UNITED STATES
                       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, 2005

                                       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 Identification No.)
 Incorporation or organization)

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

        Securities Registered Pursuant to Section 12(g) of the Act: NONE

     Indicate by check mark if the Registrant is a well-known  seasoned  issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

     Indicate by check mark if the  Registrant  is not  required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]

     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. [ ]

     Indicate by check mark whether the Registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large  accelerated  filer" in Rule 12b-2 of the  Exchange  Act.  Large
accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]

     Indicate  by check mark  whether  the  Registrant  is a shell  company  (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

     As of June 30, 2005, the aggregate market value of the Registrant's  common
stock held by  non-affiliates  of the registrant was  $188,071,337  based on the
closing price as reported on the American Stock Exchange.

     Indicate the number of shares  outstanding of each of the issuer's  classes
of common stock, as of the latest practicable date.

                Class                          Outstanding at February 28, 2006
---------------------------------------       ----------------------------------
Common Stock, $.001 par value per share               18,448,791 shares

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's  proxy statement to be delivered to stockholders in
connection with the Registrant's  2006 Annual Meeting of Stockholders to be held
on May 17, 2006 are  incorporated  by reference into Part III of this Form 10-K.
The  Registrant  intends to file its proxy  statement  within 120 days after its
fiscal year end.

<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
Private  Securities  Litigation  Reform  Act of  1995,  and are  including  this
statement  for  purposes  of  complying  with  these  safe  harbor   provisions.
Forward-looking   statements   include  our  discussion  of  "Quantitative   and
Qualitative  Disclosures  about Market Risks" in Item 7A below.  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 the Company  (including changes to laws governing the taxation of Real
Estate Investment Trusts  ("REITs")),  availability of capital,  interest rates,
competition,  supply of and demand for office and  industrial  properties in our
current and proposed market areas, tenant defaults and bankruptcies, and general
accounting principles, policies and guidelines applicable to REITs. In addition,
the actual timing of development, construction, and leasing on the projects that
the Company  believes it may acquire in the future under the Berg Land  Holdings
Option Agreement is unknown presently.  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 1A, Risk Factors.

                                     - i -
<PAGE>

                          MISSION WEST PROPERTIES, INC.
                          2005 FORM 10-K ANNUAL REPORT

<TABLE>
<CAPTION>
                                Table of Contents


                                     PART I                                                                     PAGE NO.
                                                                                                                --------
<S>              <C>                                                                                              <C>
Item 1.           Business                                                                                          1
Item 1A.          Risk Factors                                                                                      9
Item 1B.          Unresolved Staff Comments                                                                        15
Item 2.           Properties                                                                                       16
Item 3.           Legal Proceedings                                                                                21
Item 4.           Submission of Matters to a Vote of Security Holders                                              21

                                                           PART II
Item 5.           Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity Securities                                                                   22
Item 6.           Selected Financial Data                                                                          23
Item 7.           Management's Discussion and Analysis of Financial Condition and Results of Operations            25
Item 7A.          Quantitative and Qualitative Disclosures about Market Risk                                       42
Item 8.           Consolidated Financial Statements and Supplementary Data                                         43
Item 9.           Changes in and Disagreements with Accountants on Accounting and Financial Disclosure             79
Item 9A.          Controls and Procedures                                                                          79
Item 9B.          Other Information                                                                                80

                                                          PART III
Item 10.          Directors and Executive Officers of the Registrant                                               81
Item 11.          Executive Compensation                                                                           81
Item 12.          Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
                  Matters                                                                                          81
Item 13.          Certain Relationships and Related Transactions                                                   81
Item 14.          Principal Accountant Fees and Services                                                           81

                                                           PART IV
Item 15.          Exhibits and Financial Statement Schedules                                                       82
                  Signatures                                                                                       83
                  Rule 13a-14(a) Certifications                                                                    97
                  Section 1350 Certifications                                                                     100
</TABLE>

                                     - ii -
<PAGE>

PART I

ITEM 1. BUSINESS

     ORGANIZATION AND GENERAL BUSINESS DESCRIPTION

     Mission West Properties,  Inc. (the "Company") acquires,  markets,  leases,
     and manages research and development ("R&D") properties,  primarily located
     in the Silicon Valley portion of the San Francisco Bay Area. As of December
     31, 2005, we owned and managed 107 properties  totaling  approximately  7.8
     million  rentable  square  feet  of R&D  properties  through  four  limited
     partnerships, or operating partnerships,  for which we are the sole general
     partner.  R&D property is designed for research and  development and office
     uses and, in some cases, includes space for light manufacturing  operations
     with loading docks.  We believe that we have one of the largest  portfolios
     of R&D  properties  in the  Silicon  Valley.  There  are  six  tenants  who
     individually  lease in  excess of  300,000  rentable  square  feet from us:
     Microsoft Corporation,  Apple Computer, Inc., Fujitsu America (a subsidiary
     of Fujitsu Limited),  JDS Uniphase  Corporation,  NEC Electronics  America,
     Inc. (a subsidiary of NEC Electronics  Corporation) and Ciena  Corporation.
     For  federal  income  tax  purposes  we have  operated  as a  self-managed,
     self-administered   and  fully  integrated  Real  Estate  Investment  Trust
     ("REIT") since fiscal 1999.

     Prior to July 1, 1998,  most of our properties  were under the ownership or
     control of Carl E. Berg,  his  brother  Clyde J. Berg,  certain  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").  We acquired  these  properties  as of July 1, 1998 by
     becoming the general partner of each of the four operating  partnerships in
     an UPREIT  transaction.  At that  time,  we also  acquired  ten  properties
     comprising   approximately  560,000  rentable  square  feet  from  entities
     controlled   by  third  parties  in  which  the  Berg  Group  members  were
     significant owners.

     Through  various  property  acquisition  agreements with the Berg Group and
     subject to the approval of the Independent Directors Committee of the Board
     of Directors,  we have the right to purchase,  on pre-negotiated terms, R&D
     and other  types of office and light  industrial  properties  that the Berg
     Group develops in the future. With in-house development,  architectural and
     construction  personnel,  the Berg Group continues to focus on a full range
     of  land  acquisition,  development  and  construction  activities  for R&D
     properties,  often  build-to-suit,  to meet the  demands of Silicon  Valley
     information technology companies. As the developer, the Berg Group takes on
     the  risks of  purchasing  the land,  obtaining  regulatory  approvals  and
     permits and financing construction.  Since September 1998, we have acquired
     approximately  3,135,000  additional rentable square feet of R&D properties
     from the Berg Group under these agreements.

     OUR RELATIONSHIP WITH THE BERG GROUP

     Through a series of  transactions  occurring  between May 1997 and December
     1998, we became the vehicle for substantially all of the Silicon Valley R&D
     property operating activities of the Berg Group. We are the general partner
     pursuant to the partnership  agreements of the operating  partnerships and,
     along with members of the Berg Group and other individuals, are party to an
     Exchange Rights Agreement and the Berg Land Holdings Option Agreement. Each
     agreement  defines the material rights and  obligations  among us, the Berg
     Group members,  and other parties to those agreements.  Among other things,
     these agreements give us rights to:

     -    control the operating partnerships;

     -    acquire, subject to approval of the Independent Directors Committee of
          the Board of  Directors,  on  pre-negotiated  terms,  all  future  R&D
          properties  developed  by the Berg  Group on land  currently  owned or
          acquired in the future; and

     -    acquire R&D, office and industrial  properties  identified by the Berg
          Group in California, Oregon and Washington, subject to approval of the
          Independent Directors Committee of the Board of Directors.

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

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

     -    participate in our securities offerings;

     -    exchange their  operating  partnership  interests  ("O.P.  Units") for
          shares of our common stock;

                                     - 1 -
<PAGE>

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

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

     To comply with REIT  requirements that restrict the percentage of the total
     value of our stock that may be owned by five or fewer individuals to 50% or
     less, our charter generally  prohibits the direct or indirect  ownership of
     more than 9% of our common stock by any  stockholder.  This limit  excludes
     the Berg Group, which has an aggregate  ownership limit of 20%.  Currently,
     the Berg Group  members  collectively  own less than 1% of the  outstanding
     shares of our common stock.

     Carl E. Berg,  the  Company's  Chairman of the Board of Directors 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  more  than  35  years,  most  recently  through  Berg  &  Berg
     Enterprises  ("Berg & Berg").  In 1969,  Mr. Berg foresaw the rising demand
     for efficient, multi-purpose facilities for the rapidly growing information
     technology  industry in the Silicon Valley.  Since 1972, in addition to his
     real estate activities, Mr. Berg also has been actively involved in venture
     capital investments in many information technology companies in the Silicon
     Valley,  including such companies as Amdahl Corporation,  Sun Microsystems,
     Inc., and Integrated  Device  Technologies,  Inc. He serves on the board of
     directors of numerous information  technology  companies.  These activities
     have helped Mr. Berg  develop a detailed  understanding  of the real estate
     requirements of information  technology companies,  acquire valuable market
     information  and increase his name  recognition  within the venture capital
     and  entrepreneurial  communities.   These  activities  also  manifest  his
     commitment  to the growth  and  success of  Silicon  Valley  companies.  We
     believe  that Mr.  Berg's  substantial  knowledge  of and  contacts  in the
     information  technology  industry  provide  a  significant  benefit  to the
     Company.

     BUSINESS STRATEGY

     Our acquisition,  growth and operating strategy  incorporates the following
     elements:

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

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

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

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

     ACQUIRING PROPERTIES DEVELOPED BY THE BERG GROUP

     We anticipate  that most of our growth,  if any, in rentable square footage
     in the  foreseeable  future  will  come  from  the  acquisition  of new R&D
     properties that are either  currently under  development or to be developed
     in the future by the Berg Group.  The Berg Land Holdings  Option  Agreement
     gives us the right to acquire future R&D property  developments by the Berg
     Group on up to 74 additional acres of land currently controlled by the Berg
     Group,  which could support  approximately  1.2 million  square feet of new
     developments. Nevertheless, at this time we do not anticipate acquiring any
     additional newly constructed R&D properties from the Berg Group for several
     years because of the current market conditions in the Silicon Valley.

     In light of the  overcapacity in the Silicon Valley R&D properties  market,
     the Berg Group currently is seeking local government approval of a proposed
     rezoning of the 160-acre Evergreen site to permit  residential  development
     on a substantial portion of the site. The Independent  Directors Committee,
     which is responsible for reviewing,  evaluating and authorizing action with
     respect to any transaction between us and any member of the Berg Group, has
     authorized  removal of the  Evergreen  site from the scope of the Berg Land
     Holdings Option Agreement, subject to the completion of the rezoning of the
     160-acre Evergreen site, or portion thereof,  for residential  development.
     In  making  this   determination,   the  Independent   Directors  Committee
     considered  a number of  factors,  including  risks  and other  potentially
     adverse  consequences that could be associated with large scale residential
     development  activities.  Any  portion  of the  Evergreen  site that is not
     rezoned as residential  property is not deemed to be removed from the scope
     of the Berg Land Holdings  Option  Agreement and would remain  eligible for
     potential future acquisition under the Berg Land Holdings Option Agreement.

                                     - 2 -
<PAGE>

     In April  2005,  the Berg Group  disclosed  the receipt of an offer from an
     unrelated  party  to  purchase  a  portion  of the  Piercy &  Hellyer  land
     comprised of approximately 10 acres in San Jose, California that is subject
     to the  Berg  Land  Holdings  Option  Agreement  with us.  The  prospective
     purchaser has disclosed its intention to develop "for sale" industrial type
     buildings.  In  light  of  the  overcapacity  in  the  Silicon  Valley  R&D
     properties  market and our current  inventory  of available  buildings  for
     lease in this submarket,  the  Independent  Directors  Committee,  which is
     responsible for reviewing,  evaluating and authorizing  action with respect
     to any transaction between us and any member of the Berg Group,  authorized
     removal of this approximately  10-acre parcel of land from the scope of the
     Berg Land Holdings Option Agreement,  subject to the completion of the sale
     to the  unrelated  party.  In making this  determination,  the  Independent
     Directors  Committee  considered a number of factors,  including  risks and
     other  potentially  adverse  consequences  that  could be  associated  with
     acquiring undeveloped land for future development. In the event this parcel
     of land is not sold to this prospective purchaser,  the parcel would not be
     deemed  to be  removed  from the  scope of the Berg  Land  Holdings  Option
     Agreement and would remain eligible for potential future acquisition by the
     Company, under the Berg Land Holdings Option Agreement.

     BERG LAND  HOLDINGS  OPTION  AGREEMENT.  We  believe  that  control of high
     quality,  developable  land is an important  strategic factor for continued
     success in the Silicon Valley market. In December 1998, we entered into the
     Berg  Land  Holdings  Option  Agreement  under  which we have an  option to
     purchase  all land  acquired,  directly or  indirectly,  by Carl E. Berg or
     Clyde J. Berg that has not been improved with completed buildings and which
     is  zoned,  intended  or  appropriate  for R&D,  office  and/or  industrial
     development or use in the states of California,  Oregon and Washington.  In
     addition,  Carl E. Berg has agreed not to directly or indirectly acquire or
     develop any real  property  zoned for office,  industrial or R&D use in the
     states of California,  Oregon and Washington  without first  disclosing and
     making  the  acquisition  opportunity  available  to  us.  Our  Independent
     Directors  Committee  decides  whether  we  will  pursue  each  opportunity
     presented to us by Mr. Berg. This  restriction will expire when there is no
     Berg Group  nominee on our board of directors  and the Berg  Group's  fully
     diluted ownership percentage,  which is calculated based on all outstanding
     shares  of common  stock and all  shares  of  common  stock  that  could be
     acquired upon the exercise of all outstanding options to acquire our voting
     stock,  as well as all shares of common stock issuable upon exchange of all
     O.P. Units ("Fully Diluted"), falls below 25%.

