPITAL RESOURCES

We expect our FFO to be the  principal  source of liquidity  for  distributions,
debt service,  leasing  commissions and recurring  capital  expenditures.  Based
solely  upon past  operating  results  for the  properties  and the  results  of
operations  for the year ended  December  31, 1998,  on a pro forma  basis,  the
Company expects its FFO for 1999 to be adequate to meet projected  distributions
to shareholders and other presently anticipated liquidity requirements in 1999.

At December 31, 1998, we had total indebtedness of approximately $205.1 million,
including  $154 million of fixed rate mortgage  debt,  $23.9 million of variable
rate mortgage debt (including  $20.75 million of related party debt),  and $27.2
million of credit  facility  debt.  Of total fixed  debt,  the  Prudential  Loan
represents  $130  million.  The loan bears an interest  rate of 6.56% per annum,
maturing  October 15, 2008, and is payable in monthly  installments of principal
(based upon 30-year amortization) and interest of approximately $0.8 million. We
paid total fees of  approximately  $0.9  million in  connection  with that loan.
During 1998, we also assumed  responsibility for a $100 million Wells Fargo line
of credit which had an outstanding  balance of approximately $27.2 million as of
December 31, 1998.  Interest rates on the Wells Fargo Line are variable and have
ranged from  approximately  6.49% to 8.20% over the past three fiscal years. The
average  rate  during the last  quarter of 1998 was 6.66%.  The Wells Fargo Line
expires in October  1999 and will need to be  replaced.  The Wells Fargo line of
credit is currently  collateralized  by 14  properties  and is guaranteed by Mr.
Berg and certain  members of the Berg Group.  There can be no assurance  that we
will be able to obtain a similar line of credit with similar  terms and our cost
of borrowing  funds could increase  substantially.  As of December 31, 1998, our
debt to total market capitalization ratio (total debt outstanding divided by the
sum of total debt  outstanding  plus the market value of common stock on a fully
diluted  basis) was  approximately  31% based  upon an  estimated  total  market
capitalization of approximately $666.6 million .


                                       23
<PAGE>

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


     DEBT DESCRIPTION               COLLATERAL                                          MATURITY     INTEREST
                                    PROPERTIES                              BALANCE       DATE         RATE
----------------------------    -----------------------------              ---------    ---------    ---------
                                                                        ($ in thousands)
<S>                             <C>                                        <C>           <C>          <C>    
LINES OF CREDIT:
Wells Fargo                      1810 McCandless Drive, Milpitas, CA        $27,201       10/99        (1)
                                 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     20,752       12/99         (1)
                                 2133 Samaritan Drive, San Jose, CA
                                 2233-2243 Samaritan Drive, San Jose, CA

MORTGAGE NOTES PAYABLE:
Great West Life & Annuity        6320 San Ignacio Ave, San Jose, CA           7,732       2/04         7.0%
  Insurance Company  
Great West Life & Annuity        6540 Via del Oro, San Jose, CA               3,689       5/04         7.0%
  Insurance Company              6385 San Ignacio Ave., San Jose, CA  
Prudential Capital Group         20400 Mariani, Cupertino, CA                 2,034       3/09         8.75%
New York Life Insurance          10440 Bubb Road, Cupertino, CA                 430       8/09         9.625%
  Company                          
Home Savings & Loan              10460 Bubb Road, Cupertino, CA                 525       1/07         9.5%
  Association                     
Amdahl Corporation               3120 Scott, Santa Clara, CA                  6,945       3/14         9.42%
Citicorp U.S.A., Inc.            2800 Bayview Drive, Fremont, CA              3,105       4/00         (2)
Mellon Mortgage Company          3530 Bassett, Santa Clara, CA                2,961       6/01         8.125%
Prudential Insurance Company     10300 Bubb, Cupertino, CA                  129,767       10/08        6.56%
  of America                     10500 N. DeAnza, Cupertino, CA 
                                 4050 Starboard, Fremont, CA 
                                 45700 Northpoint Loop, Fremont, CA
                                 45738 Northpoint Loop, Fremont, CA  
                                 450-460 National Ave., 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 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                                             157,188
                                                                           ---------
TOTAL                                                                      $205,141
                                                                           =========
</TABLE>
(1)  The lesser of (a) 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%.
(2)  One month LIBOR plus 1.625% adjusted monthly.

                                       24

<PAGE>

On August 6, 1998, Berg & Berg Developers and Microsoft Corporation entered into
a lease with  respect to an  approximate  515,000  square  foot  property  to be
constructed by Microsoft on L'Avenida in Mountain View,  California,  one of the
sites  comprising  the Pending  Development  Projects.  Microsoft  controls  the
construction  of this  facility,  which is  scheduled  to be completed in phases
between  March and May 1999.  We will acquire the R&D  properties to be built by
Berg & Berg Developers on the L'Avenida site when and if  construction  has been
completed and the buildings have been fully leased.  Upon any  acquisition by us
of the Pending Development Projects, the Berg Group may elect to receive cash or
L.P. Units from the operating partnerships.

HISTORICAL CASH FLOWS

Net cash provided by operating  activities  for the year ended December 31, 1998
was  approximately  $16.3  million  compared  to  net  cash  used  in  operating
activities  of  approximately  $1.0  million and net cash  provided by operating
activities of $1.2 million for the thirteen-month period ended December 31, 1997
and the fiscal year ended  December  31,  1996,  respectively.  The change was a
direct result of our acquisition of the general partnership interests in each of
the operating partnerships.

Net cash used in investing  activities  was  approximately  $.12 million for the
year  ended  December  31,  1998  compared  to net cash  provided  by  investing
activities   of   approximately   $46.2   million  and  $2.5   million  for  the
thirteen-month period ended December 31, 1997 and the fiscal year ended November
30, 1996,  respectively.  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  $21.5 million for the
year ended  December 31, 1998 compared to  approximately  $42.7 million and $1.2
for the  thirteen-month  period  ended  December  31,  1997 and the fiscal  year
November 30, 1996,  respectively.  During 1998, we reduced debt  outstanding  by
utilizing proceeds from new borrowings, issuing 6,495,058 shares of common stock
for gross proceeds of approximately $28.3 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, 1998, 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
865,000 rentable square feet under expiring leases annually from January 1, 1999
through  December 31, 2000. We expect that the average  annual cost of recurring
tenant improvements and leasing commissions,  related to the properties, will be
approximately  $1.5 million from January 1, 1999 through  December 31, 2000.  We
believe we will recover  substantially  all of these sums from the tenants under
the new or renewed leases through  increases in rental rates.  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  the  Company.   See   "--Forward   Looking
Information."


                                       25
<PAGE>

FUNDS FROM OPERATIONS

As defined by 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.  FFO,  along with cash  provided by
(used in)  operating,  investing  and  financing  activities  for the year ended
December  31, 1998  presented  on a  historical  basis,  are  summarized  in the
following table:



                                                    FOR THE
                                                      YEAR
                                                     ENDED
                                                   DECEMBER 31,
                                                      1998
                                                   -----------
     CALCULATION OF FUNDS FROM OPERATIONS:
     Net (loss)                                     $  (221)
                Add back:

                     Minority Interest (1)           12,007
                     Real estate depreciation         5,410
                                                   -----------
     Total Funds from Operations                    $17,196
     CASH FLOW PROVIDED BY (USED IN):              ===========
     Operating activities                           $16,264
     Investing activities                              (118)
     Financing activities                           (21,469)




(1) Through one of the operating  partnerships,  we own partnership interests in
two joint  ventures each of which owns one property.  The operating  partnership
owns a 75% interest in one of the joint  ventures and an 83.33%  interest in the
other joint venture. For the period from July 1, 1998 through December 31, 1998,
the amounts of net income from those joint ventures attributable to the minority
interests held outside the operating  partnerships totaled $0.042 million.  This
amount has not been added back in the  determination  of FFO on a  fully-diluted
basis.


IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

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

YEAR 2000

We utilize  computer  software for our corporate  and real  property  accounting
records  and to prepare  our  financial  statements.  The vendor of our  current
principal software  accounting system has advised us that it will provide a Year
2000  compliant  software  upgrade  to us in mid 1999.  If  necessary,  we could
prepare all required  accounting  entries  manually without  incurring  material
additional operating expenses.

Conceivably,  tenants of the properties  could  experience  delays in processing
their  accounting  records and making  required lease payments if they encounter
Year 2000 compliance problems. We do not believe that any such delays would have
a material adverse effect on us.

                                       26
<PAGE>



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
PrivateSecurities  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."

                                       27

<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 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.

<TABLE>
<CAPTION>

                                            1999      2000     2001      2002      2003    THEREAFTER   TOTAL   FAIR VALUE
                                            ----      ----     ----      ----      ----    ----------   -----   ----------
<S>                                        <C>       <C>       <C>      <C>      <C>        <C>        <C>       <C>
VARIABLE RATE DEBT:
  Secured line of credit                   $27,201                                                     $27,201   $ 27,201
  Average interest rate (1)                 (6.93%)
  Secured notes payable (related parties)   20,752                                                     $20,752   $ 20,752
  Average interest rate (1)                 (6.93%)
  Secured notes payable                              $3,105                                            $ 3,105   $  3,105
  Average interest rate (1)                          (7.13%)

FIXED RATE DEBT:
  Secured notes payable                      2,189    2,351    $5,137   $2,578   $2,768     $139,060  $154,083   $154,083(2)
  Average interest rate                     (6.80%)  (6.80%)   (6.80%)  (6.80%)  (6.80%)      (6.80%)
</TABLE>

(1) Based upon implied LIBOR for respective time period
(2) Fair value  approximates  book value for fixed rate debt.  $129,767  of this
    amount is the Prudential Loan which funded on September 23, 1998.

                                       28

<PAGE>




ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





                         MISSION WEST PROPERTIES, INC.

                         INDEX TO FINANCIAL STATEMENTS


<TABLE>

<S>                                                                                  <C>
Report of Independent Accountants.................................................   30
Consolidated Balance Sheets of Mission West Properties, Inc.at December 31,
  1998 and 1997...................................................................   31
Consolidated Statements of Operations of Mission West Properties, Inc. for
  the year ended December 31, 1998, the one-month end December 31, 1997 and the
  years ended November 30, 1997 and 1996..........................................   32
Consolidated Statements of Changes in Stockholders' Equity of Mission West
  Properties, Inc. for the year ended December 31, 1998, the one-month ended 
  December 31, 1997 and the years ended November 30, 1997 and 1996................   33
Consolidated Statements of Cash Flows of Mission West Properties, Inc. for
  the year ended December 31, 1998,  the one-month  ended December 31, 1997 and
  the years ended November 30, 1997 and 1996......................................   34
Notes to the Consolidated Financial Statements....................................   35
Report of Independent Accountants.................................................   50
Schedule III: Real Estate and Accumulated Depreciation of Mission West
  Properties, Inc. as of December 31, 1998........................................   51
Report of Independent Accountants.................................................   54
Combined Balance Sheets of the Berg Properties (Predecessor) at June 30, 1998 
  and December 31, 1997...........................................................   55
Combined Statement of Operations of the Berg Properties (Predecessor) for the 
  six months ended June 30, 1998 and the years ended December 31, 1997 and 1996...   56
Combined Statements of Net Equity (Deficit) of the Berg Properties 
  (Predecessor) for the six months ended June  30,  1998 and the  years  ended  
  December 31, 1997 and 1996......................................................   57  
Combined Statements of Cash Flows for the Berg Properties (Predecessor) for the
  six months ended June 30,  1998  and the  years  ended  December  31,  1997
  and  1996.......................................................................   58 
Notes to the Consolidated Financial Statements....................................   59
Report of Independent Accountants.................................................   65
Schedule III: Real Estate and Accumulated Depreciation of the Berg Properties
  (Predecessor) as of December 31, 1997...........................................   66
</TABLE>