     As of December 31, 2005, we had acquired 20 leased R&D properties  totaling
     approximately 1,992,000 rentable square feet under this agreement at a cost
     of approximately  $205.2 million,  for which we issued 7,933,849 O.P. Units
     and assumed debt of approximately $118 million.  The principal terms of the
     agreement include the following:

     -    So long as the Berg Group members and their affiliates own or have the
          right to acquire shares  representing at least 65% of our common stock
          on a Fully  Diluted  basis,  we will have the  option to  acquire  any
          building developed by any member of the Berg Group on the land subject
          to the  Berg  Land  Holdings  Option  Agreement  at  such  time as the
          building has been leased.  Upon our exercise of the option, the option
          price  will  equal  the sum of the  following  or a lesser  amount  as
          approved by the Independent Directors Committee:

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

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

     -    We also must assume all property tax assessments.

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

     -    All action taken by us under the Berg Land Holdings Option  Agreement,
          including  any  variations  from stated terms  outlined  above must be
          approved  by a majority of the  members of the  Independent  Directors
          Committee of our Board of Directors.

                                     - 3 -
<PAGE>

     As a general policy which has been established by the Independent Directors
     Committee, we do not acquire properties under the Berg Land Holdings Option
     Agreement until they have been leased. We are responsible for a significant
     portion  of the  leasing  process  in  connection  with such  acquisitions,
     however.

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

<TABLE>
<CAPTION>
                                                                      Approximate Rentable Area
         Available Land:                           Net Acres                (Square Feet)
         ----------------------------------- ----------------------- -----------------------------
<S>                                                    <C>                    <C>
         Piercy & Hellyer                               20                      327,000
         Morgan Hill (1)                                18                      288,025
         King Ranch                                     12                      207,000
         Fremont & Cushing                              24                      387,000
                                             ----------------------- -----------------------------
                       Total                            74                    1,209,025
                                             ======================= =============================
</TABLE>

     (1)  This land is owned by the TBI joint ventures partnership. We expect to
          own an approximate 50% interest in the partnership  through one of our
          operating  partnerships.  The property will be operated and managed by
          the other joint venture partner in the entity.

     Although we expect to acquire new properties or joint ventures available to
     us under the terms of the Berg Land Holdings Option  Agreement,  subsequent
     to the  approval by the  Independent  Directors  Committee  of our Board of
     Directors,  there can be no assurance that we actually will  consummate any
     of the intended transactions.  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  Operation  ("FFO") or available cash for
     distribution.  See  Item  1A,  "Risk  Factors  - Our  contractual  business
     relationships with the Berg Group present additional  conflicts of interest
     which may result in the realization of economic benefits or the deferral of
     tax  liabilities  by the Berg  Group  without  equivalent  benefits  to our
     stockholders."

     Given the downturn in the Silicon  Valley real estate market for R&D/office
     properties, we may not be able to maintain historical levels of growth from
     acquisitions of new developments in the future.

     OPPORTUNISTIC ACQUISITIONS

     In addition to our  principal  opportunities  under the Berg Land  Holdings
     Option  Agreement,  we believe  our  acquisitions  experience,  established
     network  of real  estate  and  information  technology  professionals,  and
     overall  financial  condition  will continue to provide  opportunities  for
     external growth.  In general,  we will seek  opportunistic  acquisitions of
     high  quality,  well located  Silicon  Valley R&D  properties in situations
     where  illiquidity  or inadequate  management  permit their  acquisition at
     favorable prices,  and where our management skills and knowledge of Silicon
     Valley  submarkets may  facilitate  increases in cash flow and asset value.
     Furthermore,  our use of the operating  partnership  structure allows us to
     offer  prospective  sellers the  opportunity to contribute  properties on a
     tax-deferred  basis  in  exchange  for  O.P.  Units.  Although  we have not
     consummated any  transactions  like this since our July 1, 1998 acquisition
     of the Berg  Group  properties,  this  capacity  to  complete  tax-deferred
     transactions  with sellers of real property further enhances our ability to
     acquire additional properties.

     FOCUS ON SINGLE TENANT SILICON VALLEY R&D Properties

     We intend to continue to emphasize the acquisition of single-tenant  rather
     than multi-tenant  properties, a practice that has historically contributed
     to  the  relatively  low  turnover  and  higher   occupancy  rates  on  our
     properties.  We believe  that the  relatively  small number of tenants (72)
     leasing our properties, mostly under the triple net lease structure, allows
     us to  efficiently  manage the  properties  and to serve our tenants' needs
     without  extensive  in-house  staff  or  the  assistance  of a  third-party
     property management  organization.  In addition, this emphasis allows us to
     incur less expense for tenant  improvements  and leasing  commissions  than
     multi-tenant, high turnover property owners. This strategy also reduces the
     time and  expense  associated  with  obtaining  building  permits and other
     governmental  approvals.  We believe that the relatively  stable,  extended
     relationships  that we have  developed with our key tenants are valuable in
     the expansion of our business.

                                     - 4 -

<PAGE>


     RECENT RENTAL MARKET DEVELOPMENTS AND THEIR IMPACT ON OUR BUSINESS

     All of the Company's properties are located in the Northern California area
     known as Silicon  Valley,  which  generally  consists  of portions of Santa
     Clara County,  Southwestern  Alameda County,  Southeastern San Mateo County
     and Eastern  Santa Cruz  County.  The Silicon  Valley  economy and business
     activity slowed markedly during 2001 through 2005 after  fast-paced  growth
     in 1999 and  2000.  In the past  several  years,  the  Silicon  Valley  R&D
     property  market has  fluctuated  with the local  economy.  According  to a
     recent report by NAI BT Commercial  Real Estate,  vacancy rates for Silicon
     Valley R&D  property  decreased  from  approximately  22.4% in late 2004 to
     19.6% at the end of 2005. Total vacant R&D square footage in Silicon Valley
     at the end of the fourth  quarter of 2005  amounted to 30.3 million  square
     feet, of which 22.9%, or 6.9 million square feet, was sublease space. Total
     negative net absorption  (which is the  computation of gross square footage
     leased less gross new square footage  vacated for the period  presented) in
     2004  amounted to  approximately  (0.3) million  square feet.  For the year
     2005, there was total positive net absorption of approximately  3.6 million
     square  feet as local  economic  conditions  improved,  but the overall R&D
     property market did not recover. Average asking market rent per square foot
     was $0.88 at year-end  for 2005 and 2004,  although  individual  properties
     within any particular  submarket presently may be leased above or below the
     current  average  asking  market  rental rates within that  submarket.  The
     impact of vacancies has not been uniform throughout the area, however.  The
     Silicon Valley R&D property market is characterized by a substantial number
     of  submarkets,  with rent and  vacancy  rates  varying  by  submarket  and
     location  within each  submarket.  In  addition,  the time to complete  the
     marketing  and lease up of vacant  space has  increased  from an average of
     several  months to as much as an  average of 18 to 36 months as a result of
     the over-supply of R&D properties in the market.

     For the years ended  December 31, 2005 and 2004,  average  occupancy in our
     portfolio was 67.9% and 71.7%, respectively.  Prior to the first quarter of
     2002,  we had achieved  historical  average  occupancy  levels of above 98%
     since 1999. We believe that maintaining  average occupancy levels above 98%
     will  not  be  sustainable  given  the  current  economic  environment,  as
     evidenced by our occupancy level of 66.7% at December 31, 2005.

     Despite our strategic  focus on single  tenant  properties  and leases,  in
     order to meet  market  conditions,  we have been,  and  expect to  continue
     leasing less than the entire  premises of some of our R&D  properties  to a
     single  tenant  from  time  to  time.  Leasing  our R&D  properties,  which
     generally have been built for single tenant occupancy,  to multiple tenants
     can  increase  our  leasing  costs and  operating  expenses  and reduce the
     profitability of our leasing activities.

     Although we  scrutinize  each  prospective  tenant's  creditworthiness  and
     continually  evaluate the financial  capacity of both our  prospective  and
     existing  tenants,  a downturn in tenants'  businesses may weaken  tenants'
     financial  conditions  and  could  result in  defaults  under  their  lease
     obligations.  We believe that the average 2006 renewal rental rates for our
     properties will be approximately equal to, or perhaps, below current market
     rents. In addition,  leasing activity for new build-to-suit and vacated R&D
     properties has slowed  considerably  during the past several years.  Leases
     representing  approximately 523,000 rentable square feet, or 9% of our 2006
     cash rent, are scheduled to expire during 2006. If we are unable to lease a
     significant portion of any vacant space or space scheduled to expire; if we
     experience  significant tenant defaults as a result of the current economic
     downturn;  if we  restructure  existing  leases and lower existing rents in
     order to retain  tenants for an extended  term; or if we increase our lease
     costs and operating expenses  substantially to accommodate multiple tenants
     in our R&D  properties;  or if we are not able to  lease  space at or above
     current  market  rates,  our results of  operations  and cash flows will be
     adversely affected.

     OPERATIONS

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

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

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

     We  believe  that  our  business  practices  provide  us  with  competitive
     advantages, including -

                                     - 5 -
<PAGE>

     -    EXTERNAL  DEVELOPMENT  AFFILIATE.  We have the option to purchase  all
          future R&D, office, industrial property developments of the Berg Group
          under the Berg Land Holdings  Option  Agreement on land currently held
          or acquired  directly or  indirectly  by Carl E. Berg or Clyde J. Berg
          that is zoned for those purposes and located in California, Oregon and
          Washington  following  completion  and lease-up of the  property.  The
          acquisition  terms and  conditions  for the  existing  and  identified
          projects have been  pre-negotiated  and are documented  under the Berg
          Land Holdings Option Agreement. This relationship provides us with the
          economic  benefits of development  while  eliminating  development and
          initial  lease-up risks. It also provides us with access to one of the
          most experienced  development  teams in the Silicon Valley without the
          expense of maintaining development personnel.

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

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

     OPERATING PARTNERSHIP AGREEMENTS

     MANAGEMENT

     The operating  partnerships  consist of four separate limited  partnerships
     engaged in the combined operation and ownership of all our properties.  The
     operating partnership agreements are identical in all material respects for
     all four of the limited partnerships. Pursuant to the operating partnership
     agreements,   we  act  as  the  sole  general   partner  of  the  operating
     partnerships,  in which capacity we have exclusive  control of the business
     and  assets  of the  operating  partnerships  and  generally  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
     employees and agents of the operating  partnerships.  Through our authority
     to manage our  business and  affairs,  our Board of  Directors  directs the
     business of the operating partnerships.

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

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

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

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

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

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

     -    a change of control of the operating partnerships.

     In  addition,  until  the  ownership  interest  of the Berg  Group  and its
     affiliates is less than 15% of the common stock on a Fully  Diluted  basis,
     the consent of the limited  partners  holding a majority of the outstanding
     O.P. Units is also required with respect to:

                                     - 6 -
<PAGE>

     -    the liquidation of the operating partnerships;

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

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

     TRANSFERABILITY OF O.P. UNITS

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

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

     ADDITIONAL CAPITAL CONTRIBUTIONS AND LOANS

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

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

     EXCHANGE RIGHTS, PUT RIGHTS AND REGISTRATION RIGHTS

     Under the Exchange Rights  Agreement  between us and the limited  partners,
     the limited partners have exchange rights that generally became exercisable
     on December 29, 1999. The Exchange Rights  Agreement  permits every limited
     partner to tender O.P. Units to us, and, at our election, to receive common
     stock on a one-for-one  basis at  then-current  market value, an equivalent
     amount of cash, or a  combination  of cash and common stock in exchange for
     the O.P. Units tendered,  subject to the 9% overall ownership limit imposed
     on non-Berg Group stockholders  under our charter document,  or the overall
     20% Berg Group ownership  limit, as the case may be. For more  information,
     please  refer to this Item 1A, "Risk  Factors - Failure to satisfy  federal
     income tax  requirements for REITs could reduce our  distributions,  reduce
     our  income  and cause our stock  price to fall."  This  exchange  ratio is
     subject to adjustment for stock splits, stock dividends,  recapitalizations
     of our common stock and similar  types of corporate  actions.  In addition,
     once in each  12-month  period  beginning  each  December  29, the  limited
     partners,  other  than Carl E. Berg and Clyde J. Berg,  may  exercise a put
     right to sell their O.P.  Units to the  operating  partnerships  at a price
     equal to the average  market price of the common  stock for the  10-trading
     day period immediately  preceding the date of tender.  Upon any exercise of
     the put  rights,  we will have the  opportunity  for a period of 15 days to
     elect to fund  the  purchase  of the O.P.  Units  and  purchase  additional
     general partner  interests in the operating  partnerships for cash,  unless
     the purchase  price  exceeds $1 million in the  aggregate for all tendering
     limited partners,  in which case, the operating  partnerships or we will be
     entitled,  but not required,  to reduce  proportionally  the number of O.P.
     Units to be acquired from each tendering  limited partner so that the total
     purchase price is not more than $1 million.

     The shares of our common  stock  issuable  in exchange  for the O.P.  Units
     outstanding  at July 1,  1998 and the O.P.  Units  issued  pursuant  to the
     Pending Projects Acquisition Agreement were registered under the Securities
     Act and generally may be sold without  restriction  if they are acquired by
     limited  partners that are not  affiliates,  as defined under SEC Rule 144.
     For more  information  please refer to this Item 1A, "Risk Factors - Shares
     eligible  for future sale could  affect the market price of our stock." The
     Exchange  Rights  Agreement  gives the  holders of O.P.  Units the right to
     participate in any registered public

                                     - 7 -
<PAGE>

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

     OTHER MATTERS

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

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

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

     The operating partnership  agreements provide that, upon the exercise of an
     outstanding  option under the 2004 Equity Incentive Plan (including options
     granted  originally  under the 1997 Stock  Option  Plan),  we may  purchase
     additional  general  partner  interests in the  operating  partnerships  by
     contributing  the  exercise  proceeds to the  operating  partnerships.  Our
     increased  interest shall be equal to the percentage of outstanding  shares
     of common stock and O.P. Units on an as-converted  basis represented by the
     shares acquired upon exercise of the option.

     TERM

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

     EMPLOYEES

     As of February 28, 2006, we employed  five people,  all of whom work at our
     executive offices at 10050 Bandley Drive, Cupertino, California, 95014.

     FACILITIES

     We lease office space at 10050 Bandley Drive,  Cupertino,  California  from
     Berg & Berg  Enterprises,  Inc. and share clerical staff and other overhead
     on what we consider to be favorable  terms.  The total monthly rent payable
     by us to Berg & Berg Enterprises, Inc. is $7,520.

                                     - 8 -

<PAGE>


ITEM 1A. RISK FACTORS

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

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

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

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

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

     BOARD OF DIRECTORS REPRESENTATION
     The Berg Group  members  have the right to  designate  two of the  director
     nominees  submitted by our Board of Directors to stockholders for election,
     as long as the Berg Group members and their  affiliates,  other than us and
     the operating  partnerships,  beneficially own, in the aggregate,  at least
     15% of our outstanding shares of common stock calculated on a Fully Diluted
     basis.  If the Fully Diluted  ownership of the Berg Group members and their
     affiliates, other than us and the operating partnerships,  is less than 15%
     but is at least 10% of the common  stock,  the Berg Group  members have the
     right to designate one of the director  nominees  submitted by our Board of
     Directors to  stockholders  for election.  Its right to designate  director
     nominees affords the Berg Group substantial  control and influence over the
     management  and direction of our  corporation.  The Berg Group's  interests
     could conflict with the interests of our  stockholders  and could adversely
     affect the price of our common stock.

     SUBSTANTIAL OWNERSHIP INTEREST
     The Berg Group currently owns O.P. Units representing  approximately  74.1%
     of the equity  interests in the operating  partnerships  and  approximately
     74.1% of our equity  interests on a Fully Diluted basis. The O.P. Units may
     be converted into shares of common stock,  subject to limitations set forth
     in our  charter  and  other  agreements  with  the  Berg  Group,  and  upon
     conversion  would  represent  voting control of our  corporation.  The Berg
     Group's  ability to exchange its O.P.  Units for common stock permits it to
     exert  substantial  influence  over the  management  and  direction  of our
     corporation. This influence increases our dependence on the Berg Group.

     LIMITED PARTNER APPROVAL RIGHTS
     Mr. Berg and other limited  partners,  including  other members of the Berg
     Group,  may restrict our operations and activities  through rights provided
     under  the  terms  of  the  amended  and  restated   agreement  of  limited
     partnership which governs each of the operating  partnerships and our legal
     relationship to each operating partnership as its general partner.  Matters
     requiring  approval of the holders of a majority of the O.P.  Units,  which
     necessarily would include the Berg Group, include the following:

                                     - 9 -

<PAGE>


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

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

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

     -    any other change of control of the operating partnerships;

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

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

     In addition, as long as the Berg Group members and their affiliates,  other
     than us and the operating partnerships, beneficially own, in the aggregate,
     at least 15% of the  outstanding  shares of common stock on a Fully Diluted
     basis,  the  consent of the  limited  partners  holding the right to vote a
     majority of the total number of O.P.  Units  outstanding  is also  required
     with respect to:

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

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

     -    the liquidation of the operating partnerships.

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

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

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

     -    our headquarters are leased from an entity owned by the Berg Group, to
          whom we pay rent of $7,520 per month;

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

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

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

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

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

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

                                     - 10 -

<PAGE>


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

     BERG LAND HOLDINGS
     The Berg  Group owns  several  parcels of  unimproved  land in the  Silicon
     Valley  that the  operating  partnerships  and we have the right to acquire
     under the terms of the Berg Land Holdings Option Agreement.  We have agreed
     to pay an amount based on  pre-negotiated  terms for any of the  properties
     that we do acquire.  We must pay the  acquisition  price in cash unless the
     Berg Group elects,  in its discretion,  to receive O.P. Units valued at the
     average  market price of a share of common stock during the  30-trading-day
     period preceding the acquisition date. At the time of acquisition, which is
     subject to the  approval  of the  Independent  Directors  Committee,  these
     properties may be encumbered by debt that we or the operating  partnerships
     will be required to assume or repay.  The use of our cash or an increase in
     our  indebtedness to acquire these properties could have a material adverse
     effect on our financial  condition,  results of  operations  and ability to
     make cash  distributions  to our  stockholders.  The Independent  Directors
     Committee recently  authorized the removal of a 160-acre site from the Berg
     Land  Holdings  Option  Agreement  if the  Berg  Group  is able  to  obtain
     residential   development   zoning  for  any  portion  of  this  land.  The
     Independent  Directors Committee determined that this site is not likely to
     be of future development  interest to us, and so the Berg Group is now able
     to pursue its own residential development  opportunities for this site. Any
     portions  of such site that are  rezoned as  residential  will no longer be
     subject to the Berg Land Holdings Option Agreement and will not provide any
     future benefit to us.

     TAX CONSEQUENCES OF SALE OF PROPERTIES
     Because many of our  properties  have  unrealized  taxable  gain, a sale of
     those  properties  could create  adverse  income tax  consequences  for the
     limited partners of the operating partnerships. We have agreed with Carl E.
     Berg, Clyde J. Berg and John  Kontrabecki,  a limited partner in two of the
     operating  partnerships,  that prior to December 29, 2008, each of them may
     prevent us and the operating  partnerships from selling or transferring any
     of the  properties  that were  acquired  from them in our July 1998  UPREIT
     acquisition  if the  proposed  sale or  other  transfer  will be a  taxable
     transaction. As a result, our opportunities to sell these properties may be
     limited.  If we need to sell  any of  these  properties  to  raise  cash to
     service  our  debt,  acquire  new  properties,  pay cash  distributions  to
     stockholders or for other working capital purposes,  we may be unable to do
     so. These restrictions could harm our business and cause our stock price to
     fall.

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

     RELATED PARTY DEBT
     On October 26, 2005, the  Independent  Directors  Committee of the Board of
     Directors  approved  the  termination  of the $20  million  line of  credit
     agreement  between  the Company  and the Berg Group  effective  October 31,
     2005. The Berg Group line of credit was  originally  scheduled to mature in
     March 2006. There are no borrowings  currently  outstanding  under the Berg
     Group line of credit.  We did not incur any fees or charges for terminating
     the Berg Group line of credit. We are liable under a mortgage loan of $10.1
     million due June 2010 that we assumed in connection with our acquisition of
     the 5300-5350  Hellyer Avenue R&D  properties  that we acquired in May 2000
     under the Berg Land Holdings  Option  Agreement.  If we are unable to repay
     our debts to the Berg Group when due,  the Berg Group  could take action to
     enforce our  payment  obligations.  Potential  actions by the Berg Group to
     enforce these obligations could result in the foreclosure in one or more of
     our properties and a reduction in the amount of cash  distributions  to our
     stockholders.  In turn, if we fail to meet the minimum  distributions  test
     because  of a loan  default  or  another  reason,  we  could  lose our REIT
     classification for federal income tax purposes. For more information please
     refer to Item 1A,  "Risk  Factors - Failure to satisfy  federal  income tax
     requirements  for REITs could reduce our  distributions,  reduce our income
     and cause our stock price to fall."

                                     - 11 -

<PAGE>


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

     The Berg Land Holdings Option Agreement, as amended, which provides us with
     significant benefits and opportunities to acquire additional R&D properties
     from the Berg Group,  will expire when the Berg Group and their  affiliates
     (excluding  us and the  operating  partnerships)  own less  than 65% of our
     common  stock  on a Fully  Diluted  basis.  Termination  of the  Berg  Land
     Holdings Option  Agreement could result in limitation of our growth,  which
     could cause our stock price to fall.

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

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

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

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

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

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

     EXPENDITURES FOR PROPERTY OWNERSHIP ARE FIXED
     Income  from  properties  and real  estate  values are also  affected  by a
     variety of other factors,  such as governmental  regulations and applicable
     laws, including real estate,  zoning and tax laws, interest rate levels and
     the availability of financing.  Various significant expenditures associated
     with an investment in real estate,  such as mortgage payments,  real estate
     taxes  and   maintenance   expenses,   generally   are  not  reduced   when
     circumstances  cause a reduction in revenue from the investment.  Thus, our
     operating  results and our cash flow may decline  materially  if our rental
     income is reduced.

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

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

     LOSS OF KEY TENANTS
     Single  tenants,  many of  whom  are  large,  publicly  traded  information
     technology  companies,  occupy most of our properties.  We may lose tenants
     when  existing  leases  expire  because it may be difficult to re-lease the
     same  property due to  substantial  overcapacity  of R&D  properties in the
     Silicon Valley at present.  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.

                                     - 12 -
<PAGE>

     Moreover,  to retain key tenants upon the expiration of existing  leases we
     may need to reduce rents,  which also could adversely  affect our operating
     results and ability to make distributions.

     TENANT BANKRUPTCIES
     Key tenants could seek the protection of the bankruptcy  laws,  which could
     result in the rejection and termination of their leases,  thereby causing a
     reduction in our rental income.  Under the bankruptcy  laws,  these tenants
     may have the right to reject  their  leases  with us and our claim for rent
     will be limited to the greater of one year or 15% of the total amount owing
     under  the  leases  upon  default,  but not to  exceed  three  years of the
     remaining  term of the lease  following the earlier of the petition  filing
     date or the date on which we gained  repossession of the property,  as well
     as any rent that was unpaid on the earlier of those dates.

     OUR SUBSTANTIAL INDEBTEDNESS
     Our properties are subject to substantial indebtedness. If we are unable to
     make  required  mortgage  payments,  we could sustain a loss as a result of
     foreclosure  on our  properties by the  mortgagor.  For example,  under our
     mortgage loan agreements with Northwestern  Mutual Life Insurance  Company,
     the payment of all $100 million  outstanding  could be accelerated upon the
     sale or certain  other  transfers  of more than 51% of the total  number of
     O.P. Units and shares of common stock of the Company held by the members of
     the Berg Group.  We have no reason to expect such a sale or transfer in the
     foreseeable future, but the members of the Berg Group have no obligation to
     us to  refrain  from any such  sale or other  transfer.  We have  adopted a
     policy  of  maintaining  a  consolidated  ratio  of  debt to  total  market
     capitalization,  which  includes  for this  purpose the market value of all
     shares of common stock for which  outstanding O.P. Units are  exchangeable,
     of less than 50%.  This ratio may not be exceeded  without the  approval of
     more than 75% of our entire Board of Directors.  Our Board of Directors may
     vote to change  this  policy,  however,  and we could  become  more  highly
     leveraged, resulting in an increased risk of default on our obligations and
     an increase in debt service  requirements  that could adversely  affect our
     financial  condition,  our  operating  results  and  our  ability  to  make
     distributions to our stockholders.

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

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

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

     OUR REAL ESTATE ASSETS MAY BE SUBJECT TO IMPAIRMENT CHARGES.

     We  continually  evaluate the  recoverability  of the carrying value of our
     real  estate  assets  for  impairment  indicators.  Factors  considered  in
     evaluating   impairment  of  our  existing   real  estate  assets   include
     significant  declines in property  operating  profits,  recurring  property
     operating  losses and other  significant  adverse changes in general market
     conditions  that are  considered  permanent  in nature.  Generally,  a real
     estate  asset is not  considered  impaired if the  undiscounted,  estimated
     future  cash flows of the asset over its  estimated  holding  period are in
     excess of the asset's net book value at the balance sheet date. Assumptions
     used to estimate  annual and  residual  cash flow,  the  estimated  holding
     period of such assets,  the lease up period when  properties are vacant and
     future rental income  require the judgment of  management.  Actual  results
     could be different than our estimates.