                                       29

<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, 1998 and
1997,  and the  results of their  operations  and their cash flows for the years
ended  December  31,  1998,  November 30, 1997 and 1996 and the one month period
ended  December 31, 1997,  in  conformity  with  generally  accepted  accounting
principles.  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 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

                                       30

<PAGE>
<TABLE>
<CAPTION>

                          MISSION WEST PROPERTIES, INC.
                           CONSOLIDATED BALANCE SHEETS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

                               ASSETS
                                                   DECEMBER 31,
                                                1998         1997
                                             -----------  -----------
<S>                                             <C>          <C>   
REAL ESTATE ASSETS:
  LAND                                          $ 90,929
  BUILDINGS AND IMPROVEMENTS                     430,510                                                             
                                             -----------
                                                 521,439
  LESS ACCUMULATED DEPRECIATION                   (5,410)          
                                             -----------                                             
NET REAL ESTATE ASSETS                           516,029                    
                                                 

CASH AND CASH EQUIVALENTS                            246     $  5,569                                                    
DEFERRED RENT                                      1,624            -    
DEFERRED COSTS AND OTHER ASSETS (NET OF            1,967          194
  ACCUMULATED AMORTIZATION OF
  $43 AT DECEMBER 31, 1998)                  ------------ ----------- 
  TOTAL ASSETS                                  $519,866     $  5,763
                                             ============ ===========


                LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
LINE OF CREDIT                                  $ 27,201
MORTGAGE NOTES PAYABLE                           157,188                     
                                                 
MORTGAGE NOTES PAYABLE (RELATED PARTIES)      
                                                  20,752
INTEREST PAYABLE                              
                                                     632
SECURITY DEPOSITS                             
                                                   2,061
PREPAID RENTAL INCOME                         
                                                   3,246
ACCOUNTS PAYABLE AND ACCRUED EXPENSES                         $   552
                                                   2,154
                                             ------------ -----------
    TOTAL LIABILITIES                            213,234          552                               
                                             ------------ -----------   
                                             

COMMITMENTS AND CONTINGENCIES (NOTES 4, 6
AND 17)

MINORITY INTEREST                                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            8
  DECEMBER 31, 1998 AND 1997, RESPECTIVELY,
  200,000,000 SHARES AUTHORIZED, 8,218,594
  SHARES AND 1,501,104 SHARES ISSUED AND    
  OUTSTANDING AT DECEMBER 31, 1998 AND 1997,                         
  RESPECTIVELY
PAID-IN CAPITAL                                   55,528       26,707
LESS AMOUNTS RECEIVABLE FROM PRIVATE                (900)        (334)                  
  PLACEMENT                                          
ACCUMULATED DEFICIT                             (21,383)     (21,162)
                                             -----------  -----------
  TOTAL STOCKHOLDERS' EQUITY                      33,253        5,211 
                                             -----------  -----------
  TOTAL LIABILITIES AND STOCKHOLDERS'           $519,866     $  5,763
    EQUITY                                   ===========  ===========
</TABLE>                                         
                See notes to consolidated financial statements

                                       31
<PAGE>
<TABLE>
<CAPTION>

                          MISSION WEST PROPERTIES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


                                            ONE MONTH
                              YEAR ENDED      ENDED     YEARS ENDED NOVEMBER 30,
                               DECEMBER      DECEMBER
                                  31,            31,
                                                       ----------------------
                                  1998          1997         1997        1996
                               -----------  ------------  ---------- -----------
                                        

<S>                             <C>           <C>          <C>       <C>    
REVENUE:
RENTAL REVENUES FROM REAL                           
ESTATE                          $27,285       $    -       $1,376    $  7,065
TENANT REIMBURSEMENTS             4,193            -            -           -                                     
                                 
OTHER INCOME, INCLUDING             278           27          359         348                                       
  INTEREST                     --------     --------     --------    --------                  
                                 31,756           27        1,735       7,413
                               --------     --------     --------    --------
EXPENSES:
PROPERTY OPERATING,               4,821            -          246       1,643
  MAINTENANCE AND REAL 
  ESTATE TAXES                                                                                         
INTEREST                          4,685            -          425       3,045
INTEREST (RELATED PARTIES)        3,511            -            -           -
GENERAL AND ADMINISTRATIVE        1,501          139        1,467         991                               
  EXPENSES                         
DEPRECIATION AND AMORTIZATION     5,410            -          246       1,369                                           
                               --------     --------     --------    --------
                                 19,928          139        2,384       7,048
                               --------     --------     --------    --------

INCOME (LOSS) BEFORE GAIN        11,828         (112)        (649)        365
  (LOSS) ON SALE OF REAL 
  ESTATE ASSETS, MINORITY                                         
  INTEREST AND INCOME TAXES                
GAIN (LOSS) ON SALE OF                -            -        4,736        (306)                                   
  REAL ESTATE ASSETS           --------     --------     --------    --------                
                            
INCOME (LOSS) BEFORE MINORITY    11,828         (112)       4,087          59
  INTEREST AND INCOME TAXES
MINORITY INTEREST                12,049            -            -           -                        
                               --------     --------     --------    --------
NET (LOSS) INCOME BEFORE           (221)        (112)       4,087          59
  INCOME TAXES
BENEFIT (PROVISION) FOR               -           38       (1,043)        (24)
  INCOME TAXES                 --------     --------     --------    --------                      
                            
NET(LOSS)INCOME                    (221)         (74)       3,044          35
                               ========     ========     ========    ========
PER SHARE AMOUNTS:
BASIC NET (LOSS) INCOME         $ (0.13)      $(0.05)      $18.48    $   0.77
  PER SHARE                    ========     ========     ========    ========                                   
                            
DILUTED NET (LOSS) INCOME       $ (0.13)      $(0.05)      $18.48    $   0.72         
  PER SHARE                    ========     ========     ========    ========                       
                            
</TABLE>
                See notes to consolidated financial statements

                                       32

<PAGE>

<TABLE>
<CAPTION>



                          MISSION WEST PROPERTIES, INC.
        CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)



                                                 
                                                                    AMOUNTS
                                     SHARES                        RECEIVABLE
                                      OF                               ON                       TOTAL                           
                                     STOCK      COMMON  PAID-IN      PRIVATE    ACCUMULATED  STOCKHOLDERS' 
                                  OUTSTANDING   STOCK    CAPITAL    PLACEMENT     DEFICIT       EQUITY
                                  -------------------------------------------------------------------------

<S>                                 <C>             <C>   <C>             <C>       <C>            <C>
BALANCE, NOVEMBER 30, 1996          $   45,624        -   $ 19,446            -     $ (5,309)      $ 14,137
ISSUANCE OF COMMON STOCK                    80                  10                                       10
  UPON OPTION EXERCISE            
NET INCOME                                                                                35             35
                                      -------- --------   --------     --------     --------       --------
BALANCE, NOVEMBER 30, 1996              45,704              19,456                    (5,274)        14,182
ISSUANCE OF COMMON STOCK               200,000                 900                                      900
  UPON PRIVATE PLACEMENT      
ISSUANCE OF COMMON STOCK             1,250,000               5,625                                    5,625
  UPON PRIVATE PLACEMENT
AMOUNTS RECEIVABLE ON                                                      (484)                       (484)
  1997 PRIVATE PLACEMENTS                                                  
ISSUANCE OF COMMON STOCK                 5,400                 726                                      726              
  UPON OPTION EXERCISE                                  
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                                                       150                         150
  1997 PRIVATE PLACEMENTS
NET (LOSS)                                                                               (74)           (74)
                                      -------- --------   --------     --------     --------       -------- 
BALANCE, DECEMBER 31, 1997           1,501,104              26,707         (334)     (21,162)         5,211
ISSUANCE OF COMMON STOCK               225,000               1,013         (900)                        113
  UPON OPTION EXERCISE                
ISSUANCE OF COMMON STOCK             6,495,058              27,827                                   27,827
  UPON PRIVATE PLACEMENT     
AMOUNTS RECEIVED FROM 1997 PRIVATE                                          334                         334
  PLACEMENTS                                         
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
                                    ========== ========   ========     ========     ========       ========

</TABLE>

                See notes to consolidated financial statements

                                       33

<PAGE>
<TABLE>
<CAPTION>

                          MISSION WEST PROPERTIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

                                                      ONE MONTH
                                         YEAR ENDED      ENDED
                                          DECEMBER     DECEMBER    YEAR ENDED NOVEMBER 30,    
                                             31,          31,       
                                            1998         1997         1997        1996
                                         -----------  -----------  ----------  -----------
<S>                                         <C>         <C>         <C>          <C>                                  
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income                           $   (221)   $     (74)  $   3,044    $      35
                                                      
Adjustments to reconcile net (loss) income
  to net cash provided by operating  
  activities 
  Minority interest                           12,049            -           -            -
  Depreciation                                 5,410            -         246        1,379
  Deferred income taxes                            -            -           -           35
  (Gain) loss on sale of real estate               -            -      (4,736)         306                                    
    assets                   
Change in operating assets and liabilities:
  Deferred rent                               (1,624)           -           -            - 
  Other assets                                (1,594)           -       1,295         (457)
  Interest payable                               632            -           -            -
  Security deposits                              218            -           -            -
  Prepaid rental income                          812            -           -            -                             
  Accounts payable and accrued expenses          582           28        (849)         (77) 
                                             --------    ---------   ---------    ---------
  Net cash provided by (used in)              16,264          (46)     (1,000)       1,221                                     
    operating activities                    --------    ---------   ---------    ---------         

CASH FLOWS FROM INVESTING
ACTIVITIES:
Improvements to real estate                     (118)           -           -            -
Net maturities of short-term                       -            -           -        2,528                     
  investments                              
Net proceeds from the sale of                      -            -      46,198            -                                  
  real estate assets                        --------    ---------   ---------    ---------       
  Net cash (used in) provided by                (118)           -      46,198        2,528                                  
    investing activities                    --------    ---------   ---------    --------- 
     

CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on line of credit             (11,843)           -           -            -
Proceeds from mortgage notes payable         130,000            -           -            -
Principal payments on mortgage notes payable (19,586)           -     (30,753)      (1,214)
Principal payments on mortgage notes payable(148,279)           -           -            -
  (related parties)
Proceeds from issuance of common stock        28,161          150       6,041            -
Net proceeds from exercise of stock options      113            -         726           10
Repurchase of common stock                       (11)           -           -            -
Minority interest distributions                  (24)           -           -            -
Dividends                                          -            -     (18,858)           -
                                            --------    ---------   ---------    ---------
                                            --------    ---------   ---------    ---------

     Net cash (used in) provided by          (21,469)         150     (42,844)      (1,204)
     financing activities                   --------    ---------   ---------    ---------
                                            --------    ---------   ---------    ---------

     Net (decrease) increase in cash          (5,323)         104       2,354        2,545
      and cash equivalents

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR   5,569        5,465       3,111          566
                                            --------    ---------   ---------    ---------
                                            --------    ---------   ---------    ---------

CASH AND CASH EQUIVALENTS, END OF YEAR      $    246    $   5,569   $   5,465    $   3,111
                                            ========    =========   =========    =========
</TABLE>

                See notes to consolidated financial statements

                                       34

<PAGE>

                            MISSION WEST PROPERTIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENT
                   (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


1. ORGANIZATION 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 ("L.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,  1998,  the Company  owns 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, for a 12.02% 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 71 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 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.

                                       35

<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 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.

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.

DEFERRED COST AND OTHER ASSETS:

Included in deferred costs and 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 ending  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.

Income taxes are accounted for in accordance  with SFAS No. 109,  ACCOUNTING FOR
INCOME TAXES.  Deferred income taxes are provided for all temporary  differences
and operating loss and tax credit carryforwards. Deferred tax assets are reduced
by a valuation  allowance when, in the opinion of management,  it is more likely
than not  that  some  portion  or all of the  deferred  tax  assets  will not be
realized.  Deferred tax assets and  liabilities  are 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.