     In 2004, we recorded an  impairment  charge to reflect the decline in value
     of one of our R&D properties  held for sale as of the year end. For further
     discussion  of this charge  please refer to Part II, Item 8,  "Consolidated
     Financial Statements and Supplementary Data - Note 16, Real Estate Held for
     Sale and Discontinued  Operations."  There can be no assurance that we will
     not take additional  charges in the future related to the impairment of our
     assets.  As of the years  ended  December  31,  2005 and  2004,  management
     believes it has applied  reasonable  estimates and judgments in determining
     the  proper  classification  of its real  estate  assets.  However,  should
     external or internal circumstances change requiring the need to shorten the
     holding periods or adjust the estimated future cash flows of certain of our
     assets, we could be required to record additional  impairment  charges.  If
     any real  estate  asset  held for sale is  considered  impaired,  a loss is
     provided to reduce the carrying value of the asset

                                     - 13 -
<PAGE>

     to its fair value,  less selling costs. Any future  impairment could have a
     material  adverse  affect on the Company's  results of operations and funds
     from operations in the period in which the charge is taken.

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

     FAILURE TO QUALIFY AS A REIT
     Although we currently  operate in a manner designed to enable us to qualify
     and maintain our REIT status, it is possible that economic,  market, legal,
     tax or other  considerations  may cause us to fail to  qualify as a REIT or
     may cause our Board of  Directors  either to refrain  from  making the REIT
     election or to revoke that election once made. To maintain REIT status,  we
     must meet certain tests for income, assets,  distributions to stockholders,
     ownership  interests,  and  other  significant  conditions.  If we  fail to
     qualify as a REIT in any taxable  year,  we will not be allowed a deduction
     for  distributions  to our stockholders in computing our taxable income and
     would  be  subject  to  federal   income  tax,   including  any  applicable
     alternative  minimum tax, on our taxable income at regular corporate rates.
     Moreover, unless we were entitled to relief under certain provisions of the
     tax laws, we would be  disqualified  from  treatment as a REIT for the four
     taxable years following the year in which our  qualification was lost. As a
     result,  funds available for  distributions  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.

     REIT DISTRIBUTION REQUIREMENTS
     To  maintain  REIT  status,  we  must  distribute  as  a  dividend  to  our
     stockholders at least 90% of our otherwise  taxable  income,  after certain
     adjustments,  with respect to each tax year. We also may be subject to a 4%
     non-deductible  excise tax in the event our  distributions  to stockholders
     fail to meet  certain  other  requirements.  Failure  to comply  with these
     requirements  could  result in our income  being  subject to tax at regular
     corporate rates and could cause us to be liable for the excise tax.

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

     STOCKHOLDERS ARE NOT ASSURED OF RECEIVING CASH DISTRIBUTIONS FROM US.

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

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

     -    the amount of cash available for distribution;
     -    our financial condition;
     -    whether to reinvest funds rather than to distribute such funds;
     -    our committed and projected capital expenditures;
     -    the amount of cash required for new property  acquisitions,  including
          acquisitions under our existing agreements with the Berg Group;
     -    the amount of our annual debt service requirements;
     -    the annual distribution  requirements under the REIT provisions of the
          federal income tax laws;
     -    our projected rental rates and revenues;
     -    prospects of tenant  renewals and re-leases of  properties  subject to
          expiring leases;
     -    cash required for re-leasing activities; and

                                     - 14 -
<PAGE>

     -    such other factors s our Board of Directors deems relevant.

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

     OUR PROPERTIES COULD BE SUBJECT TO PROPERTY TAX REASSESSMENTS.

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

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

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

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

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

     We cannot predict the effect, if any, that future sales of shares of common
     stock,  or the  availability  of shares for future sale,  could have on the
     market price of our common stock.  As of December 31, 2005, all outstanding
     shares of our common stock,  other than shares  controlled  by  affiliates,
     were eligible for sale in the public  market  without  resale  restrictions
     under the federal  securities laws. Sales of substantial  amounts of common
     stock,  including  shares  issued in  connection  with the  exercise of the
     exchange rights held by the limited partners of the operating partnerships,
     or the  perception  that such sales could  occur,  could  adversely  affect
     prevailing market prices for the common stock.  Additional shares of common
     stock may be issued to limited  partners,  subject to the  applicable  REIT
     qualification ownership limit, if they exchange their O.P. Units for shares
     of common stock pursuant to their exchange rights,  or may be sold by us to
     raise  funds  required  to purchase  such O.P.  Units if  eligible  limited
     partners elect to tender O.P. Units to us using their put rights. Shares of
     stock  controlled  by our  affiliates  may be sold  subject  to  Rule  144,
     including the limitation under Rule 144(e) on the number of shares that may
     be sold within a three-month period. Additional common stock reserved under
     our 2004 Equity Incentive Plan,  including stock options,  may also be sold
     in the market at some time in the future.  Future sales of our common stock
     in the market could adversely affect the price of our common stock.

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

     None.

                                     - 15 -
<PAGE>


ITEM 2. PROPERTIES

     GEOGRAPHIC AND TENANT FOCUS

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

     -    anticipate trends in the market;

     -    identify and  concentrate  our efforts on the most  favorably  located
          sub-markets;

     -    take  advantage  of  our   experience   and  extensive   contacts  and
          relationships with local government agencies,  real estate brokers and
          subcontractors, as well as with tenants and prospective tenants; and

     -    identify strong tenants.

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

     LEASING

     The current  leases for the  properties  have terms  ranging from one to 15
     years.  Most of the leases  provide for fixed  periodic  rental  increases.
     Substantially all of the leases are triple-net leases pursuant to which the
     tenant is required to pay  substantially  all of the operating  expenses of
     the property,  property taxes and insurance,  including all maintenance and
     repairs,  and  excluding  only certain  structural  repairs to the building
     shell.  Most of the leases contain renewal options that allow the tenant to
     extend the lease based on adjustments to then  prevailing  market rates, or
     based on fixed rental adjustments, which may be at or below market rates.

     PROPERTY PORTFOLIO

     All of our properties  are R&D/office  type  properties.  Generally,  these
     properties   are  one-  to   two-story   buildings   of  tilt-up   concrete
     construction,  have on average  3.5 or more  parking  spaces  per  thousand
     rentable square feet, clear ceiling heights of less than 18 feet, and range
     in size from  approximately  4,500 to 211,000 rentable square feet. Most of
     the  office  space  is open  and  suitable  for  configuration  to meet the
     tenants' requirements with the use of movable dividers.

     The  following  table  sets  forth  certain  information  relating  to  our
     properties as of December 31, 2005:


<TABLE>
<CAPTION>
                                                                                                                Major
                                                            Percentage                                         Tenants'      2005
                                                  Total      Occupied    Average                               Rentable     Annual
                                        No. of   Rentable     as of        2005                               Sq. Ft. at  Base Rents
         Location                     Properties  Sq. Ft. Dec. 31, 2005 Occupancy   Major Tenants              12/31/05      (1)
         ---------------------------------------------------------------------------------------------------------------------------
<S>     <C>                             <C>    <C>          <C>           <C>      <C>                         <C>     <C>
         5300-5350 Hellyer Avenue (2)     2      160,000     100%          100%     Tyco Electronics Corp.      160,000   $3,518,068

         10401-10411 Bubb Road (2)        1       20,330      78%          96%      Aeroflex, Inc.               15,830      292,322

         45365 Northport Loop West        1       64,218      0%           13%      Vacant                            -      155,770

         45700 Northport Loop East        1       47,570      0%            0%      Vacant                            -            -

         45738 Northport Loop West        1       44,256     100%          100%     Quicksil, Inc.               44,256      444,946

         4050 Starboard Drive             1       52,232     100%          100%     Flash Electronics, Inc.      52,232      724,453

         3501 W. Warren Avenue &          1       67,864      52%          52%      ASM Nutool, Inc.             35,340      691,719
         46600 Fremont Blvd.

                                     - 16 -
<PAGE>
                                                                                                                Major
                                                            Percentage                                         Tenants'      2005
                                                  Total      Occupied    Average                               Rentable     Annual
                                        No. of   Rentable     as of        2005                               Sq. Ft. at  Base Rents
         Location                     Properties  Sq. Ft. Dec. 31, 2005 Occupancy   Major Tenants              12/31/05      (1)
         ---------------------------------------------------------------------------------------------------------------------------
         48800 Milmont Drive              1       53,000      0%            0%      Vacant                            -            -

         4750 Patrick Henry Drive         1       65,780      0%           18%      Vacant                            -      102,200

         Triangle Technology Park (2)     7      416,927      59%          57%      Intevac Corporation         129,583    4,822,895
                                                                                    Xicom Technology, Inc.       47,480
                                                                                    LSA - Cleanpart              28,300
                                                                                    IXYS Technologies, Inc.      19,600
                                                                                    Solid Data                   19,535

         5850-5870 Hellyer Avenue         1      109,715      7%            7%      Silver Creek Valley Church    7,675      131,547

         5750 Hellyer Avenue              1       73,312      0%            0%      Vacant                            -            -

         5500-5550 Hellyer Avenue         2      196,534      23%          23%      ACT Electronics, Inc.        46,120      588,030

         5400 Hellyer Avenue              1       77,184      43%          66%      Tasman Networks, Inc.        32,902      423,413

         5325-5345 Hellyer Ave.           2      256,500     100%          100%     Celestica Asia, Inc.        256,500    5,091,192

         5905-5965 Silver Creek           4      346,000     100%          100%     CIENA Corporation           346,000    9,356,838

         855 Embedded Way                 1       67,912     100%          100%     Lynuxworks, Inc.             67,912    1,597,182

         1065-1105 La Avenida Street      5      515,700     100%          100%     Microsoft Corporation       515,700   10,089,304

         1750 Automation Parkway          1       80,641     100%          100%     JDS Uniphase Corporation     80,641    1,305,251

         1756 Automation Parkway (6)      1       80,640     100%          100%     JDS Uniphase Corporation     80,640    2,056,716

         1762 Automation Parkway (6)      1       61,100     100%          100%     JDS Uniphase Corporation     61,100    2,371,664

         1768 Automation Parkway (6)      1      110,592     100%          100%     JDS Uniphase Corporation    110,592    3,536,328

         255 Caspian Drive                1      119,756     100%          25%      Equinix Operating Co., Inc. 119,756      592,792

         245 Caspian Drive (3)            1            -      0%            0%      Vacant                            -            -

         5970 Optical Court               1      128,520     100%          100%     Photon Dynamics, Inc.       128,520    1,787,124

         5900 Optical Court               1      165,000     100%          100%     Stryker Endoscopy           165,000    3,329,256

         2630 Orchard Parkway             1       60,633      0%           48%      Vacant                            -      173,277

         2610 Orchard Parkway             1       54,093      0%            0%      Vacant                            -            -

         55 West Trimble Road             1       91,722      0%            0%      Vacant                            -            -

         2001 Walsh Avenue                1       80,000     100%          100%     NEC Electronics America, Inc 80,000      766,666

         2880 Scott Boulevard             1      200,000     100%          100%     NEC Electronics America, Inc200,000    3,265,512

         2890 Scott Boulevard             1       75,000     100%          100%     NEC Electronics America, Inc.75,000    2,263,895

         2800 Scott Boulevard             1       99,800     100%          94%      Nvidia Corporation           99,800    1,008,490

         2300 Central Expressway          1       46,338     100%          100%     JDS Uniphase Corporation     46,338    3,332,022

         2220 Central Expressway          1       62,522      0%           33%      BRE/San Tomas LLC            62,522      333,333

         2330 Central Expressway          1       62,522      0%            0%      Vacant                            -            -

         2251 Lawson Lane (6)             1      125,000     100%          100%     Fujitsu IT Holdings, Inc.   125,000    1,264,768

         1230 East Arques                 1       60,000     100%          100%     Fujitsu IT Holdings, Inc.    60,000      327,069

         1250 East Arques                 4      200,000     100%          100%     Fujitsu IT Holdings, Inc.   200,000      869,311

         3120 Scott Blvd. (4)             -            -       -            -       -                                 -        1,080

                                     - 17 -
<PAGE>
                                                                                                                Major
                                                            Percentage                                         Tenants'      2005
                                                  Total      Occupied    Average                               Rentable     Annual
                                        No. of   Rentable     as of        2005                               Sq. Ft. at  Base Rents
         Location                     Properties  Sq. Ft. Dec. 31, 2005 Occupancy   Major Tenants              12/31/05      (1)
         ---------------------------------------------------------------------------------------------------------------------------
         20400 Mariani Avenue             1      105,000     100%          82%      Dade Behring, Inc.           62,323    1,633,219
                                                                                    Apple Computer, Inc.         42,677

         10500 De Anza Blvd.              1      211,000     100%          100%     Apple Computer, Inc.        211,000    5,206,608

         20605-705 Valley Green Dr.       2      142,000     100%          100%     Apple Computer, Inc.        142,000    3,254,084

         10300 Bubb Road                  1       23,400     100%          100%     Apple Computer, Inc.         23,400      252,720

         10440 Bubb Road                  1       19,500     100%          100%     Lightmaster Systems, Inc.    10,573      234,930

         10460 Bubb Road                  1       45,460      94%          81%      Luminous Networks, Inc.(5)   30,460      573,406
                                                                                    Blue Lane Technologies, Inc. 12,197

         1135 Kern Avenue                 1       18,300      0%            4%      Vacant                            -        7,502

         450 National Avenue              1       36,100      0%           25%      Vacant                            -      319,371

         3301 Olcott Street               1       64,500      0%            0%      Vacant                            -            -

         2800 Bayview Avenue              1       59,736      0%            0%      Vacant                            -            -

         5521 Hellyer Avenue              1      203,800      0%            0%      Vacant                            -            -

         6850 Santa Teresa Blvd.          1       30,000      59%          59%      Indala Corporation           17,650      192,391

         6810 Santa Teresa Blvd.          1       54,996      13%          21%      Silicon Valley Real Estate    7,281      200,143

         140-160 Great Oaks Blvd. &       2      105,300      54%          74%      Amtech Microelectronics, Inc 31,500    1,217,272
         6781 Via Del Oro                                                           Santa Clara Water District   25,429

         6540-6541 Via Del Oro &          2       66,600      35%          64%      Modutek Corporation          17,400      640,629
         6385-6387 San Ignacio Ave.