                                       36
<PAGE>


NET INCOME PER SHARE:

The Company has adopted SFAS No. 128 EARNINGS PER SHARE  effective  for its year
ended November 30, 1997. 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  approximates  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 technology industry.  Additionally,  because the properties are
leased to 71 tenants, default by any major tenant could significantly impact the
results of the consolidated total. One tenant,  Apple Computers,  Inc. accounted
for  approximately  12.2% of the  Company's  rental  revenues for the year ended
December 31, 1998,  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.

RECLASSIFICATIONS:

Certain  1997 and 1996  amounts  have been  reclassified  to conform to the 1998
presentation.

                                       37

<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       Proforma
                                                                   Year Ended     Year Ended
                                                                    December       December
                                                                    31, 1998       31, 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 ammortization                                10,781         10,842
                                                                  ------------   ------------
                                                                      39,164         38,875
                                                                  ------------   ------------
      Income before minority interest, gain on sale of real           23,089         17,245
        estate and income taxes
      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                         $  0.24      $   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, 1998,  $2,050 remained  outstanding  under the
Demand Notes. The Demand Notes,  along with interest expense (interest income to
the operating partnerships),  is eliminated in consolidation and is not included
in the corresponding line items within the consolidated financial statements.


                                       38
<PAGE>

Each of the limited  partners  of the  operating  partnerships  has the right to
exchange  their L.P.  Units for shares of common stock.  Such  exchange  rights,
however,  are not available until December 29, 1999.  During the period prior to
December 29, 1999, the limited partners will be allowed to seek one registration
of not more than  500,000  shares of common stock for resale (on Form S-3 or the
equivalent) and will have "piggyback  registration" rights for not more than 25%
of the total number of shares  proposed for a public offering of common stock by
the Company. Subsequent to December 29, 1999, the limited partners are generally
limited to the exchange or sale of L.P. Units once during any 12-month period by
each limited  partner of up to one-third of the aggregate  number of L.P.  Units
owned by such limited partner.

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 L.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. Upon the
exercise  of any such  right by a limited  partner,  the  Company  will have the
option to purchase the tendered L.P. Units with available  cash,  borrowed funds
or the proceeds of an offering of newly issued shares of common stock. These put
rights become  exercisable  on December 29, 1999,  and are available once a year
for a maximum of one-third of the eligible  limited  partners' total L.P. Units.
If the total  purchase  price of the L.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 L.P. Units
to be acquired from each  tendering  limited  partner so that the total purchase
price does not exceed $1 million dollars.

On March 30, 1998,  the Company  issued  200,000 shares of common stock at $4.50
per share to an  executive  officer of the Company in  exchange  for a $900 note
receivable payable to the Company.  The note is a full recourse  promissory note
bearing  interest  at 5.59% and is  collateralized  by a pledge  of the  shares.
Interest is payable annually and principal is due March 30, 2003.

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.

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  87.98%,  on a  weighted  average  basis,  of the
ownership  interests in the real estate operations of the Company as of December
31, 1998.  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  single  asset  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 period of July
1, 1998 through December 31, 1998,  income associated with the interests held by
the non-affiliated third parties of these two propertiess is $42.

6. REAL ESTATE

PENDING  PROJECTS  ACQUISITION  AGREEMENT The Company has entered into a Pending
Projects  Acquisition  Agreement  which permits the  acquisition  by the Company
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.  To date, the
Company has completed one  acquisition  under the Pending  Projects  Acquisition
Agreement  representing  52,800  rentable square feet (Richard Avenue Property -
see PROPERTY  ACQUISITIONS below). There are four additional projects with total
rentable square feet of approximately  965,100  anticipated to be acquired under
the Pending  Projects  Acquisition  Agreement.  As of  December  31,  1998,  the
estimated  acquisition cost for these four remaining  projects is $165,334.  The
Company expects to acquire the last of these pending development projects by the
end of first quarter 2000.


                                       39
<PAGE>

The Berg Group as  sellers  of the  pending  development  projects  may elect to
receive cash or L.P.  Units at a value of $4.50 per unit. 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 L.P.  Units.  Consequently,  the
"absolute"  acquisition  cost may be greater than the stated  acquisition  value
given the  significant  discount that the sellers receive in connection with the
L.P. Units issued to them.

One  of  the  intended  acquisitions  under  the  Pending  Projects  Acquisition
Agreement  is the  L'Avenida  project  in  Mountain  View,  California  that  is
currently  under  development  and is planned to have  approximately  515,000 of
rentable square feet. On August 6, 1998,  Microsoft  Corporation  entered into a
lease with respect to this property. Microsoft controls the construction of this
facility,  which is well underway and scheduled to be completed in phases in the
spring and summer of 1999.  The Company  will acquire the R&D  properties  being
built on the L'Avenida site when and if  construction  has been  completed.  The
expected  acquisition  value  to the  Company  is  approximately  $116  million.
Microsoft  has signed a  seven-year  lease with a first year's rent of $2.95 per
square foot per month and 4% annual increases.

BERG LAND HOLDINGS  OPTION  AGREEMENT  Through the operating  partnerships,  the
Company also has the option to acquire, any future R&D property  developments on
approximately  162 acres of Silicon Valley Land owned by certain  members of the
Berg  Group  under the terms of the Berg Land  Holdings  Option  Agreement.  The
owners of the  future R&D  property  developments  may obtain  cash or, at their
option, L.P. Units. To date, the Company has completed one acquisition under the
Berg Land Holdings Option Agreement representing  approximately 110,000 rentable
square feet (Hellyer Avenue Property - 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;  (b) 10% of the full construction cost of the
building;  (c) the  agreement's  acquisition  value of the  parcel  on which the
improvements  were  constructed  (ranging from $8.50 to $20.00 per square foot);
(d) 10% of the  acquisition  value of the parcel for the period from  January 1,
1998 to the close of escrow;  and e) interest at LIBOR (London  Interbank  Offer
Rate) plus 1.65% on the cost of the construction costs of the building; less (f)
any debt encumbering the 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  two properties with a total of 388,000  rentable square
feet that the  Company  has the right to  acquire  under this  agreement.  As of
December 31, 1998, the estimated acquisition value to the operating partnerships
for these two  projects is  $32,226.  The final  acquisition  price of these two
properties could differ significantly from this estimate.

PROPERTY  ACQUISITIONS  During the fourth quarter of 1998, the Company  acquired
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  $13,692.  The  Company  assumed  $9,606 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.

The Richard Avenue property is a single-story building containing  approximately
52,800 rentable  square feet. The total purchase price was $4,198.  The building
is currently 100% leased by one tenant with a lease expiration of August 2003.

The Hellyer Avenue property is a single-story  contemporary  building containing
approximately 110,000 rentable square feet. The total purchase price was $9,494.
The building is currently  100% leased by two tenants with both leases  expiring
in November 2005.

                                       40

<PAGE>

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 1st
                      Year's Rent        Estimated
                      Per Square           Fair       Cost to Berg   Acquisition
                         Foot              Value         Group          Price
                      -----------        ---------    ------------   -----------
                                        (unaudited)  
<S>                   <C>              <C>           <C>             <C>  

  Richard Avenue        $1.06            $ 6,716       $ 2,080         $ 4,198
  Hellyer Avenue        $0.99             13,034         8,380           9,494
                      -----------        ---------    ------------   -----------
  Total                                  $19,750       $10,460         $13,692
                                         =========    ============   ===========

</TABLE>

                                       41

<PAGE>

7.  DEBT

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


     DEBT DESCRIPTION               COLLATERAL                                          MATURITY     INTEREST
                                    PROPERTIES                              BALANCE       DATE         RATE
----------------------------    -----------------------------              ---------    ---------    ---------
<S>                             <C>                                        <C>           <C>          <C>    
LINES OF CREDIT:
Wells Fargo                      1810 McCandless Drive, Milpitas, CA        $27,201(1)   10/99         (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(5)
(RELATED PARTIES):
                                 2033-2043 Samaritan Drive, San Jose, CA     20,752(3)   12/99(4)      (2)
                                 2133 Samaritan Drive, San Jose, CA
                                 2233-2243 Samaritan Drive, San Jose, CA

MORTGAGE NOTES PAYABLE:
Great West Life & Annuity        6320 San Ignacio Ave, San Jose, CA           7,732       2/04         7.0%
  Insurance Company  
Great West Life & Annuity        6540 Via del Oro, San Jose, CA               3,689       5/04         7.0%
  Insurance Company              6385 San Ignacio Ave., San Jose, CA  
Prudential Capital Group         20400 Mariani, Cupertino, CA                 2,034       3/09         8.75%
New York Life Insurance          10440 Bubb Road, Cupertino, CA                 430       8/09         9.625%
  Company                          
Home Savings & Loan              10460 Bubb Road, Cupertino, CA                 525       1/07         9.5%
  Association                     
Amdahl Corporation               3120 Scott, Santa Clara, CA                  6,945       3/14         9.42%
Citicorp U.S.A., Inc.            2800 Bayview Drive, Fremont, CA              3,105       4/00         (6)
Mellon Mortgage Company          3530 Bassett, Santa Clara, CA                2,961       6/01         8.125%
Prudential Insurance Company     10300 Bubb, Cupertino, CA                  129,767       10/08        6.56%
  of America                     10500 N. DeAnza, Cupertino, CA 
                                 4050 Starboard, Fremont, CA 
                                 45700 Northpoint Loop, Fremont, CA
                                 45738 Northpoint Loop, Fremont, CA  
                                 450-460 National Ave., 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 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                                             157,188
                                                                           ---------
TOTAL                                                                      $205,141
                                                                           =========

</TABLE>

(1)Amounts  available  under the Wells  Fargo  line at  December  31,  1998 were
     $72,799.  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 three months ended December 31, 1998 was 6.66%.

(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 1999.

(5)Mortgage notes payable generally require monthly installments of interest and
     principal over various terms extending  through the year 2014. The weighted
     average  interest rate of mortgage  notes payable was 6.80% at December 31,
     1998.

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

(7)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.

                                       42
<PAGE>

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

                              Lines    Mortgage      Mortgage
                              of       Notes          Notes       Total
                              Credit   Payable       Payable
                                                     (Related
                                                     Parties)
                              -------  ---------  --------------  --------

      <S>                     <C>      <C>           <C>          <C>      
      December 31, 1999       $27,201     2,189       $20,752       50,142
      December 31, 2000                   5,456                      5,456
      December 31, 2001                   5,137                      5,137
      December 31, 2002                   2,578                      2,578
      December 31, 2003                   2,768                      2,768
      Thereafter                        139,060                    139,060
                              -------  ---------  --------------  --------
                              $27,201  $157,188      $20,752      $205,141
                              =======  =========  ==============  ========
</TABLE>

8. OPERATING PARTNERSHIP DISTRIBUTIONS

On  December  28,  1998,  the  Company,  as  general  partner  of the  operating
partnerships,   declared  a  $0.17  per  L.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 were applied against
amounts owed by him to the operating  partnerships  as of December 31, 1998. The
remaining  amount of $328 was owed to other L.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. 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 December  2004.  All options  granted  during 1998 have a $4.50
option price per share.

                                       43
<PAGE>

The  following  table shows the  activity  and detail for the 1997 Stock  Option
Plan:

                                           1997 Stock         Option Price
                                           Option Plan         Per Share
                                           -----------        ------------
  Balance, December 31, 1997
    Options granted                          905,000              $4.50
    Options exercised                       (225,000)
                                           ---------   
  Balance, December 31, 1998                (680,000)
                                           =========



As of December 31, 1998,  4,595,000 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,  1998,  outstanding
options to purchase 19,063 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  loss and net  loss  per  share  would  have  been  increased  by
approximately  $146 or $.09 per  share for the year  ended  December  31,  1998,
resulting  in a total  net loss of $367 or $.21 per  share,  for the year  ended
December 31, 1998. 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.  As of November
30, 1996, 5,000 and 6,667 shares were authorized under each plan, of which 4,387
and 5,453 were available for grant and 880 and 1,636 were exercisable  under the
Director  Stock Option Plan and the Incentive  Stock Option Plan,  respectively.
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  described  above were exercised or cancelled in February
1997.

Activity in these two plans comprised the following:

                                    December 31,     November 30,
                                       1997              1996
                                    -----------      -----------
     Beginning share balance           2,967             3,333
     Exercised (Between $90 and       (2,747)              (80)
     $292.5 per share)
     Canceled ($274 per share)          (220)             (286)
                                    ---------        ---------
     Ending share balance                  -             2,967
                                    =========        =========

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 year ended  December 31, 1998,  the Company  recognized $22 of
expense for employer contributions made in connection with this plan.


                                       44
<PAGE>

10. NET INCOME PER SHARE

The Company  adopted SFAS No. 128,  EARNINGS PER SHARE,  effective with its year
ended November 30, 1997.  This  Statement  requires the Company to present basic
and diluted net income per share on the face of the income statement.  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         Month       
                                                    Ended        Ended    
                                                   December     December
                                                      31,          31,      Years Ended November 30,
                                                     1998         1997           1997      1996
                                                  ---------    ----------      --------  ---------
<S>                                               <C>           <C>            <C>        <C>
  Weighted average shares outstanding (basic)     1,688,059     1,501,104      164,692    45,684
  Incremental shares from assumed option exercise    22,730             -            -     2,901
                                                  ---------    ----------      --------  ---------
  Weighted average shares outstanding (diluted)   1,710,789     1,501,104      164,692    48,585
                                                  =========    ==========      ========  =========
</TABLE>

The  outstanding  L.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.  L.P.  Units
outstanding at December 31, 1998 were 60,151,697.

11. INCOME TAXES

The Company  intends to elect to be taxed as a REIT  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 shareholders and comply with certain other requirements.

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

                                            December 31, 
                                          1998           1997
                                     ------------------------
  <S>                                    <C>                               
  Prepaid Rent                             $  134           -              
                                         --------   ---------
    Deferred Tax Assets                       134           -
           
  Deferred Rental Revenue                     (67)          -
                                         --------   ---------
    Deferred Tax Liabilities                  (67)          -
                                         --------   ---------
                                               67           -
  Deferred tax asset valuation                (67)          -
    allowance                            --------   ---------
  Net deferred taxes                            -           -
                                         ========   =========  
                          
</TABLE>
   

                                       45
<PAGE>
                               
The provision for (benefit  from) income taxes  reconciles to the statutory rate
as follows:

<TABLE>
<CAPTION>
                                                                 One Month
                                                                   Ended            November 30,
                                                  December 31,  December 31,   ----------------------
                                                     1998          1998          1997          1996
                                                  ---------------------------------------------------
<S>                                                 <C>            <C>           <C>          <C>  
Statutory federal tax rate                           34.0%         34.0%         34.0%         34.0%
Increase (decrease) in taxes resulting from:
  Depreciation differences                             6              -             -             -
  Change in deferred tax asset valuation allowance  (34.0)            -           1.6         (64.2)
  Alternative minimum taxes                             -             -             -          60.9
  State income tax, net of federal tax benefit        (6)             -          (1.4)          6.1
  Reconciliation of previous tax estimates              -             -          (8.9)            -
  Other                                                 -             -             -           3.9
                                                  ---------------------------------------------------
                                                        0%         34.0%         25.3%         40.7%
                                                  ===================================================

</TABLE>
<PAGE>
<TABLE>
<CAPTION>

The provision for (benefit from) income taxes comprises the following:

                  Year        One month            Year ended
                 ended          ended          November 30, 1996
               December 31,  December 31,  --------------------------
                  1998          1997           1997         1996
               ------------------------------------------------------
<S>                   <C>        <C>        <C>             <C>
Current:
  Federal             -          $ (38)     $   491         $(21)
  State               -                          85           10
               ------------------------------------------------------
                      -                         576          (11)
               ------------------------------------------------------
Deferred:
  Federal             -                         467           35
  State               -                           -            -
               ------------------------------------------------------
                      -                         467           35
               ------------------------------------------------------ 
                      -          $ (38)      $1,043         $ 24
               ======================================================
</TABLE>


As of  December  31, 1998 and 1997,  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  arise  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  years  1997  and  1996  were  due  to  changes  in the  state  loss
carryforward amounts.

                                       46
<PAGE>

12. RELATED PARTY TRANSACTIONS

As of December 31, 1998, the Berg Group owned 56,464,623 L.P. Units of the total
60,151,697 L.P. Units issued and  outstanding.  Along with the Company's  common
shares  owned by the  Berg  Group,  the Berg  Group's  interest  in the  Company
represents  82.8% of the Company,  assuming  conversion of the  60,151,697  L.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
have been paid as of December 31, 1998.

As of  December  31,  1998,  debt in the amount of  $20,752  was due Berg & Berg
Enterprises, Inc. This amount includes $9,606 of debt assumed in connection with
the  fourth  quarter  1998   acquisitions   of  two  properties  (see  Note  6).
Additionally,  on December  28,  1998,  the  operating  partnerships  declared a
distribution  of  $0.17  per  L.P.  Unit  (see  Note  8).  The  amount  of  this
distribution  payable  to  members of the Berg Group in the amount of $9,599 was
converted to related party debt on December 31, 1998.  Interest expense incurred
in  connection  with debt due Berg & Berg  Enterprises,  Inc. was $3,511 for the
year ended December 31, 1998.

Carl E. Berg has a significant  financial  interest in two companies  that lease
space from the operating partnerships. These companies occupy, in the aggregate,
35,862  square  feet at a weighted  average  of $.63 per square  foot per month.
These leases were in effect prior to the  Company's  acquisition  of its general
partnership  interests.  The leases  expire in 2001 (5,862 square feet) and 2002
(30,000 square feet).

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 $61 for the year ended
December 31, 1998.

13. FUTURE MINIMUM RENTS

The  Company,  through  the  operating  partnerships,  owns  interest  in 71 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  noncancellable  operating  leases,  excluding  tenant  reimbursements  of
expenses, as of December 31, 1998, are as follows:

<TABLE>
<CAPTION>    
            <S>                 <C>
            1999                $ 52,219
            2000                  48,084
            2001                  43,473
            2002                  33,595
            2003                  22,910
            Thereafter            30,801
                                --------
                                $231,082
                                ========  
</TABLE>

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. Future
minimum rents from this tenant are $24,266.

14. SUPPLEMENTAL CASH FLOW INFORMATION:

Cash paid for  interest  was  $7,540,  $0,  $410 and  $3,106  for the year ended
December 31, 1998, the one month ended December 31, 1997 and for the years ended
November  30, 1997 and 1996,  respectively.  The Company  received an income tax
refund of $228 and $17 for the years ended  December  31, 1998 and  November 30,
1996,  respectively and paid income taxes, net of refunds,  of $546 for the year
ended November 30, 1997.

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.

                                       47
<PAGE>

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 fourth  quarter  acquisitions  of the Richard Avenue and
Hellyer Avenue properties,  the Company assumed $9,606 of related party debt due
to Berg & Berg  Enterprises,  Inc.,  and issued  672,064 L.P.  Units for a total
acquisition value of $13,692.

Amounts due to the Berg Group in the amount of $9,599 for distributions declared
to L.P.  Unit  holders,  were  converted  to related  party debt due Berg & Berg
Enterprises, Inc. on December 31, 1998.

15. SALE OF REAL ESTATE INVESTMENTS

On December 6, 1996, the Company  entered into an agreement to sell all its real
estate  assets to Spieker  Properties,  L.P.  (Spieker),  a  California  limited
partnership,  for $50,500 in cash. The Company's  shareholders approved the sale
of the real estate  assets to Spieker on December  16,  1996.  A majority of the
sale  transaction  was completed  January 22, 1997,  at which time,  nine of the
Company's 11 real estate  properties  were sold.  The sale of the two  remaining
properties was completed on May 6, 1997.

The  Company  used  the  $47,500  in cash  received  from  the  sale of the nine
properties to repay all  outstanding  debt, as well as related  transaction  and
closing costs,  including  $3,000 in "break-up" fees from previously  terminated
sales transactions. The Company received $3,000 in cash from the sale of the two
remaining properties which was used to pay related transaction costs.

On February 4, 1997, the Company declared a special dividend of $9.00 per share,
which was paid on February 27, 1997 to all shareholders of record as of February
19, 1997.  This  dividend  represented  the currently  available  portion of the
proceeds  from the sale of the real  estate  assets.  On October 21,  1997,  the
Company paid a dividend of $3.30 per share to all shareholders.  The record date
for this distribution was August 28, 1997.


16. SUBSEQUENT EVENTS

The  Company  expects  to close on an  acquisition  of a newly  constructed  R&D
property located on Santa Teresa Boulevard, in San Jose California,  on April 1,
1999. This  acquisition  will add  approximately  54,996 square feet of rentable
space  and will be  acquired  from the Berg  Group  under the  Pending  Projects
Acquisition  Agreement  (Note 6).  The total  gross  acquisition  price for this
property will be $6,648.

17. COMMITMENTS AND CONTINGENCIES

The  Company and the  operating  partnerships,  from time to time,  are party 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.

                                       48

<PAGE>

18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

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>

                                       49

<PAGE>










                     REPORT OF INDEPENDENT ACCOUNTANTS ON
                         FINANCIAL STATEMENT SCHEDULES

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

Our audits of the consolidated  financial  statements  referred to in our report
dated  January 29, 1999  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 29, 1999


                                       50
<PAGE>

                                                       SCHEDULE III
                                               Mission West Properties, Inc.
                                        REAL ESTATE AND ACCUMULATED DEPRECIATION
                                                 (Dollars in thousands)
December 31, 1998
                                           
<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                        1,604         7,805       9,409 
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  $  2,961        849          4,133                          849         4,133       4,982 
5850-5870 Hellyer      San Jose                        2,787          6,502                        2,787         6,502       9,289
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          6,945      2,044          9,948                        2,044         9,948      11,992
20400 Mariani          Cupertino            2,034      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              430        434          2,112                          434         2,112       2,546 
10460 Bubb             Cupertino              525        994          4,838           16             994         4,854       5,848 
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              3,105      1,070          5,205                        1,070         5,205       6,275 
6850 Santa Teresa      San Jose                          377          1,836                          377         1,836       2,213 
140-160 Great Oaks     San Jose                        1,402          6,822                        1,402         6,822       8,224 
6541 Via del Oro/      San Jose             3,689      1,039          5,057                        1,039         5,057       6,096 
6385-6387 San Ignacio                          
6311-6351 San Ignacio  San Jose                 C      6,246         30,396           21           6,246        30,417      36,663
6320-6360 San Ignacio  San Jose             7,732      2,616         12,732                        2,616        12,732      15,348 
75 E. Trimble/2610     San Jose                        3,477         16,919                        3,477        16,919      20,396 
  N. First Street
2033-2243 Samaritan    San Jose            20,752      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            27,201     13,994         66,213                       13,994        66,213      80,207 
1600 Memorex           Santa Clara                     1,221          5,940                        1,221         5,940       7,161
1688 Richard           Santa Clara                     1,248          2,912                        1,248         2,912       4,160
3506-3510 Bassett      Santa Clara    D                  943          4,591                          943         4,591       5,534
3540-3544 Bassett      Santa Clara    D         C      1,565          7,615                        1,565         7,615       9,180
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                     129,767      
     Group Loan                          --------   --------       --------         ----         -------      --------     --------
                                         $205,141    $90,929       $430,392         $118         $90,929      $430,510    $521,439
                                         ========   ========       ========         ====         =======      ========     ========
</TABLE>

                                       51
<PAGE>

------------------------------------------------------
(A) The aggregate  cost for federal  income tax purposes at December 31, 1998 is
    $199,085 
(B) 16.67% of this property's ownership is held by unaffiliated parties outside
    the operating partnerships or the Company
(C) Encumbered by the $129,767  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.
(E) 25% of this property's ownership is held by unaffiliated parties outside the
    operating partnerships of the Company.