         6311-6351 San Ignacio Ave.       5      362,767      46%          44%      Saint Gobain                 95,953    2,591,541
                                                                                    Avnet, Inc.                  32,154
                                                                                    Teledex, LLC                 30,000

         6320-6360 San Ignacio Ave.(6)    1      157,292      71%          71 %     Nortel Networks Corp.        92,692    3,689,281
                                                                                    Quantum 3D, Inc.             19,600

         75 East Trimble Road &           2      170,810      59%          90%      Comerica Bank                93,984    2,136,958
         2610 North First Street

         2033-2243 Samaritan Drive        3      235,122      28%          28%      Texas Instruments, Inc.      48,677    3,154,294
                                                                                    South Seas Enterprise        12,000

         1170 Morse Avenue                1       39,231     100%          100%     The Parkinson's Institute    39,231      541,392

         3236 Scott Blvd.                 1       54,672     100%          100%     Celeritek, Inc.              54,672      628,050

         1212 Bordeaux Lane               1       71,800      0%           33%      Vacant                            -      528,210

         McCandless Technology Park       14     705,958      49%          47%      Arrow Electronics, Inc.      92,862    5,762,474
                                                                                    Chartered Semiconductor Mfg. 45,312
                                                                                    ST Assembly Test Serv., Inc. 33,984
                                                                                    Hermes Microvision, Inc.     25,285
                                                                                    A&D Engineering, Inc         19,332

         1600 Memorex Drive               1      107,500     100%          100%     Sasco Electric               84,700      849,686
                                                                                    International Network Serv.  22,800

         1688 Richard Avenue              1       52,800     100%          100%     NWE Technology, Inc.         52,800      354,624

         1700 Richard Avenue              1       58,783     100%          100%     Broadwing Comm Services, Inc 58,783      755,359
                                        ----------------                                                                     -------

         TOTAL                          107    7,801,340      67%                                                       $101,338,577
                                       =================                                                                ============
</TABLE>

                                     - 18 -
<PAGE>

     (1)  Annual cash rents do not include any effect for  recognition of rental
          income on the straight-line method of accounting required by generally
          accepted  accounting  principles in the United States of America under
          which  contractual rent payment  increases are recognized  evenly over
          the lease term.
     (2)  Joint venture properties.
     (3)  Property  represents  a  commitment  by the Berg Group to construct an
          approximate  75,000 to 90,000  square foot  building on land  acquired
          during 2001.
     (4)  This  property was sold in 2005.  It is included in this table for the
          sole purpose of presenting the annual cash rent received in 2005.
     (5)  Luminous Networks terminated its lease obligations  effective February
          28, 2006.
     (6)  JDS Uniphase, Fujitsu and Nortel Networks are currently in negotiation
          to  terminate  their  lease  obligations  with  us for  the  indicated
          properties.  An additional 377,000 rentable square feet will be vacant
          in 2006 if we accept these lease terminations.

     We own 100% of all of the  properties,  except for one of the  buildings in
     the Triangle  Technology  Park,  which is owned by a joint venture in which
     we, through an operating  partnership,  own a 75% interest, the property at
     10401-10411  Bubb  Road,  which is owned by a joint  venture  in which  we,
     through  an  operating  partnership,   own  an  83.33%  interest,  and  the
     properties at 5300-5350 Hellyer Avenue,  which are owned by a joint venture
     in which we, through an operating  partnership,  own a 50% interest,  and a
     Berg affiliate owns the other 50% venture interest.

     LEASE EXPIRATIONS

     The following table sets forth a schedule of the lease  expirations for the
     properties  beginning with 2006, assuming that none of the tenants exercise
     existing  renewal  options  or  termination   rights.  The  table  excludes
     2,416,353 rentable square feet that was vacant as of January 1, 2006.

<TABLE>
<CAPTION>
                            Number of                                                           Percentage of Total Annual
           Year of Lease     Leases      Rentable Square Footage      2006 Annual Base Rent      Base Rent Represented By
            Expiration      Expiring   Subject to Expiring Leases   Under Expiring Leases (1)       Expiring Leases (2)
         --------------------------------------------------------------------------------------------------------------------
<S>                           <C>             <C>                       <C>                                <C>
               2006            19                523,173                 $ 9,185,419                         9.2%

               2007            18              1,026,814                  21,277,637                        21.3%

               2008            12                395,112                   3,951,054                         4.0%

               2009            15                611,141                   9,192,654                         9.2%

               2010             8                481,267                   8,709,139                         8.7%

               2011             3                696,484                  15,089,192                        15.1%

               2012             5                430,617                   8,622,735                         8.7%

               2013             1                125,044                     543,941                         0.6%

               2014             4                771,323                  16,759,694                        16.8%

               2015             2                204,256                   4,021,913                         4.0%

            Thereafter          1                 98,500                   2,389,132                         2.4%
                           --------------------------------------------------------------------------------------------------
                               88              5,363,731                 $99,742,510                        100%
                           ==================================================================================================
</TABLE>

     (1)  The base  rent for  expiring  leases is based on  scheduled  2006 cash
          rent,  which is different  than annual rent  determined  in accordance
          with GAAP.
     (2)  Based upon 2006 cash rent as discussed in Note (1)
     (3)  JDS Uniphase, Fujitsu and Nortel Networks are currently in negotiation
          to terminate certain lease obligations with us. An additional  377,000
          rentable  square feet will be vacant in 2006 if we accept  these lease
          terminations. Also includes Luminous rent, a tenant who terminated its
          lease obligations in early 2006.

     If we are unable to lease a significant  portion of the available  space or
     space  scheduled to expire in 2006 and thereafter at any of our properties;
     if existing tenants do not renew their leases; or if rental rates decrease,
     our  results of  operations,  financial  condition  and cash flows would be
     adversely affected.

     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.

                                     - 19 -
<PAGE>
     Under various federal, state and local laws, ordinances and regulations, an
     owner or  operator  of real  property  may be held  liable for the costs of
     removal or remediation of certain hazardous or toxic substances  located on
     or in the  property.  Such laws  often  impose  liability  on the owner and
     expose the owner to governmental  proceedings without regard to whether the
     owner knew of, or was  responsible  for, the  presence of the  hazardous or
     toxic substances.  The cost of any required  remediation or removal of such
     substances may be substantial. In addition, the owner's liability as to any
     specific  property is  generally  not limited and could exceed the value of
     the property and/or the aggregate assets of the owner. The presence of such
     substances, or the failure to properly remove or remediate such substances,
     may also adversely  affect the owner's ability to sell or rent the property
     or to borrow  using the  property  as  collateral.  Persons who arrange for
     treatment  or the disposal of  hazardous  or toxic  substances  may also be
     liable  for  the  costs  of any  required  remediation  or  removal  of the
     hazardous or toxic substances at a disposal facility, regardless of whether
     the  facility is owned or operated by such owner or entity.  In  connection
     with the  ownership  of the  properties  or the  treatment  or  disposal of
     hazardous or toxic substances, we may be liable for such costs.

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

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

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

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

                                     - 20 -

<PAGE>


ITEM 3. LEGAL PROCEEDINGS

     Neither the operating  partnerships,  the  properties nor we are subject to
     any material  litigation nor, to our knowledge,  is any material litigation
     threatened against the operating  partnerships,  the properties or us. From
     time to time, we are engaged in legal  proceedings  arising in the ordinary
     course of our business.  We do not expect any of such proceedings to have a
     material adverse effect on our cash flows,  financial  condition or results
     of operations. We are currently involved in the following legal proceedings
     which we believe the ultimate outcome, will have no material adverse effect
     on our financial statements.

     REPUBLIC PROPERTIES  CORPORATION  ("RPC") V. MISSION WEST PROPERTIES,  L.P.
     ("MWP"),  IN THE CIRCUIT  COURT OF  MARYLAND  FOR  BALTIMORE  CITY CASE NO.
     24-C-00-005675.  RPC is a former 50% partner with Mission West  Properties,
     L.P. in the Hellyer Avenue  Limited  Partnership  ("Hellyer  LP"). In April
     2004 the Circuit Court for  Baltimore  City,  Maryland  issued a Memorandum
     Opinion in the case and awarded  damages of $933,548 to the RPC plaintiffs,
     which  must be paid by us or MWP.  The court  denied all  requests  by MWP,
     including a  declaration  that all of RPC's  interests in Heller L.P.  were
     validly converted to limited  partnership  interests and transferred to MWP
     or  its  designee  in  accordance  with  the  terms  of  the  Hellyer  L.P.
     partnership  agreement.   The  court  also  denied  RPC's  request  for  an
     injunction  ordering the  reinstatement of RPC's  partnership  interests in
     Hellyer L.P. We have appealed the decision to the Maryland  Appeals  Court.
     We do not believe that any further  court  decisions  in this case,  for or
     against us and MWP, will have a material adverse effect on our business. We
     have  a  receivable   from  a  Berg  Group  affiliate  for  the  amount  of
     distributions it received as the successor to RPC's interest in the Hellyer
     LP which  exceeds the amount of the damages  awarded to the RPC parties and
     would be used to pay for those  damages  in the event the  decision  of the
     Circuit Court is upheld  ultimately.  Furthermore,  we have never accounted
     for the 50%  interest  of RPC as our  asset  and if RPC is  deemed  to have
     retained that  interest or  reacquires  that interest our balance sheet and
     financial  condition  would  not be  impacted.  Although  to date,  we have
     consolidated the assets,  liabilities and operating  results of the Hellyer
     LP and  allocated  50% of the  operating  income to the  minority  interest
     holder.  In February 2001, we filed a suit against RPC in Superior Court of
     the State of  California  for the County of Santa  Clara Case No. CV 796249
     which has been stayed  pending  resolution  of the Maryland  case.  In July
     2004,  RPC  attached  our bank  account  for  approximately  $1.1  million.
     Following a July 2004 hearing in Superior  Court of the State of California
     for the County of Santa Clara,  the parties agreed that we will post a $1.5
     million bond and RPC will remove the  attachment  of our bank account until
     final  resolution  of the appeal in  Maryland.  On  February  4, 2005,  the
     Maryland  Appeals  Court heard our appeal.  On March 1, 2005,  the Maryland
     Appeals  Court ruled in favor of MWP,  finding  that the  Circuit  Court of
     Maryland could not assert  personal  jurisdiction in the RPC suit. In April
     2005,  the decision of the Maryland  Appeals  Court became  final,  and MWP
     obtained a court order for the release of a $1,551 bond, which it posted to
     remove an  attachment  order issued to RPC. In April 2005,  RPC submitted a
     motion to the Superior Court of the State of California  effectively asking
     the  court  to  prevent  MWP  from  dismissing  the  previously   dismissed
     California suit. In July 2005, the Maryland Supreme Court agreed to hear an
     appeal filed by RPC. In December 2005, the Maryland Supreme Court heard the
     appeal  filed by RPC.  The  Maryland  Supreme  Court has not  rendered  its
     decision.

     In January 2004, the GLOBAL CROSSING ESTATE REPRESENTATIVE,  FOR ITSELF AND
     THE LIQUIDATING TRUSTEE OF THE GLOBAL CROSSING LIQUIDATING TRUST V. MISSION
     WEST  PROPERTIES  L.P.  filed an action in United States  Bankruptcy  Court
     Southern  District  of New York  Case No.  02-40188  (REG)  asserting  that
     payments of $815,052 made in the ordinary course of business within 90 days
     of the Global  Crossing  bankruptcy  filing were  preference  payments.  In
     addition,  the  Global  debtors  and  the  Creditors'  Committee  filed  an
     objection to the  unsecured  claim filed by Mission West  Properties in the
     Global  cases for  $16,710,605.  We have  engaged  legal  counsel to defend
     ourselves  in this claim and intend to  vigorously  contest the matter.  On
     February 9, 2005, the Court held a hearing to consider the objection  filed
     with respect to Mission West  Properties'  claim. In April 2005, we filed a
     motion for summary judgment in the United States  Bankruptcy Court Southern
     District of New York requesting the Court to dismiss the preference  claim.
     The motion for summary  judgment  was denied.  Discovery  continues by both
     parties and no trial date has been set.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No  matters  were  submitted  to a vote of  stockholders  during the fourth
     quarter of the year ended December 31, 2005.

                                     - 21 -

<PAGE>


PART II

ITEM 5. MARKET FOR REGISTRANT'S  COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND
        ISSUER PURCHASES OF EQUITY SECURITIES

     Our common stock is listed on the American Stock Exchange  ("AMEX") and the
     Pacific Exchange,  Inc. and trades under the symbol "MSW." The high and low
     closing  sale  prices per share of common  stock as reported on AMEX during
     each quarter of 2005 and 2004 were as follows:

<TABLE>
<CAPTION>
                                                     2005                              2004
                                         -----------------------------     -----------------------------
                                             High            Low               High            Low
                                         -------------   -------------     -------------   -------------
<S>                                        <C>             <C>               <C>             <C>
                1st Quarter                 $11.19          $10.04            $14.00          $12.81
                2nd Quarter                 $10.53          $ 9.50            $13.44          $11.40
                3rd Quarter                 $11.00          $10.02            $12.14          $ 9.95
                4th Quarter                 $10.26          $ 9.71            $10.95          $ 9.51
</TABLE>

     On February 28, 2006,  there were 191  registered  holders of the Company's
     common  stock.  We declared and paid  dividends in each quarter of 2005 and
     2004.  We expect to pay  quarterly  dividends  during 2006.  The  following
     tables show information for quarterly dividends for 2005 and 2004.