                                       52
<PAGE>
<TABLE>
                                                    SCHEDULE III
                                               Mission West Properties, Inc.
                                        REAL ESTATE AND ACCUMULATED DEPRECIATION
                                                 (Dollars in thousands)
December 31, 1998

<CAPTION>
                                           
                                         Accumulated      Date of      Depreciable
 Property Name             City         Depreciation    Acquisition       Life
------------------------------------    ------------    -----------    -----------
<S>                    <C>                 <C>            <C>           <C>     
10401-10411 Bubb       Cupertino      B    $   40          7/98         40 Years
2001 Logic             Cupertino              141          7/98         40 Years
47000 Northport        Fremont                 74          7/98         40 Years
45738 Northport        Fremont                 56          7/98         40 Years
4050 Starboard         Fremont                 83          7/98         40 Years
3501 W. Warren/Fremont Fremont                116          7/98         40 Years
48800 Milmont          Fremont                 64          7/98         40 Years
4750 Patrick Henry     Santa Clara            100          7/98         40 Years
4949 Hellyer           San Jose               220          7/98         40 Years
3520 Bassett           Santa Clara    D        69          7/98         40 Years
3530 Bassett           Santa Clara  D,E        54          7/98         40 Years
5850-5870 Hellyer      San Jose                29         11/98         40 Years
2251 Lawson Lane       Santa Clara            121          7/98         40 Years
1230 E. Arques         Sunnyvale               35          7/98         40 Years
1250 E. Arques         Sunnyvale               83          7/98         40 Years
3120 Scott Blvd.       Santa Clara            126          7/98         40 Years
20400 Mariani          Cupertino              104          7/98         40 Years
10500 De Anza          Cupertino              468          7/98         40 Years
20605-705 Valley Green Cupertino              214          7/98         40 Years
10300 Bubb             Cupertino               41          7/98         40 Years
10460 Bubb             Cupertino               63          7/98         40 Years
1135 Kern              Sunnyvale               27          7/98         40 Years
405 Tasman             Sunnyvale               35          7/98         40 Years
450 National           Mountain View           39          7/98         40 Years
3301 Olcott            Santa Clara            114          7/98         40 Years
2800 Bayview           Fremont                 67          7/98         40 Years
6850 Santa Teresa      San Jose                25          7/98         40 Years
140-160 Great Oaks     San Jose                87          7/98         40 Years
6541 Via del Oro/      San Jose                65          7/98         40 Years
6385-6387 San Ignacio                            
6311-6351 San Ignacio  San Jose               382          7/98         40 Years
6320-6360 San Ignacio  San Jose               161          7/98         40 Years
  N. First Street 
2033-2243 Samaritan    San Jose               310          7/98         40 Years
1170 Morse             Sunnyvale               42          7/98         40 Years
3236 Scott             Santa Clara             77          7/98         40 Years       
1212 Bordeaux          Sunnyvale              139          7/98         40 Years                         
1325-1810 McCandless   Milpitas               854          7/98         40 Years 
1600 Memorex           Santa Clara             76          7/98         40 Years                               
1688 Richard           Santa Clara             10          9/98         40 Years
3506-3510 Bassett      Santa Clara    D        59          7/98         40 Years                  
3540-3544 Bassett      Santa Clara    D        97          7/98         40 Years                 
3550 Bassett           Santa Clara    D        68          7/98         40 Years                
3560 Bassett           Santa Clara    D        67          7/98         40 Years              
3570-3580 Bassett      Santa Clara    D        67          7/98         40 Years    
                                           ------   
                                           $5,410
                                            =====
</TABLE>


                                       51
<PAGE>

(A) The aggregate cost for federal income tax purposes at December 31, 1998
    is $199,085.
(B) 16.67% of this property's ownership is held outside the operating 
    partnerships.
(C) Encumbered by the $129,767 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 outside the operating partnerships.


                                       52
<PAGE>












                 MISSION WEST PROPERTIES, INC.

                      NOTE TO SCHEDULE III

                       December 31, 1998
                     (Dollars in thousands)

        1. Reconciliation of real estate and accumulated depreciation:

                                               1998
                                           --------------
        Real estate investments:
           Balance at beginning of year                -    
           Additions                          $  521,439
           Dispositions                                -
                                           --------------
           Balance at end of year             $  521,439
                                           ==============

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

                                       53

<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


                                       54
<PAGE>

<TABLE>
<CAPTION>


                        THE BERG PROPERTIES (PREDECESSOR)
                             COMBINED BALANCE SHEETS
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


                                 June 30,           December 31,
                                  1998                  1997
                               --------             --------
                               ASSETS

      <S>                      <C>                  <C>
      Real estate assets:    
      Land                     $ 30,426             $ 30,426
      Buildings and              61,323               61,262
        improvements
      Tenant improvements        85,790               86,541
                               --------             --------
                                177,539              178,229
        Less, accumulated       (81,939)             (78,077)
          depreciation
                               --------             --------
           Net real estate       95,600              100,152
            assets

      Cash and cash                  -                 5,719
        equivalents
      Deferred rent               4,964                4,144
      Deferred costs and          3,982                3,935
        other assets           --------             --------                           

           Total assets        $104,546             $113,950
                               ========             ========


                     LIABILITIES AND NET (DEFICIT) EQUITY

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

           Total liabilities   $104,546             $113,950
             and net (deficit) ========             ========
             equity
                             
</TABLE>



                  See notes to combined financial statements

                                       55
<PAGE>


                   
<TABLE>
<CAPTION>


                          THE BERG PROPERTIES (PREDECESSOR)
                          COMBINED STATEMENTS OF OPERATIONS
                    (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


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

      REVENUE:

      <S>                           <C>           <C>           <C>    
      Rental revenue from           $22,341       $40,163       $28,934
        real estate
      Tenant reimbursements           3,826         6,519         3,902
                                  ---------     ---------     ---------
                                     26,167        46,682        32,836
                                  ---------     ---------     ---------

      EXPENSES:

      Property operating              2,088         3,741         1,906
        and maintenance
      Real estate taxes               2,126         4,229         3,750
      Interest                        3,044         5,919         6,090
      Interest (related                  61           248           293
        parties)
      Management fees                   645         1,050           827
        (related parties)
      Depreciation and                3,862         7,717         6,739
        amortization              ---------     ---------     ---------                      
                                     11,826        22,904        19,605
                                  
      Income before                  14,341        23,778        13,231
        extraordinary item
      Extraordinary item                  -             -           610
                                  ---------     ---------     ---------
      Net income                    $14,341       $23,778       $13,841
                                  =========     =========     =========
</TABLE>











                  See notes to combined financial statements

                                       56
<PAGE>


<TABLE>
<CAPTION>

                        THE BERG PROPERTIES (PREDECESSOR)
                   COMBINED STATEMENTS OF NET EQUITY (DEFICIT)
                             (DOLLARS IN THOUSANDS)



              <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

                                      57

<PAGE>
<TABLE>
<CAPTION>
                        THE BERG PROPERTIES (PREDECESSOR)
                        COMBINED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

                                       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                       -               -           (610)
    extinguishment of debt
  Changes in operating assets
    and liabilities:
      Deferred rent                        (820)         (1,330)          (586)
      Other assets                          (53)         (1,221)          (406)
      Accounts payable and                  131            (160)           353
        accrued expenses
      Other liabilities                     331           1,113            907
                                        -------         -------        -------
  Net cash provided by                   17,798          29,909         20,248
    operating activities                -------         -------        -------
                               
CASH FLOWS FROM INVESTING
ACTIVITIES:
  Purchase and improvements                (132)        (17,251)       (29,275)
    to real estate
  Tenant reimbursements for                 822               -              -
    improvements
                                        -------         -------        -------             
  Net cash provided by (used                690         (17,251)       (29,275)
    in) investing activities            -------         -------        -------
                               
CASH FLOWS FROM FINANCING
ACTIVITIES:
  Net (repayments) borrowings on         (1,277)          2,415          6,047
    lines of credit               
  Proceeds from mortgage notes payable        -           3,105              -
  Principal payments on mortgage           (686)         (2,429)        (1,563)
    notes payable
  Proceeds from  mortgage               119,956               -              -
    notes payable (related
    parties)
  Principal payments on                  (1,975)           (571)          (504)
    mortgage notes payable              
    (related parties)  
  Capital contributions                       -             755         12,299
  Capital distributions                (140,225)        (11,707)        (6,846)
                                       --------        --------       --------                                  
  Net cash (used in) provided by        (24,207)         (8,432)         9,433
    financing  activities              --------        --------       --------                                        
  Net (decrease) increase in cash        (5,719)          4,226            406
    and cash equivalents
  Cash and cash equivalents,              5,719           1,493          1,087
    beginning of year                  --------        --------       --------
  Cash and cash equivalents,           $      -        $  5,719       $  1,493
    end of year                        ========        ========       ========                      
                                   
  Supplemental information:
  Cash paid for interest,              $  1,731        $  6,272       $  6,278
    net of amounts capitalized                                     
  Supplemental schedule of non-cash
    investing and financing activities:
  Assumption of lines of               $ 36,676               -              -
    credit by Carl Berg                ========        ========       ========                            
  Non-cash transfers of                       -        $  6,775       $     75
    construction-in-progress           ========        ========       ========  
                               
</TABLE>
                  See notes to combined financial statements

                                       58
<PAGE>

                              THE BERG PROPERTIES
                    NOTES TO COMBINED FINANCIAL STATEMENTS
                   (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


                                  
1. ORGANIZATION 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.


                                       59
<PAGE>


                              THE BERG PROPERTIES
               NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
                   (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


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 judgements 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.

                                       60
<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.

                                       61

<PAGE>

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

<TABLE>
<CAPTION>

                                                                                       Balance         Balance
                                                                                       June 30,        Dec.31,       
Description                       Collateral Properties                                  1998            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 Drive, 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
(RELATED PARTIES)         2133 Samaritan Drive, San Jose, CA   
                          2233-2243 Samaritan Drive, San Jose, CA                          $156,632             -       3/99   (1)

MORTGAGE NOTES:
Great West Life &         6320 San Ignacio Ave, San Jose, CA                                  7,804         7,872       2/04   7%
Annuity Insurance 
Company
Great West Life &         6385 San Ignacio Ave, San Jose, CA                                  3,723         3,755       5/04   7%
Annuity Insurance         6540 Via del Oro, San Jose, CA                     
Company
Great West Life &         1170 Morse Ave., Sunnyvale, CA                                      1,969         1,986       5/04   7%
Annuity Insurance 
Company
National Electrical       2251 Lawson Lane, Santa Clara, CA                                   4,692         4,820       1/09   9.75%
Contractors Association
Pension Benefit Trust Fund
Prudential Capital Group  1230 E. Arques, Sunnyvale, CA                                       1,110         1,147      11/07   9%
Prudential Capital Group  20605-20705 Valley Green Drive, 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             10440 Bubb Road, Cupertino, CA                                        441           452       8/09   9.63%
Insurance Company                              
Home Savings & Loan       10460 Bubb Road, Cupertino, CA                                        547           569       1/07   9.5%
Association   
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.