<TABLE>
<CAPTION>
                                                              2005
                                         -----------------------------------------------
                                                           Payment            Dividend
                                          Record Date        Date            Per Share
                                         -------------   -------------     -------------
<S>                                       <C>             <C>                <C>
                1st Quarter                03/31/05        04/07/05           $0.16
                2nd Quarter                06/30/05        07/07/05            0.16
                3rd Quarter                09/30/05        10/06/05            0.16
                4th Quarter                12/31/05        01/05/06            0.16
                                                                           -------------
                   Total                                                      $0.64
                                                                           =============
</TABLE>

<TABLE>
<CAPTION>
                                                              2004
                                         -----------------------------------------------
                                                           Payment           Dividend
                                          Record Date        Date            Per Share
                                         -------------   -------------     -------------
<S>                                       <C>             <C>                <C>
                1st Quarter                03/31/04        04/08/04           $0.24
                2nd Quarter                06/30/04        07/08/04            0.24
                3rd Quarter                09/30/04        10/07/04            0.24
                4th Quarter                12/31/04        01/07/05            0.16
                                                                           -------------
                   Total                                                      $0.88
                                                                           =============
</TABLE>

     For federal income tax purposes, we have characterized 89% of the dividends
     declared  in 2005 as taxable  ordinary  income and 11% as return of capital
     (unaudited).  For 2004, we have characterized 98% of the dividends declared
     as taxable ordinary income and 2% as return of capital (unaudited).

     The  closing  price of our common  stock on  December  30,  2005,  the last
     trading day, was $9.74 per share.

                                     - 22 -

<PAGE>


ITEM 6. SELECTED FINANCIAL DATA

     The following table sets forth selected  historical  financial  information
     for  Mission  West  Properties,  Inc.  See Part II - Item 7,  "Management's
     Discussion and Analysis of Financial  Condition and Results of Operations -
     Overview  and  Background"  for  discussion  of business  combinations  and
     property  dispositions  that  materially  affect the  comparability  of the
     selected financial data.

     Selected consolidated  financial data is derived from the audited financial
     statements and notes thereto (see Part II - Item 8, "Consolidated Financial
     Statements and Supplementary Data,") and is as follows:

<TABLE>
<CAPTION>
                                                                                   Years Ended December 31,
                                                           -------------------------------------------------------------------------
                                                               2005           2004            2003           2002           2001
                                                           -------------  --------------  -------------  -------------  ------------
                                                                         (dollars in thousands, except per share data)
         OPERATING DATA:
         Revenue:
<S>                                                        <C>           <C>            <C>             <C>            <C>
             Rental revenue from real estate                $100,765       $119,339        $129,275       $127,675       $121,307
             Tenant reimbursements                            14,762         14,919          18,683         19,759         17,000
             Other income                                      4,606          6,913           4,525          4,246          2,462
                                                           -------------  --------------  -------------  -------------  ------------
         Total revenues                                      120,133        141,171         152,483        151,680        140,769
                                                           -------------  --------------  -------------  -------------  ------------

         Expenses:
             Property operating, maintenance and real
                estate taxes                                  19,478         20,046          20,866         23,370         18,007
             Interest                                         21,295         17,581          16,446          9,588          8,704
             Interest (related parties)                          972          1,077           1,064          3,422          4,709
             General and administrative                        1,910          2,011           1,324          1,488          1,284
             Depreciation and amortization of real estate     21,283         21,347          20,139         17,675         16,109
                                                           -------------  --------------  -------------  -------------  ------------
         Total expenses                                       64,938         62,062          59,839         55,543         48,813
                                                           -------------  --------------  -------------  -------------  ------------
         Income before gain on sales of assets, equity in
         earnings of unconsolidated joint venture and
         minority interests                                   55,195         79,109          92,644         96,137         91,956
             Gain on sales of assets                               -              -               -              -         11,453
             Equity in earnings of unconsolidated joint venture  724          2,947           3,885              -              -
             Minority interests                              (46,234)       (68,199)        (80,459)       (80,348)       (86,375)
                                                           -------------  --------------  -------------  -------------  ------------
             Income from continuing operations                 9,685         13,857          16,070         15,789         17,034
         Discontinued operations, net of minority interests:
             Gain from disposal of discontinued operations       445              -               -          1,018              -
             (Loss)/income attributable to discontinued
                operations (1)                                  (103)          (545)            142            308          1,052
                                                           -------------  --------------  -------------  -------------  ------------
             (Loss)/income from discontinued operations          342           (545)            142          1,326          1,052
                                                           -------------  --------------  -------------  -------------  ------------

         Net income to common stockholders                   $10,027        $13,312         $16,212        $17,115        $18,086
                                                           =============  ==============  =============  =============  ============
         Net income to minority interests                    $47,524        $66,100         $80,836        $86,641        $91,312
                                                           =============  ==============  =============  =============  ============

         Basic net income from continuing operations per share  $0.53         $0.77           $0.90          $0.90          $1.00
         Diluted net income from continuing operations per share$0.53         $0.77           $0.90          $0.88          $0.97

         Basic net income/(loss) from discontinued
            operations per share                                $0.02        ($0.03)          $0.01          $0.08          $0.06
         Diluted net income/(loss) from discontinued
            operations per share                                $0.02        ($0.03)          $0.01          $0.08          $0.06

         Basic net income per share                             $0.55         $0.74           $0.91          $0.98          $1.06
         Diluted net income per share                           $0.55         $0.74           $0.91          $0.96          $1.03
         Dividends per share                                    $0.64         $0.88           $0.96          $0.96          $0.89


         PROPERTY AND OTHER DATA:
         Total properties, end of period (2)                      107           109             109            101             97
         Total rentable square feet, end of period (000's)      7,780         7,917           7,917          7,164          6,799
         Average monthly rental revenue per square foot (3)     $1.58         $1.80           $1.77          $1.71          $1.59
         Occupancy at end of period                                67%           71%             77%            84%            97%

         FUNDS FROM OPERATIONS (4):                           $79,152      $103,320        $117,918       $118,444       $115,013
         Cash flows provided by operating activities          $21,898       $38,970         $36,104        $34,452        $40,521
         Cash flows used in investing activities              ($2,875)      ($1,519)      ($109,983)      ($20,744)       ($3,040)
         Cash flows provided by/(used) in financing activities$10,899      ($40,061)        $73,529       ($14,539)      ($36,862)
</TABLE>

                                     - 23 -
<PAGE>

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                           -------------------------------------------------------------------------
                                                               2005            2004            2003           2002          2001
                                                           -------------  --------------  -------------  -------------  ------------
                                                                                    (dollars in thousands)
<S>                                                          <C>             <C>            <C>            <C>           <C>
         BALANCE SHEET DATA:
         Real estate assets, net of accumulated depr. & amort.$  927,381      $  960,863     $  985,751       $886,122      $857,653
         Total assets                                          1,023,377       1,005,656      1,032,632        926,783       909,953
         Line of credit - related parties                              -           9,560          6,320         58,792        79,887
         Revolving line of credit                                      -          24,208         23,965         23,839             -
         Loan payable                                                  -               -              -         20,000             -
         Debt                                                    357,481         292,822        299,858        125,062       127,416
         Debt - related parties                                   10,051          10,420         10,762         11,078        11,371
         Total liabilities                                       407,680         380,355        394,324        289,817       286,768
         Minority interests                                      500,682         512,089        524,918        526,580       514,810
         Stockholders' equity                                   $115,015        $113,212       $113,390       $110,386      $108,375
         Common stock outstanding                             18,448,791      18,097,191     17,894,691     17,487,329    17,329,779
         O.P. Units issued and outstanding                    86,088,095      86,384,695     86,398,064     86,474,032    85,762,541
</TABLE>

(1)  Upon the  implementation  of SFAS 144,  "Accounting  for the  Impairment or
     Disposal of Long-Lived  Assets," on January 1, 2002, the operating  results
     of real  estate  held  for  sale and  sold  are  reported  as  discontinued
     operations for all years presented.  Additionally,  all gains and losses on
     the sale of assets  classified  as held for sale  subsequent  to January 1,
     2002 are included in discontinued operations.  As the operating results and
     gains or losses  from the sale of real  estate  assets  prior to January 1,
     2002 are included in continuing operations,  the presentation of results is
     not comparable between years.
(2)  As of December  31,  2005,  2004,  2003,  2002 and 2001,  total  properties
     include a property at 245 Caspian in  Sunnyvale  with no  building.  During
     2001, the Company paid the Berg Group  approximately $7.5 million for their
     commitment to complete an approximate 75,000 to 90,000 square foot building
     on the property.
(3)  Average  monthly  rental  revenue  per square foot has been  determined  by
     taking  the total  cash base rent for the  period  divided by the number of
     months in the period,  and then divided by the average occupied square feet
     in the period.
(4)  Funds from Operations  ("FFO") is a non-GAAP  financial  instrument used by
     REITs to  measure  and  compare  operating  performance.  As defined by the
     National  Association  of Real Estate  Investment  Trusts  ("NAREIT"),  FFO
     represents  net income  (loss)  before  minority  interest of unit  holders
     (computed in accordance with GAAP),  including  non-recurring  events other
     than  "extraordinary  items" under GAAP and excluding gains and losses from
     sales of discontinued operations or depreciable operating properties,  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.  FFO
     does include  impairment  losses for properties  held for sale and held for
     use.  We have  revised  our FFO  computations  for  2002  and  2001 for the
     inclusion of the  amortization of leasing  commissions in depreciation  and
     amortization of real estate in order to be comparable to our 2005, 2004 and
     2003 FFO  presentation  and to more  closely  conform to the  NAREIT's  FFO
     definition.  Additionally, our 2005, 2004 and 2003 FFO calculation includes
     our portion of the  depreciation  and  amortization of real estate from our
     unconsolidated   joint  venture,   but  excludes  the  above-market   lease
     intangible asset, which was recorded as a reduction of revenues. Management
     considers FFO to be an  appropriate  supplemental  measure of the Company's
     operating and financial  performance  because when compared year over year,
     it reflects the impact to operations from trends in occupancy rates, rental
     rates,  operating costs,  general and administrative  expenses and interest
     costs, providing a perspective not immediately apparent from net income. In
     addition,  management  believes that FFO provides useful  information about
     the Company's financial  performance when compared to other REITs since FFO
     is  generally  recognized  as  the  industry  standard  for  reporting  the
     operations of REITs.  FFO should not be considered  as an  alternative  for
     neither net income as a measure of  profitability  nor is it  comparable to
     cash flows provided by operating  activities  determined in accordance with
     GAAP. FFO is not  comparable to similarly  entitled items reported by other
     REITs that do not define them  exactly as we define FFO. SEE PART II - ITEM
     7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
     OF  OPERATIONS  - FUNDS  FROM  OPERATIONS"  FOR  RECONCILIATION  OF OUR FFO
     FIGURES TO OUR NET INCOME DETERMINED IN ACCORDANCE WITH GAAP.

                                     - 24 -
<PAGE>


ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS


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

     OVERVIEW AND BACKGROUND

     Our original  predecessor was formed in 1969 as Palomar Mortgage Investors,
     a California  business trust,  which operated as a mortgage REIT until 1979
     when, under the name of Mission  Investment Trust, it terminated its status
     as a REIT and began to  develop  and market  its own  properties.  In 1982,
     Mission  West  Properties  was  incorporated  as  a  successor  to  Mission
     Investment Trust. In 1997, our predecessor,  Mission West Properties,  sold
     all its real estate  assets and paid a special  dividend of $9.00 per share
     to stockholders, after which it retained only nominal assets. Subsequently,
     the Berg Group acquired  control of the corporation as a vehicle to acquire
     R&D  properties,  or  interests  in entities  owning such  properties  in a
     transaction completed on September 2, 1997. At that time the Berg Group and
     other investors acquired an aggregate 79.6% controlling ownership position.
     In May 1998, we, the Berg Group members,  an independent  limited  partner,
     and certain other persons entered into an acquisition  agreement providing,
     among other things,  for our  acquisition  of interests as the sole general
     partner  in  the  operating  partnerships.   At  the  time,  the  operating
     partnerships  held  approximately  4.34 million rentable square feet of R&D
     property  located in Silicon  Valley.  The agreement  also provided for the
     parties to enter into the Pending Projects Acquisition Agreement,  the Berg
     Land Holdings Option Agreement and the Exchange Rights Agreement, following
     stockholder   approval.   Effective  July  1,  1998,  we  consummated   our
     acquisition  of  the  general   partnership   interests  in  the  operating
     partnerships through the purchase of the general partnership interests, and
     all  limited  partnership  interests  in the  operating  partnerships  were
     converted  into  59,479,633  O.P.  Units,  which  represented  ownership of
     approximately 87.89% of the operating partnerships. Our general partnership
     interests  represented  the  balance  of the  ownership  of  the  operating
     partnerships.  At December 31, 2005, we owned a 17.50% general  partnership
     interest in the  operating  partnerships,  taken as a whole,  on a weighted
     average basis.