                                       62

<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 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  methodoligies 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
noncancelable operating leases,  excluding tenant reimbursements of expenses, as
of June 30, 1998, are approximately as follows:

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

                                       63
<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.


                                       64

<PAGE>





                     REPORT OF INDEPENDENT ACCOUNTANTS ON
                         FINANCIAL STATEMENT SCHEDULES

To the members of the Berg Group    

Our audits of the combined financial  statements referred to in our report dated
January 29, 1999,  included in this Form 10-K of Mission West  Proprties,  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

                                       65

<PAGE>

                             THE BERG PROPERTIES

                                  SCHEDULE III
<TABLE>
<CAPTION>
                                                                                 December 31, 1997
                                                 ---------------------------------------------------------------------------------
                                                                                                                         Cost
                                                                                  Initial Cost                       Capitalization
                                                                 ----------------------------------------------      Subsequent to
                                                                                    Shell             Tenant         Acquisition/
Building                            Sq. Ft.      Encumbrance        Land         Improvements      Improvements       Improvement
------------------------------     ---------     -----------     -----------     ------------      ------------      -------------
<S>                                <C>           <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      3,755,444           48,685         909,965           793,345            800,000
6540 Via Del Oro                      31,800        993,000           80,772         334,458           303,990                  0
6385-6387 San Ignacio                 34,800        993,001           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 Dr.                   39,800                         564,762         784,519           784,519              7,716
1740 McCandless Dr.                   51,602                         732,232       1,017,155         1,017,155              5,951
1680 McCandless Dr.                   73,253                         990,398               0                 0          3,562,232
1600 McCandless Dr.                   40,970                         581,364         807,582           807,582              6,126
1500 McCandless Dr.                   42,700                         605,913         841,683           841,683              6,565
1450 McCandless Dr.                   45,312                         606,086               0                 0          2,136,034
1350 McCandless Dr.                   46,272                         593,511               0                 0          2,206,705
1325 McCandless Dr.                   77,568                       1,027,019               0                 0          3,574,201
1425 McCandless Dr.                   38,579                         549,423         763,211           763,211              5,790
1525 McCandless Dr.                   28,655                         406,614         564,834           564,834              4,285
1575 McCandless Dr.                   33,263                         472,002         655,665           655,665              4,974
1625 McCandless Dr.                   33,625                         477,139         662,801           662,801              5,027
1745 McCandless Dr.                   35,731                         507,023         704,313           704,313              5,342
1765 McCandless Dr.                  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 Avenue                  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 Drive                   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
                                   ---------     -----------     -----------     ------------      ------------      -------------
                                   ---------     -----------     -----------     ------------      ------------      -------------

                                       66
<PAGE>

<CAPTION>


                             THE BERG PROPERTIES

                                  SCHEDULE III

                                                                 December 31, 1997
                                --------------------------------------------------------------------------------
                                  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 Dr.                 564,762         787,362           789,392          2,141,516        (322,450)       1995
1740 McCandless Dr.                 732,232       1,019,348         1,020,913          2,772,493        (260,940)       1995
1680 McCandless Dr.                 990,398       1,721,342         1,840,890          4,552,630        (541,969)       1996
1600 McCandless Dr.                 581,364         809,839           811,451          2,202,654        (266,610)       1995
1500 McCandless Dr.                 605,913         844,216           845,715          2,295,844        (277,866)       1995
1450 McCandless Dr.                 593,511       1,057,469         1,091,140          2,742,120        (345,049)       1995
1350 McCandless Dr.                 606,086       1,079,873         1,114,257          2,800,216        (352,358)       1996
1325 McCandless Dr.               1,027,049       1,738,889         1,835,282          4,601,220        (612,079)       1997
1425 McCandless Dr.                 549,423         765,344           766,868          2,081,635        (261,180)       1995
1525 McCandless Dr.                 406,614         566,413           567,540          1,540,567        (193,498)       1995
1575 McCandless Dr.                 472,002         657,498           658,806          1,788,306        (224,614)       1995
1625 McCandless Dr.                 477,139         664,653           665,976          1,807,768        (227,058)       1995
1745 McCandless Dr.                 507,023         706,281           707,687          1,920,991        (241,280)       1995
1765 McCandless Dr.               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 Avenue               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 Drive               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>


                                       66
<PAGE>

                               THE BERG PROPERTIES
                                  SCHEDULE III
                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 1997
                                 (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 estate                                      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>

                                       67

<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 which is incorporated herein by this reference.


                                       68
<PAGE>

                                    PART III

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  directors  and executive  officers of Mission West  Properties,  Inc. as of
March 10, 1999 are as follows:
<TABLE>
<CAPTION>

Name                         Age    Position
--------------------        -----  ---------------------------------------------
<S>                         <C>   <C>                                           
Carl E. Berg                 61    Chairman  of  the  Board,   Chief  Executive
                                     Officer, President and Director
Michael J. Anderson          39    Vice  President,  Chief  Operating  Officer,
                                     Secretary and Director
Marianne K. Aguiar           32    Vice President of Finance and Controller

John Bolger(1), (2), (3)     52    Director

William A. Hasler(1), (3)    57    Director

Lawrence B. Helzel(2), (3)   50    Director
</TABLE>

--------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Independent Directors Committee


The   following   is  a   biographical   summary  of  the   experience   of  our
executive/senior officers and directors:

Mr. Berg has served as Chief  Executive  Officer,  President and Director of the
Company since September 1997. Since 1979, Mr. Berg has been a general partner of
Berg & Berg  Developers  and has  been a  director  and  officer  of Berg & Berg
Enterprises, Inc. since its inception. Mr. Berg is also a director of Integrated
Device Technologies,  Inc., Videonics, Inc., Valence Technology, Inc. and System
Integrated Research, Ltd.

Mr.  Anderson  joined the  Company on January 1, 1998.  On March 30,  1998,  Mr.
Anderson was appointed Chief Operating  Officer,  Vice President and a Director.
After seven years as a real estate  attorney and partner at Ware &  Freidenrich,
Palo Alto, California, Mr. Anderson has spent the next six years in private real
estate development with Sandhill Homes, LP and Sandhill Property Company.

Ms. Aguiar joined the Company on March 29, 1998 and was appointed Vice President
of Finance and  Controller.  From June 1996 to March 1998,  Ms. Aguiar served as
Vice  President,  Controller  of Oasis  Residential,  Inc. and from July 1996 to
March 1998 she was  Treasurer.  From November  1995 to May 1996,  Ms. Aguiar was
employed  by SBT  Accounting  Systems  where from  April 1996 to June 1996,  she
served as Acting Vice President of Finance and Controller and from November 1995
to April 1996 she served as Assistant Controller. From November 1992 to November
1995,  Ms. Aguiar was employed by Coopers & Lybrand LLP where her last title was
Audit Manager.

Mr. Bolger  became a director of the Company on March 30, 1998.  Mr. Bolger is a
private investor.  He was Vice President of Finance and  Administration of Cisco
Systems, Inc. from May 1989 through December 1992. Mr. Bolger is also a director
of  Integrated  Device  Technology,   Inc.,  Integrated  Systems  Inc.,  Sanmina
Corporation and TCSI Corporation.

Mr. Hasler became a director of the Company on December 4, 1998.  Mr. Hasler was
Dean of Haas School of Business, University of California,  Berkeley, a position
from which he resigned  in June 1998 to assume the  position of Co-CEO of Aphton
Corporation,  a public pharmaceutical  company. Mr. Hasler is also a director of
Aphton,  Solectron,  Quickturn Design, Walker Interactive,  TCSI Corporation and
several  start-up  companies.  He is a public  governor of the Pacific Stock and
Options  Exchange  and a member of the Advisory  Board of Critical  Technologies
Institute.

Mr. Helzel became a director of the Company on December 4, 1998. Mr. Helzel is a
general partner of Helzel Kirshman,  L.P., a private investment  partnership and
is a member of the Pacific Exchange. 

                                       69
<PAGE>

Mr. Helzel has been a director for Pacific Gateway Properties, a publicly traded
real  estate  company  for the past seven  years and also serves on the board of
directors of Infotec Commercial Systems, Inc. and Avirnex  Communications Group,
Inc., both privately held companies.

NUMBER, TERMS AND ELECTION OF DIRECTORS

The number of directors is set at five.  Each  director will serve for a term of
one year or until the next annual meeting at which directors are elected. In the
election of directors,  each  shareholder is entitled to one vote for each share
of common stock held by such shareholder.

COMPENSATION OF DIRECTORS

We intend to pay our directors  who are not officers fees for their  services as
directors. They will receive annual compensation of $15,000 plus a fee of $1,000
for  attendance  (in  person or by  telephone)  at each  meeting of the board of
directors, but not for committee meetings.  Officers of the Company who are also
directors will not be paid any director fees.

Each  non-employee  member of the board of  directors  who  became or  becomes a
member of the board of directors  after November 10, 1997, the date on which the
1997 Stock Option Plan (the "Option Plan") was approved by the  shareholders  of
the  Company,  automatically  receives a grant of an option to  purchase  50,000
shares of common  stock at an  exercise  price  equal to 100% of the fair market
value of the common  stock at the date of grant of such option upon  joining the
board of directors. Such options 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
remains a director.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Directors, executive officers and each beneficial owner of more than ten percent
of our common stock are required by Section 16(a) of the Securities Exchange Act
of 1934, as amended, to file reports periodically  disclosing their transactions
in our securities. Based on a review of such reports, no reporting person failed
to file required reports on a timely basis during fiscal year 1998.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During  1998,  John C.  Bolger  and  Roger S.  Kirk  served  as  members  of the
Compensation  Committee.  Neither  Mr.  Bolger  nor Mr.  Kirk were  officers  or
employees  of the  Company.  No  executive  officer  served  as a member  of the
compensation committee of another entity, one of whose executive officers served
on the  Compensation  Committee.  No executive  officer  served as a director of
another  entity,  one of whose  executive  officers  served on the  Compensation
Committee.  No executive officer served as a member of a compensation  committee
of another entity, one of whose executive officers served as a director.

                                       70

<PAGE>



ITEM 11.  EXECUTIVE COMPENSATION

The following table sets forth salary and other  compensation  earned by or paid
for the period of January 1, 1998 to December  31,  1998 to the Chief  Executive
Officer and each of the Company's other executive  officers.  No current officer
received  compensation  in any other prior  fiscal year.  All current  officers,
except Carl E. Berg, joined the Company in 1998. Carl E. Berg joined the Company
in September 1997, but received no compensation from the Company in 1997.
<TABLE>
<CAPTION>

                                                                                         LONG TERM
                                                      ANNUAL COMPENSATION               COMPENSATION
                                             -------------------------------------   ------------------
                                                                                         SECURITIES
                                                                                         UNDERLYING
                                                                     OTHER ANNUAL      OPTIONS GRANTED
NAME AND PRINCIPAL POSITION         YEAR      SALARY      BONUS      COMPENSATION          IN 1998
-------------------------------------------------------------------------------------------------------
<S>                                <C>     <C>          <C>           <C>                 <C>          
Carl E. Berg                        1998    $100,000        -             -                   -
  Chief Executive Officer and
  President
Michael J. Anderson                 1998    $147,919     $50,000       $22,188(1)          600,000
  Vice President, 
  Chief Operating Officer 
  and Secretary
Bradley P. Perkins(2)               1998    $146,667        -             -                 80,000
  Vice President,
  General Counsel
  and Secretary
Marianne K. Aguiar                  1998    $ 74,775        -             -                 75,000
  Vice President       
  and Controller
</TABLE>

(1) Employer contribution to 401(k) plan.
(2) Bradley P. Perkins resigned from the Company effective February 2, 1999.

The following  table shows certain  information  relating to options to purchase
shares of common stock granted to the executive  and executive  officers  during
1998.
<TABLE>
<CAPTION>
    
                          
                                                                                 POTENTIAL
                                                                              REALIZABLE VALUE
                                                                                AT ASSUMED
                                                                              ANNUAL RATES OF
                                                                                STOCK PRICE
                                                                              APPRECIATION FOR
                                           INDIVIDUAL GRANTS (1)               OPTION TERM(2)
                                    ------------------------------------    --------------------
                                     PERCENT
                      NUMBER OF      OF TOTAL
                      SHARES OF      OPTIONS    
                     COMMON STOCK   GRANTED TO   
                      UNDERLYING     EMPLOYEES    EXERCISE
                       OPTIONS       IN FISCAL   PRICE PER   EXPIRATION   
NAME                  GRANTED(#)       YEAR        SHARE        DATE          5%           10%
-------------------------------------------------------------------------------------------------
<S>                   <C>            <C>         <C>        <C>           <C>         <C>
Carl E. Berg              -             -            -           -            -            -

Michael J. Anderson    600,000        79.5%       $4.50      01/01/04      $918,000    $2,082,000

Bradley P. Perkins      80,000        10.6%       $4.50      02/02/04(3)   $122,400    $  277,600

Marianne K. Aguiar      75,000         9.9%       $4.50      03/29/04      $114,750    $  260,250

</TABLE>

(1) All options granted in 1998  become  exercisable  as follows:  a) six months
    from date of grant,  6.25%;  b) one year  from date of grant,  an additional
    12.5%;  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. The
    option  price is equal to the fair  market  value of the common stock on the
    date of grant.
(2) Assumed annual rates of stock price  appreciation for  illustrative purposes
    only.  Actual  stock  prices  will vary from time to time based  upon market
    factors and the Company's financial performance.  No assurances can be given
    that these appreciation rates will be achieved.
(3) Bradley P.  Perkins  resigned  effective  February  2, 1999 and all unvested
    options  lapsed  by their terms.  At that date the  total  number of  shares
    vested under his option grant was 15,000.

The following  table sets forth  certain  information  concerning  exercised and
unexercised  options held by  executive  and  executive  offices at December 31,
1998:

                                       71

<TABLE>
<CAPTION>                                
                                                                                 
                                                                           
                                                            NUMBER OF                         
                                                      SECURITIES UNDERLYING            VALUE OF UNEXERCISED
                                                      UNEXERCISED OPTIONS AT         IN-THE-MONEY OPTIONS AT      
                                                        DECEMBER 31, 1998               DECEMBER 31, 1998
                                                  ----------------------------------------------------------------
                        SHARES               
                      ACQUIRED ON      VALUE    
NAME                  EXERCISE(#)   REALIZED($)   EXERCISABLE   UNEXERCISAGBLE   EXERCISABLE(1)   UNEXERCISABLE(1)
------------------------------------------------------------------------------------------------------------------
<S>                    <C>             <C>          <C>         <C>                <C>              <C>
Carl E. Berg               -            N/A            -

Michael J. Anderson     225,000          -             -         375,000               -             $843,750

Bradley P. Perkins(2)      -            N/A          5,000        75,000            $11,250          $157,500

Marianne K. Aguiar         -            N/A          4,688        70,312            $10,548          $158,202
                                                                     
</TABLE>

(1) Based on  closing  price of $6 3/4 per  share of  common  stock on  December
    31,1998, as reported by the American Stock Exchange.
(2) Bradley P. Perkins resigned  effective February 2, 1999. At such time, total
    vested options under his option grant were  15,000.  Mr.  Perkins  exercised
    these  options  within  3  days of his  termination of  employment  with the
    Company.

CONTRACTUAL ARRANGEMENTS

In January  1998,  the Company  entered into an  employment  agreement  with Mr.
Anderson, Vice President,  Chief Operating Officer and Director,  providing that
in the  case  of  voluntary  termination  for  good  cause  (as  defined  in the
agreement) or involuntary termination other than for cause, Mr. Anderson will be
entitled to a severance  payment of $100,000 and a  continuation  of medical and
other group insurance  benefits for six months.  In the event such a termination
occurs  more than 12 months from his hire date,  the  vesting of Mr.  Anderson's
stock  options will  accelerate  and options  which would have vested in the six
month period following his termination date will be vested as of the termination
date.  Additionally,  Mr.  Anderson  acquired  200,000 shares of Common Stock on
March 30,  1998  pursuant  to the  exercise of an option at $4.50 per share upon
delivery of a full  recourse note payable in four years or upon  termination  of
employment.  Mr. Anderson's note is secured by the shares,  which are subject to
repurchase  by  the  Company  to the  extent  not  vested  upon  termination  of
employment.

BENEFIT PLANS

1997 STOCK OPTION PLAN.

The 1997 Stock  Option Plan (the "Option  Plan") was  approved by the  Company's
stockholders  on  November  10,  1997.  The 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 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
Option  Plan,  subject to equitable  adjustments  to reflect  certain  corporate
events.  Options to purchase no more than  500,000  shares may be granted in one
calendar year to any individual.

Each option granted under the Option Plan is evidenced by a written stock option
agreement  between  the  Company  and the  optionee  and  generally  will become
exercisable  cumulatively as to 20% of the underlying shares on each anniversary
of the date of grant for so long as the  optionee is  employed  by or  providing
services to the Company.

The exercise  price per share for options  granted under the Option Plan may not
be less  than  100% of the fair  market  value on the date of  grant,  except in
certain specific circumstances, in which case the exercise price may not be less
than 110%.  Each option may be  exercised  only to the extent that it is vested.
Options 

                                       72
<PAGE>

must generally be exercised  during the optionee's  employment or within
30  days  following  the  optionee's  termination  of  status  as  an  employee,
consultant or director,  unless termination is due to the death or disability of
an  optionee.  If  termination  of status is due to death or  disability  of the
optionee,  an option may be exercised  within no more than six months  following
the termination.

401(K) PLAN

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.





                                       73

<PAGE>


ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  following  table  sets forth  information  with  respect to the  beneficial
ownership of the Company's  Common Stock as of March 10, 1999 by (i) each person
who is a  shareholder  of the  Company  holding  more than a 5%  interest in the
Company,  (ii) directors and Named Executive  Officer of the Company,  and (iii)
the directors and officers of the Company as a group. Unless otherwise indicated
in the footnotes to the table, all of such interests are owned directly, and the
person or entity has sole or shared voting and investment power. The Company has
relied  on  information   supplied  by  its  officers,   directors  and  certain
shareholders and on information contained in filings with the SEC.
<TABLE>
<CAPTION>
                                                                           Percent
                                                                           of all
                                                                          Shares of
                                              Percent                    Common Stock     Percent of All                           
                                               of All                      Assuming         Shares of 
                          Number of Shares    Shares of     Number       Exchange of         Common                          
                           Beneficially        Common       of L.P.      Holder's L.P.      Stock/L.P.                             
    Name                     Owned(1)          Stock        Units         Units (2)         Units(1)(2)
-----------------------------------------------------------------------------------------------------
<S>                         <C>                <C>      <C>                  <C>              <C> 
DIRECTORS AND
EXECUTIVE OFFICERS:
Michael J. Anderson           311,112(3)        3.8%          -               3.8%              *
  Vice President,         
  Chief Operating
  Officer, and
  Director
Lawrence B. Helzel            185,293(4)        2.3%          -               2.3%              *
  Director                  
  c/o Helzel Kirshman, LP
  5550 Redwood Road,
  Suite 4
  Oakland, CA 94619
Carl E. Berg                   77,333(5)(15)     *      34,599,447(6)(15)    81.3%            50.9%
  President, Chief        
  Executive Officer, and
  Director
John C. Bolger                 36,810(7)         *            -                *                *
  Director                  
  96 Sutherland Drive
  Atherton, CA 94027
Marianne K. Aguiar             19,991(8)         *            -                *                *
  Vice President of       
  Finance and Controller
William A. Hasler               5,210(9)         *            -                *                *
  Director                  
  c/o Aphton Corporation
  1 Market Street
  Spear Tower, Ste. 1850
  San Francisco, CA 94105
 
5% SHAREHOLDERS:
Ingalls & Snyder LLC(10)    2,744,917          33.4%          -                *                *            
  61 Broadway
  New York, NY 10006
Ingalls & Snyder            1,125,067          13.7%          -                *                *
Value Partners, L.P.(11)    
  61 Broadway
  New York, NY 10006
Dan McCarthy                  870,000(12)      10.6%          -                *                *
  c/o Ingalls &           
  Snyder LLC
  61 Broadway
  New York, NY 10006
Clyde J. Berg                  27,333(13)(15)    *      27,061,507(14)(15)   77.2%            39.7%
  c/o Berg & Berg         
  Developers
  10050 Bandley Drive
  Cupertino, CA  95014
Berg & Berg Enterprises,       27,333            *       6,305,487           44.2%             9.3%
  Inc.(15)
  10050 Bandley Drive
  Cupertino, CA  95014
All Directors and Officers    635,749           7.8%    34,599,447           82.4%            51.6%
  as a group (6 persons)(16)      
</TABLE>
   
*  Less than 1%.

                                       74

<PAGE>

(1) Beneficial  ownership  is  determined  in  accordance  with the rules of the
    Securities and Exchange  Commission  which  generally  attribute  beneficial
    ownership of  securities  to persons who possess sole or shared voting power
    and/or  investment  power with  respect  to those  securities  and  includes
    securities which such person has the right to acquire  beneficial  ownership
    within 60 days of March 10, 1999. Unless otherwise indicated, the persons or
    entities identified in this table have sole voting and investment power with
    respect to all shares shown as  beneficially  owned by them.  Percent of all
    shares  of  common  stock   calculations   are  based  on  8,233,538  shares
    outstanding as of March 10, 1999. Percent of all shares of common stock/L.P.
    Units  calculations are based on 68,185,235  shares of common stock and L.P.
    Units exchangeable for common stock as of March 10, 1999.

(2) Assumes L.P.  Units are exchanged for shares of common stock without  regard
    to (i) whether such L.P.  Units may be exchanged  for shares of common stock
    within  60  days of  March  10,  1999,  and  (ii)  certain  ownership  limit
    provisions set forth in the Company's Articles of Amendment and Restatement.

(3) Includes (i) 86,112 shares of common stock  issuable on exercise of options,
    and (ii) 144,444 shares of common stock which are subject to repurchase upon
    termination of employment.

(4) Includes 5,210 shares of common stock issuable on exercise of Option 5.

(5) Includes  27,333  shares of common  stock  held of record by BBE.  Mr.  Berg
    disclaims  beneficial ownership of 53,071 shares of Common Stock held by him
    as a trustee under various pension and profit sharing plans. Such shares are
    not included herein. Mr. Berg has no investment control over such shares.

(6) Includes L.P.  Units in which Mr. Berg has a pecuniary  interest as a result
    of his  status as a limited  partner  in the  operating  partnerships.  Also
    includes an additional  6,305,487 shares of Common Stock held by or issuable
    on exchange of L.P. Units  beneficially  owned by BBE. This does not include
    any share deemed  beneficially  owned by Kara Ann Berg, his daughter,  as to
    which he disclaims beneficial ownership.

(7) Includes 14,588 shares of common stock issuable on exercise of options.

(8) Includes 17,449 shares of common stock issuable on exercise of options.

(9) All 5,210 shares of common stock are issuable on exercise of options.

(10)Edward H. Oberst,  Managing Director, has the power to vote and the power to
    direct the  investment  of  Ingalls & Snyder LLC with  respect to the common
    stock.

(11)Thomas  Boucher and Robert L. Cipson,  general  partners of Ingalls & Snyder
    Value  Partners,  L.P.  ("Value  Partners"),  have the power to vote and the
    power to direct the  investment of Value Partners with respect to the common
    stock.

(12)Includes  100,000  shares  held  in  Mr.  McCarthy's  Individual  Retirement
    Account.