     Since  the  beginning  of  calendar  year  1999,  we have  been  taxed as a
     qualified REIT.

     Our  reincorporation  under the laws of the State of  Maryland  through the
     merger of Mission  West  Properties  into  Mission  West  Properties,  Inc.
     occurred on December 30, 1998, at which time all outstanding  shares issued
     by our predecessor California corporation were converted into shares of our
     common stock on a one-for-one basis.

     In July 1999,  we completed a public  offering of  8,680,000  shares of our
     common stock at $8.25 per share.  The net proceeds of  approximately  $66.9
     million,  after deducting  underwriting discounts and other offering costs,
     were used primarily to repay indebtedness.

     We have grown through property acquisitions.  Since September 1998, we have
     acquired a total of  approximately  4.2 million rentable square feet of R&D
     buildings under the Pending Project  Acquisition  Agreement,  the Berg Land
     Holdings Option Agreement, and from unrelated third parties. The total cost
     of these properties was  approximately  $633 million.  We issued a total of
     27,962,025 O.P. Units and assumed debt totaling  approximately $308 million
     to acquire them.  Major  property  acquisitions  made by us from  unrelated
     sellers include the following:

     On April 9,  2003,  we  acquired  the  36-acre  San Tomas  Technology  Park
     consisting of seven R&D properties  with a total of  approximately  625,000
     rentable square feet for $110 million. We financed that acquisition through
     new debt and an existing line of credit.

     CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     We  prepare  our  consolidated  financial  statements  in  conformity  with
     accounting  principles  generally  accepted in the United States of America
     ("GAAP"),  which  requires  us to make  certain  estimates,  judgments  and
     assumptions   that  affect  the  reported   amounts  in  the   accompanying
     consolidated  financial  statements,  disclosure of  contingent  assets and
     liabilities and related footnotes. Accounting and disclosure decisions with
     respect to material transactions that are subject to significant management
     judgments or estimates  include  impairment of long lived assets,  deferred
     rent  receivables,  and  allocation of purchase  price relating to property
     acquisitions and the related depreciable lives assigned. Actual results may
     differ from these estimates under different assumptions or conditions.

     Critical  accounting  policies are defined as those that require management
     to make estimates,  judgments and assumptions,  giving due consideration to
     materiality,  in certain  circumstances that affect amounts reported in the
     consolidated  financial

                                     - 25 -
<PAGE>

     statements,  and potentially  result in materially  different results under
     different  conditions and  assumptions.  We believe that the following best
     describe our critical accounting policies:

     REAL ESTATE ASSETS
     Real  estate  assets are stated at cost.  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") 66,
     "Accounting  for  Sales  of Real  Estate."  The  gain  on the  sale is only
     recognized  proportionately  as  the  seller  receives  payments  from  the
     purchaser.  Interest  income  is  recognized  on  an  accrual  basis,  when
     appropriate.

     BUSINESS COMBINATIONS
     Statement of financial  Accounting  Standards 141, "Business  Combinations"
     ("SFAS 141"),  was effective  July 1, 2001. The  acquisition  costs of each
     property  acquired  prior to July 1, 2001 were  allocated only to building,
     land and leasing commission with building depreciation being computed based
     on an  estimated  weighted  average  composite  useful life of 40 years and
     leasing commission  amortization being computed over the term of the lease.
     Acquisitions  of properties  made  subsequent to the effective date of SFAS
     141 are based on an allocation of the acquisition  cost to land,  building,
     tenant  improvements,  and  intangibles  for at market and above  market in
     place leases,  and the  determination of their useful lives are guided by a
     combination SFAS 141 and management's estimates. If we do not appropriately
     allocate these  components or we  incorrectly  estimate the useful lives of
     these components,  our computation of depreciation and amortization expense
     may not appropriately  reflect the actual impact of these costs over future
     periods, which will affect net income.

     IMPAIRMENT OF LONG-LIVED ASSETS
     We review real estate assets for impairment  whenever  events or changes in
     circumstances  indicate  that the  carrying  amount  of an asset may not be
     recoverable in accordance with Statement of Financial  Accounting Standards
     144,  "Accounting  for the  Impairment  and Disposal of Long-Lived  Assets"
     ("SFAS  144").  If the carrying  amount of the asset  exceeds its estimated
     undiscounted  net  cash  flow,  before  interest,   we  will  recognize  an
     impairment loss equal to the difference between its carrying amount and its
     estimated  fair value.  If impairment is recognized,  the reduced  carrying
     amount  of  the  asset  will  be  accounted  for  as its  new  cost.  For a
     depreciable  asset,  the new cost  will be  depreciated  over  the  asset's
     remaining  useful  life.   Generally,   fair  values  are  estimated  using
     discounted cash flow,  replacement cost or market comparison analyses.  The
     process of evaluating for impairment requires estimates as to future events
     and conditions,  which are subject to varying market  factors,  such as the
     vacancy rates,  future rental rates and operating  costs for R&D facilities
     in the Silicon  Valley area and related  submarkets.  The analysis  that we
     prepare in connection with determining if there may be any asset impairment
     loss under SFAS 144 considers  several  assumptions:  holding period of ten
     years,  36  months  lease up  period  and cap rate  ranging  from 8% to 9%.
     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  discussed  in  Note  16  to  the
     consolidated financial statements, we recognized an impairment loss in 2004
     on one asset held for sale under the application of this standard.

     ALLOWANCE FOR DEFERRED RENT AND DOUBTFUL ACCOUNTS
     The preparation of the  consolidated  financial  statements  requires us to
     make  estimates and  assumptions.  As such,  we must make  estimates of the
     uncollectability  of our accounts receivable based on the evaluation of our
     tenants' financial  position,  analyses of accounts  receivable and current
     economic  trends.  We also make  estimates for a  straight-line  adjustment
     reserve for  existing  tenants  with the  potential  of early  termination,
     bankruptcy or ceasing operations.  Our estimates are based on our review of
     tenants' payment  histories,  the remaining lease term,  whether or not the
     tenant is currently  occupying our building,  publicly available  financial
     information and such additional information about their financial condition
     as tenants provide to us. The information  available to us might lead us to
     overstate  or  understate  these  reserve  amounts.  The  use of  different
     estimates or assumptions could produce different results.  Moreover, actual
     future collections of accounts  receivable or reductions in future reported
     rental income due to tenant  bankruptcies or other business  failures could
     differ materially from our estimates.

     CONSOLIDATED JOINT VENTURES
     We,  through an operating  partnership,  own three  properties  that are in
     joint  ventures  of which we have  controlling  interests.  We  manage  and
     operate all three properties. The recognition of these properties and their
     operating  results  are  100%  reflected  on  our  consolidated   financial
     statements,  with appropriate  allocation to minority interest,  because we
     have  operational  and  financial  control  of  the  investments.  We  make
     judgments and assumptions  about the estimated monthly payments made to our
     minority  interest  joint  venture  partners,  which are reported  with our
     periodic  results of  operations.  Actual  results  may  differ  from these
     estimates under different assumptions or conditions.

     INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
     We, through an operating  partnership,  have a 50% non-controlling  limited
     partnership interest in one unconsolidated  joint venture.  This investment
     is not consolidated because the we do not exercise significant control over
     major operating and financial  decisions.  We account for the joint venture
     using the equity method of accounting.

                                     - 26 -

<PAGE>


     REVENUE RECOGNITION
     Rental  revenue is  recognized  on the  straight-line  method of accounting
     required  by GAAP  under  which  contractual  rent  payment  increases  are
     recognized evenly over the lease term, regardless of when the rent payments
     are received by us. The  difference  between  recognized  rental income and
     rental  cash  receipts  is recorded  as  Deferred  Rent  Receivable  on the
     consolidated balance sheets.

     Rental  revenue is affected if existing  tenants  terminate  or amend their
     leases. We try to identify tenants who may be likely to declare bankruptcy,
     cease  operations  or are likely to seek a negotiated  settlement  of their
     obligation.  By  anticipating  these  events in advance,  we expect to take
     steps to  minimize  their  impact on our  reported  results  of  operations
     through lease  renegotiations,  reserves  against deferred rent receivable,
     and  other  appropriate  measures.  Our  judgments  and  estimations  about
     tenants'  capacity to continue to meet their lease  obligations will affect
     the  rental  revenue  recognized.  Material  differences  may result in the
     amount and timing of our rental revenue for any period if we made different
     judgments or estimations.

     Lease  termination  fees are  recognized  as other  income  when there is a
     signed termination letter agreement, all of the conditions of the agreement
     have been met,  and when the  tenant no longer  has the right to occupy the
     property.  These fees are paid by tenants who want to terminate their lease
     obligations  before the end of the contractual term of the lease. We cannot
     predict or forecast the timing or amounts of future lease termination fees.

     We recognize income from rent, tenant  reimbursements and lease termination
     fees  and  other  income  once  all of the  following  criteria  are met in
     accordance with SEC Staff Accounting Bulletin 104:

     -    the agreement has been fully executed and delivered;
     -    services have been rendered;
     -    the amount is fixed and determinable; and
     -    collectability is reasonably assured.

     With regards to critical  accounting  policies,  where applicable,  we have
     explained  and  discussed the criteria for  identification  and  selection,
     methodology in application and impact on the financial  statements with the
     Audit  Committee  of our  Board of  Directors,  which  has  reviewed  these
     policies.

     RESULTS OF OPERATIONS

     COMPARISON OF THE YEAR ENDED  DECEMBER 31, 2005 TO THE YEAR ENDED  DECEMBER
     31, 2004

     RENTAL REVENUE FROM CONTINUING PROPERTY OPERATIONS
     As of December 31, 2005 and 2004, through our controlling  interests in the
     operating  partnerships,  we  owned  107 and 109  R&D  properties  totaling
     approximately  7.8 and 7.9 million rentable square feet,  respectively.  We
     sold three  vacant R&D  properties  and  acquired  one vacant R&D  property
     during 2005.

     The following  table depicts the amounts of rental revenue from  continuing
     operations  for the years ended  December 31, 2005 and 2004  represented by
     our  historical  properties  and the  percentage  of the total  decrease in
     rental  revenue  over  the  period  that is  represented  by each  group of
     properties. We did not acquire any new properties in 2004.

<TABLE>
<CAPTION>
                                                    December 31,
                                          ----------------------------------
                                              2005                2004             $ Change            % Change
                                          --------------      --------------     --------------      --------------
                                                          (dollars in thousands)
<S>                                         <C>                 <C>               <C>                   <C>
         Same Property                       $100,765            $119,339          ($18,574)             (15.6%)
</TABLE>

     For the year ended  December 31, 2005,  our rental revenue from real estate
     decreased  by ($18.6)  million,  or  (15.6%).  Pursuant  to SFAS 141,  $1.9
     million  of  amortization  expense  with  respect  to  above-market  leases
     included in the San Tomas  Technology  Park  acquisition was offset against
     rental revenue and not separately  stated as  amortization  expense for the
     years ended  December 31, 2005 and 2004.  The ($18.6)  million  decrease in
     rental revenue  resulted from current  adverse  market  conditions as "Same
     Property"  rents  decreased,  as our portfolio  occupancy rate decreased by
     (4.0%) and market  rental rates  decreased.  The lower rental rate from the
     new Microsoft  blend and extend lease,  which  accounted for more than half
     the  decline,  and  the  loss  of  several  tenants  due  to  cessation  of
     operations,  tenant  relocation  or tenant  requiring  lesser  space  since
     December 31, 2004 represented the balance of the decline.

     Our overall  occupancy rate at December 31, 2005 and 2004 was approximately
     66.7% and 70.7%, respectively.  According to NAI BT Commercial Real Estate,
     the occupancy  rate for R&D property in the Silicon  Valley at December 31,
     2005 was  approximately  80.4%. Due to an over supply of R&D properties and
     competition from other landlords in the Silicon Valley

                                     - 27 -
<PAGE>

     bidding for  tenants,  our  occupancy  rate may drop further in 2006 if the
     523,000   rentable  square  feet  scheduled  to  expire  is  notrenewed  or
     re-leased.  Factors  that  contributed  to  our  low  occupancy  rate  were
     primarily the general  downturn in the Silicon  Valley's  economy in recent
     years,  the softening of our market  specifically  and the expected  weaker
     performance of our properties. We are also currently negotiating with three
     tenants, JDS Uniphase,  Fujitsu and Nortel Networks,  for early termination
     of leases on  approximately  470,000  rentable square feet. If these leases
     are terminated, our occupancy rate will decline further.

     EQUITY IN EARNINGS FROM UNCONSOLIDATED JOINT VENTURE
     As of December 31, 2005, we had investments in four R&D buildings, totaling
     593,000  rentable  square  feet in  Morgan  Hill,  California,  through  an
     unconsolidated  joint venture with TBI, in which we acquired a 50% interest
     from the Berg  Group in January  2003.  We have a  non-controlling  limited
     partnership interest in this joint venture,  which we account for using the
     equity  method of  accounting.  For the years ended  December  31, 2005 and
     2004,  equity  in  earnings  from  the  unconsolidated  joint  venture  was
     approximately  $0.7  million  and  $2.9  million  (including  $1.0  million
     relating to lease termination income), respectively. Our equity in earnings
     from this unconsolidated  joint venture declined primarily due to the early
     termination of a tenant lease  agreement in September 2004 as well as lower
     rents  received from the  properties of this joint  venture.  The occupancy
     rate for the  properties  owned by this joint  venture at December 31, 2005
     and 2004 was approximately 78.7%.