(13) All shares are held by BBE.

(14)Includes L.P.  Units in which Mr. Berg has a pecuniary  interest as a result
    of his  status as a limited  partner  in the  operating  partnerships.  Also
    includes  L.P.  Units held by Mr.  Berg as trustee of the Carl Berg  Child's
    Trust UTA dated  June 2,  1978;  and the 1981  Kara Ann Berg  Trust,  and an
    additional  6,305,487 shares of Common Stock held by or issuable on exchange
    of L.P.  Units  beneficially  owned by BBE.  This does not include any share
    deemed  beneficially  owned  by  Sonya  L.  Berg and  Sherri  L.  Berg,  his
    daughters, as to which he disclaims beneficial ownership.

(15)Carl E. Berg is an  executive  officer and  director  and Clyde J. Berg is a
    director of BBE. With members of their immediate families,  the Messrs. Berg
    beneficially  own,  directly  and  indirectly,  all of the shares of capital
    stock of BBE.

(16) Current officers and directors  include Carl E. Berg,  Michael J. Anderson,
     Marianne K.  Aguiar,  John C. Bolger,  William A.  Hasler,  and Lawrence B.
     Helzel. See Notes 3 through 9.

                                       75

<PAGE>

ITEM 13.  CERTAIN TRANSACTIONS

PRIVATE PLACEMENT TRANSACTIONS--1998

On May 4, 1998, the Company entered into agreements with prospective  purchasers
to sell  and  issue  6,495,058  shares  of  common  stock in  private  placement
transactions,.  The  Company  did not  obtain  a  "fairness  opinion"  or  other
independent financial advice with respect to the terms,  including price, of the
private  placement,  although  Ingalls & Snyder LLC has acted as placement agent
and  advisor  for the  purchasers  of  5,800,000  shares  of Common  Stock.  The
purchasers of record of the common stock  include,  among others,  the following
officers,  directors,  5%  shareholders  and  purchasers,  who by  reason of the
purchase of common stock in the private placement, became 5% shareholders:



                                    Non-Placement Agent        Ingalls & Snyder
                                     Private Placement             Placement
                                    -------------------        ----------------
Carl E. Berg                              50,000                         -
Lawrence Helzel                                                    180,083
Dan McCarthy                                                       870,000
Ingalls & Snyder LLC                                             2,744,917
Ingalls & Snyder Value Partners                                  1,125,067
Prism Partners I, L.P.                                             450,000



See "Item 1--Business" and "Item 4--Recent Sales of Unregistered Securities."

TRANSACTIONS WITH CARL E. BERG AND THE BERG GROUP

The Company  entered into a series of  transactions  with Carl E. Berg who is an
officer,  director and 5% security holder of the Company,  and his affiliates in
the Berg Group, including Clyde J. Berg.

UPREIT TRANSACTIONS

Prior to July  1998,  three  of the four  limited  partnerships  comprising  the
operating  partnerships  were controlled by Carl E. Berg, his brother,  Clyde J.
Berg and other members of the Berg Group. The Messrs. Berg also owned 50% of the
fourth limited partnership as limited partners and they and other members of the
Berg  Group  held  R&D  properties  that  were   contributed  to  the  operating
partnerships in July of 1998. The prior interests in the operating  partnerships
were  converted to L.P.  Units at the closing of the  formation of the operating
partnerships  when the Company  became the sole  general  partner in each of the
operating partnerships. Additional L.P. Units were issued in connection with the
acquisition of the R&D properties held outside the operating partnerships.

Under the terms of the Acquisition  Agreement dated as May 14, 1998, as amended,
the  L.P.   Units  were  valued  at  $4.50  per  share  for  purposes  of  these
transactions.  The  Company  did  not  obtain  a  "fairness"  opinion  or  other
independent financial advice with respect to the transactions. The L.P. Units in
which the Messrs.  Berg and Berg & Berg  Enterprises,  Inc. acquired a pecuniary
interest are as follows:


                                       76

<PAGE>

                                L.P. Units
                       ------------------------------

Carl E. Berg                    28,091,377
Clyde J. Berg                   17,347,806
Berg & Berg                      6,305,487
Enterprises, Inc.


Additional  L.P.  Units  were  acquired  by certain  members of their  immediate
families,   to   which   they   disclaim   beneficial   ownership.    See   Item
1.--"Business-Organization  and General Business  Description," "-Risk Factors,"
Item 4.  "Submission  of Matters to a Vote of Security  Holders,"  and "Item 12.
Security Ownership of Certain Beneficial owners and Management."

PENDING DEVELOPMENT  PROJECTS.  Carl E. Berg and other members of the Berg Group
entered into the Pending Projects  Acquisition  Agreement  pursuant to which the
Company,  through the  operating  partnerships,  will  acquire  certain  pending
development  projects  from Carl E. Berg and other  members of the Berg Group as
each  property  is  completed  and  leased.  One of the four  projects  has been
completed and leased.  As a result of the  completion and leasing of the pending
development project, one of the operating partnerships acquired the property and
Carl E.  Berg and  Clyde J.  Berg each  received  additional  L.P.  Units in the
operating partnership. Each received 202,583 L.P. Units.

Carl E. Berg and other  members  of the Berg  Group  have the right to obtain as
many as 33,513,906 additional L.P. Units in exchange for the pending development
projects.  The sellers of these projects may elect to receive cash or L.P. Units
at a value of $4.50 per L.P.  Unit,  which is a  substantial  discount  from the
current market price of the common stock.

See "Item 1--Business--Business" and "--Risk Factors"

BERG LAND HOLDINGS  AGREEMENT.  Carl E. Berg and other members of the Berg Group
own several  parcels of unimproved  land in the Silicon  Valley and have entered
into the Berg Land Holdings Option  Agreement with the Company and the operating
partnerships.   Pursuant  to  the  agreement,  the  Company  and  the  operating
partnerships have the right to acquire any building developed on the land at the
time the  building  has been  leased.  The  purchase  will be payable in cash as
determined in accordance with the formula set out in the agreement.

Effective  December 31, 1998,  Messrs.  Berg and other members of the Berg Group
loaned $9.6 million to the operating  partnerships which was equal to the amount
of distributions payable by the partnerships with respect to their L.P. Units as
of  December  28,  1998.  See  Item  1.-  Business  Risk  Factors  and  Item 7.-
"Management's  Discussion  and  Analysis of Fianacial  Condition  and Results of
Operation."

See "Item 1--Business--Business" and "--Risk Factors"

ISSUANCE  AND  ASSUMPTION  OF  DEBT.  The  Company  is  liable  for  a  loan  of
approximately  $21 million  payable to BBE, which is a member of the Berg Group.
Both  Carl E. Berg and Clyde J. Berg are  directors  of BBE and,  together  with
their  immediate  families,  own all of the  capital  stock of BBE.  The loan is
secured by three properties, and the maturity date has recently been extended.

In September  1998,  the Company also assumed a $100 million line of credit with
the Wells Fargo Bank N.A.  previously provided to and guaranteed by some members
of the Berg  Group.  The  outstanding  balance  on the line of credit  was $27.2
million as of December 31, 1998.

Effective  Decmber 31, 1998,  Messrs.  Berg and other  members of the Berg Group
loaned $9.6 million to the operating partnerships, which was equal to the amount
of  distributions  payable by the operating  partnerships  with respect to their
L.P.  Units as of December 28, 1998.  See Item 1 - "Business  Risk  Factors" and
Item 7 -  "Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of Operations."

                                       77
<PAGE>

See "Item 1--Business--Risk Factors"

LEASE FROM BERG & BERG  ENTERPRISES,  INC.  The  Company  leases  its  executive
offices from BBE. In 1998, the Company paid  approximately  $61,000 to BBE under
the terms of the loan agreement for its executive offices.

PURCHASE BY MICHAEL ANDERSON

Michael J. Anderson,  Vice President and Chief Operating Officer of the Company,
acquired  200,000  shares of  Common  Stock on March 30,  1998  pursuant  to the
exercise of an option.  Mr.  Anderson's  shares are subject to repurchase by the
Company. The Company loaned Mr. Anderson $900,000 to purchase the shares.


                                       78
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                                    PART IV


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


      Exhibits required by Item 601 of Regulation S-K.

                                 EXHIBIT INDEX

--------  --------------------------------------------------------------
2.1**     Merger Agreement and Plan of Merger between Mission West
          Properties and Mission West Properties, Inc.
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 the Company and the
          Limited Partners
10.3.1**  1997 Stock Option Plan of the Company
10.3.2**  Form of Incentive Stock Option Agreement
10.3.3**  Form of Non-statutory Stock Option Agreement
10.3.4**  Form of Director's Stock Option Agreement
10.4.1**  Acquisition  Agreement,  dated as of May 14, 1998,  among the Company,
          Certain Partnerships and the Berg Group (as defined therein)
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 the Company
          and the purchasers of Common Stock in a private placement of 5,800,000
          shares and Subscription Agreement relating to same
10.5.2**  Stock Purchase  Agreement  dated as of May 4, 1998 between the Company
          and the  purchasers of Common Stock in a private  placement of 695,058
          shares and Subscription Agreement relating to same
10.5.3*** Form of Registration  Rights  Agreement for  purchasers,  who acquired
          shares of Common Stock under the May 4, 1998 Stock Purchase Agreements
          (filed  as  Exhibit  10.8 to  Post-effective  Amendment  No. 1 to  S-4
          Registration  Statement  filed  on  Form  S-3 on  February  11,  1999.
          Commission File No. 333-52835-99).
10.6*     Pending Projects Acquisition Agreement among the Company, the 
          Operating Partnership and the members of the Berg Group
10.7*     Berg Land Holdings Option Agreement between the Company and certain
          members of the Berg Group
10.8**    Berg & Berg Enterprises, Inc. Sublease Agreement 
10.9      Amended and Restated Incentive Stock Option Agreement for  
          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, 1998 between
          the Company and Dan and Paul McCarthy 
21.1      Subsidiaries of the Registrant
23.1      Consent of PricewaterhouseCoopers LLP

                                       79

<PAGE>

24.1      Powers of Attorney
27.1      Financial Data Schedule

*  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 by reference.
   (b)Reports on Form 8-K.

1)      The  Company  filed on  January 4, 1999 the  Current  Report on Form 8-K
        dated December 30, 1998 to report on becoming the successor by merger to
        all  of the  assets  and  liabilities  of  Mission  West  Properties,  a
        California corporation.

2)      The  Company  filed on  January 4, 1999 the  Current  Report on Form 8-K
        dated December 31, 1998 to report on Mission West Properties shareholder
        approval  of  matters   submitted  to  vote  at  a  special  meeting  of
        shareholders  held on December 28,  1998,  the  completion  of a private
        placement of 6,495,058 shares of common stock,  and the  reincorporation
        merger of Mission West Properties into the Company.

                                       80

<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, 1999          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 and Michael J. Anderson,  or
either   of  them,   each   with  the   power  of   substitution,   his  or  her
attorney-in-fact, 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           March 30, 1999
   ------------------          Officer, President     
   Carl E. Berg                and Director


   /S/  MICHAEL J. ANDERSON    Chief Operating           March 30, 1999
   ------------------          Officer and Director 
   Michael J. Anderson 

   /S/  MARIANNE K. AGUIAR     Vice President and        March 30, 1999
   ------------------          Controller (Principal 
   Marianne K. Aguiar          Financial and                
                               Accounting Officer)


   /S/ JOHN BOLGER             Director                  March 30, 1999
   ------------------
   John Bolger                                 


   /S/ WILLIAM A. HASLER       Director                  March 30, 1999
   ------------------
   William A. Hasler


   /S/ LAWRENCE B. HELZEL     Director                  March 30, 1999
   ------------------
   Lawrence B. Helzel


                                       81
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