     OTHER INCOME FROM CONTINUING PROPERTY OPERATIONS
     The  following  table  depicts the amounts of other income from  continuing
     operations for the years ended December 31, 2005 and 2004.

<TABLE>
<CAPTION>
                                                    December 31,
                                          ----------------------------------
                                              2005                2004             $ Change            % Change
                                          --------------      --------------     --------------      --------------
                                                          (dollars in thousands)
<S>                                          <C>                 <C>               <C>                  <C>
         Other income                         $4,606              $6,913            ($2,307)             (33.4%)
</TABLE>

     Other income of approximately  $4.6 million for the year ended December 31,
     2005  included  approximately  $2.4 million  from  termination  fees,  $0.1
     million from tenant  bankruptcy  settlements,  $0.9 million from management
     fee  income,  $0.5  million  from  interest  income and $0.5 from  security
     deposit  forfeitures.  Other income of  approximately  $6.9 million for the
     year ended  December  31, 2004  included  approximately  $4.3  million from
     termination fees, $1.2 million from tenant bankruptcy  settlements and $1.2
     million from management fee income. Management fee is paid by the tenant to
     the landlord for the administration and supervision of the property.  We do
     not consider termination fees and prior tenant bankruptcy settlements to be
     recurring items.

     EXPENSES FROM CONTINUING PROPERTY OPERATIONS
     The  following  table  reflects  the  amounts  of  property  operating  and
     maintenance  expenses and real estate taxes from continuing  operations for
     the years  ended  December  31, 2005 and 2004 and the  percentage  of total
     decrease  in  expenses  over the  period  that is  represented  by the same
     property.

<TABLE>
<CAPTION>
                                                    December 31,
                                          ----------------------------------
                                               2005                2004            $ Change            % Change
                                          --------------      --------------     --------------      --------------
                                                          (dollars in thousands)
<S>                                         <C>                 <C>                 <C>                 <C>
         Same Property                       $19,478             $20,046             ($568)              (2.8%)
</TABLE>

     Operating expenses and real estate taxes from continuing  operations,  on a
     combined  basis,  decreased  by  ($0.5)  million,  or  (2.8%),  and  tenant
     reimbursements from continuing  operations  decreased by ($0.1) million, or
     (1.1%), primarily as a result of refunds of real estate taxes in the amount
     of approximately $0.7 million from property tax appeals that we filed under
     California's   Proposition  8  and  lower  occupancy   during  the  periods
     presented.  Total operating  expenses and real estate taxes exceeded tenant
     reimbursements  because  of  vacancies,  which  reached  approximately  2.6
     million  rentable  square feet by year-end 2005.  Certain  expenses such as
     property  insurance,  real estate taxes,  and other fixed  expenses are not
     recoverable  from vacant  properties.  We expect tenant  reimbursements  to
     decrease  further in the coming  year as our  vacancy  rate  increases.  At
     December 31, 2005 our vacancy rate was 33%.

     General and  administrative  expenses  decreased  by  approximately  ($0.1)
     million,  or (5.0%), from $2.0 million for the year ended December 31, 2004
     to $1.9 million for the year ended December 31, 2005.

     The following  table depicts the amounts of depreciation  and  amortization
     expense of real  estate  from  continuing  operations  for the years  ended
     December 31, 2005 and 2004.

<TABLE>
<CAPTION>

                                                    December 31,
                                          ----------------------------------
                                              2005                2004             $ Change            % Change
                                          --------------      --------------     --------------      --------------
                                               (dollars in thousands)
<S>                                         <C>                 <C>                  <C>                <C>
         Depreciation & amortization         $21,283             $21,347              ($64)              (0.3%)
</TABLE>

                                     - 28 -
<PAGE>

     Depreciation  and  amortization  expense  of real  estate  from  continuing
     operations  decreased  by  ($64,000),  or  (0.3%),  primarily  due  to  the
     disposition of three R&D  properties,  one R&D property  acquisition  and a
     fully amortized  in-place lease  intangible  asset in the second quarter of
     2005.

     The following table depicts the amounts of interest expense from operations
     for the years ended December 31, 2005 and 2004.

<TABLE>
<CAPTION>
                                                    December 31,
                                          ----------------------------------
                                               2005                2004             $ Change            % Change
                                          --------------      --------------     --------------      --------------
                                                          (dollars in thousands)
<S>                                         <C>                 <C>                 <C>                  <C>
         Interest                            $21,295             $17,581             $3,714               21.1%
         Interest (related parties)              972               1,077              (105)              (9.7%)
                                          --------------      --------------     --------------
              Total                          $22,267             $18,658             $3,609               19.3%
                                          ==============      ==============     ==============
</TABLE>

     Interest  expense  increased  by $3.7  million,  or 21.1%,  primarily  from
     additional  debt that we  incurred  under two new  collateralized  mortgage
     loans totaling $150.8 million obtained from Allianz Life Insurance  Company
     of North America in 2005 and from a cash flow interest rate derivative loss
     of  approximately  ($0.8)  million.   Interest  expense  (related  parties)
     decreased by ($0.1) million, or (9.7%),  because we paid off the Berg Group
     line of credit during 2005 and terminating it effective October 31, 2005.

     NET INCOME TO COMMON STOCKHOLDERS AND NET INCOME TO MINORITY INTERESTS
     The following table depicts the amounts of earnings  attributable to common
     stockholders  and minority  interests for the years ended December 31, 2005
     and 2004.


<TABLE>
<CAPTION>
                                                         December 31,
                                             -------------------------------------
                                                                                                                % Change by
                                                  2005                  2004               $ Change                Group
                                             ----------------      ---------------      ----------------      ----------------
                                                               (dollars in thousands)
<S>                                              <C>                  <C>                <C>                      <C>
         Net income to stockholders               $10,027              $13,312            ($  3,285)               (24.7%)
         Net income to minority interests          47,524               66,100              (18,576)               (28.1%)
                                             ----------------      ---------------      ----------------
              Total                               $57,551              $79,412             ($21,861)               (27.5%)
                                             ================      ===============      ================
</TABLE>

     As  of  December  31,  2005  and  2004,  we  owned  a  controlling  general
     partnership  interest  of 17.81%,  21.68%,  16.18%  and 12.41% and  17.16%,
     21.63%, 16.14% and 12.38% in the four operating partnerships,  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.  We owned a
     17.50%  and  17.26%   general   partnership   interest  in  the   operating
     partnerships, taken as a whole, on a consolidated weighted average basis as
     of  December  31,  2005  and  2004,  respectively.  Net  income  to  common
     stockholders in 2005 decreased by ($3.3) million, or (24.7%), from the year
     ended December 31, 2004. Our net income  attributable to minority interests
     in 2005  decreased  by ($18.6)  million,  or  (28.1%),  from the year ended
     December  31,  2004.  The  decrease  in net income  attributable  to common
     stockholders  and minority  interests is primarily due to lower income from
     operations as a result of the decrease in revenues and increase in interest
     expense as  discussed  above.  Minority  interest  represents  the  limited
     partners'  ownership  interest  of  82.50%  and  82.74%  in  the  operating
     partnerships,  on a weighted  average  basis,  as of December  31, 2005 and
     2004,  respectively.  The  decrease  in  the  minority  interest  ownership
     percentage  resulted from the issuance of additional shares of common stock
     from the  exchange  of O.P.  Units for common  stock by  minority  interest
     holders and the exercise of stock options.

     INCOME/(LOSS) FROM DISCONTINUED OPERATIONS
     The following table depicts the amounts of income/(loss)  from discontinued
     operations for the years ended December 31, 2005 and 2004.

<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                       -------------------------------------------------------------
                                                                                    2005                             2004
                                                                       -----------------------------     ---------------------------
                                                                                          (dollars in thousands)
<S>                                                                              <C>                               <C>
         Income/(loss) attributable to discontinued operations                    $1,632                            ($2,644)
         Minority interest in earnings attributable to discontinued operations    (1,290)                             2,099
                                                                       -----------------------------     ---------------------------
         Total income/(loss) from discontinued operations                          $ 342                            ($  545)
                                                                       =============================     ===========================
</TABLE>

     In  accordance  with our  adoption  of SFAS 144,  in 2005 we sold three R&D
     properties  consisting of  approximately  342,000  rentable square feet and
     classified  the net gains on sale and  operating  results  of the  disposed
     properties  as  discontinued  operations.  SFAS 144  requires  prior period
     results of operations for these  properties to be restated and presented in
     discontinued operations in prior consolidated statements of operations.

                                     - 30 -
<PAGE>

     We recognized total income of $1.6 million from discontinued operations, of
     which  $0.3  million  and  $1.3  million   were   attributable   to  common
     stockholders  and  minority  interests,  respectively,  for the year  ended
     December 31, 2005.  For the year ended  December  31, 2004,  we  recognized
     total loss from  discontinued  operations  of ($2.6)  million.  The loss to
     common  stockholders  and minority  interests  attributable to discontinued
     operation from these  properties in 2004 was  approximately  ($0.5) million
     and  ($2.1)  million,  respectively.  In  2004,  an  impairment  charge  of
     approximately  ($2.2)  million was  recorded  for an asset held for sale to
     reduce the  carrying  value of the asset to its fair  value,  less  selling
     costs.

     COMPARISON OF THE YEAR ENDED  DECEMBER 31, 2004 TO THE YEAR ENDED  DECEMBER
     31, 2003

     RENTAL REVENUE FROM CONTINUING PROPERTY OPERATIONS
     As of December 31, 2004 and 2003, through our controlling  interests in the
     operating partnerships,  we owned 109 R&D properties totaling approximately
     7.9 million rentable square feet. We did not purchase any new properties in
     2004.

     The following  table depicts the amounts of rental revenue from  continuing
     operations  for the years ended  December 31, 2004 and 2003  represented by
     our historical properties and the properties acquired in each such year and
     the percentage of the total decrease in rental revenue over the period that
     is represented by each group of properties.

<TABLE>
<CAPTION>
                                                    December 31,
                                          ----------------------------------
                                                                                                      % Change by     % of Total Net
                                              2004                 2003            $ Change          Property Group      Change
                                          --------------      --------------     --------------      --------------   --------------
                                                          (dollars in thousands)
<S>                                        <C>                 <C>               <C>                    <C>              <C>
         Same Property (1)                  $107,667            $121,175          ($13,508)              (11.1%)          (10.5%)
         2003 Acquisitions (2)                11,672               8,100             3,572                44.1%             2.8%
                                          --------------      --------------     --------------                       --------------
              Total/Overall                 $119,339            $129,275          ($ 9,936)               (7.7%)           (7.7%)
                                          ==============      ==============     ==============                       ==============
</TABLE>

     (1)  "Same  Property"  is defined as  properties  owned by us prior to 2003
          that we still owned as of December 31, 2004.
     (2)  Operating  rental revenue for 2003  Acquisitions do not reflect a full
          12 months of operations in 2003 because these properties were acquired
          at  various  times  during  2003.   2004  and  2003  amounts   include
          approximately  $1.9 million and $1.4 million,  respectively,  of above
          market rent  amortization  against  rental revenue from real estate in
          connection with the implementation of SFAS 141.

     For the year ended  December 31, 2004,  our rental revenue from real estate
     decreased by ($10.0) million,  or (7.7%),  from the year ended December 31,
     2003.  Pursuant to SFAS 141, $1.9 million and $1.4 million of  amortization
     expense  with  respect to  above-market  leases  included  in the San Tomas
     Technology  Park  acquisition  was offset  against  rental  revenue and not
     separately stated as amortization  expense for the years ended December 31,
     2004 and 2003, respectively. The ($10.0) million decrease in rental revenue
     resulted from adverse market  conditions as "Same Property" rents decreased
     by ($13.5)  since our  portfolio  occupancy  rate  decreased by (6.6%) as a
     result of the loss of  several  tenants  due to  cessation  of  operations,
     tenant  relocation or tenant  requiring  lesser space.  Market rental rates
     decreased,  as well. However,  rents from properties acquired in 2003 added
     approximately  $3.6  million of rental  revenue  due to a full 12 months of
     operations in 2004.

     Our overall  occupancy rate at December 31, 2004 and 2003 was approximately
     70.7% and 77.3%, respectively.  According to NAI BT Commercial Real Estate,
     the occupancy  rate for R&D property in the Silicon  Valley at December 31,
     2004 was approximately 77.6%. Factors that contributed to our low occupancy
     rate were the general  downturn in the Silicon  Valley's  economy in recent
     years,  the softening of our market  specifically  and the expected  weaker
     performance of our properties.

     EQUITY IN EARNINGS FROM UNCONSOLIDATED JOINT VENTURE
     As of December 31, 2004, we had investments in four R&D buildings, totaling
     593,000  rentable  square  feet in  Morgan  Hill,  California,  through  an
     unconsolidated  joint venture with TBI, in which we acquired a 50% interest
     from the Berg  Group in January  2003.  We have a  non-controlling  limited
     partnership interest in this joint venture,  which we account for using the
     equity  method of  accounting.  For the years ended  December  31, 2004 and
     2003,  equity  in  earnings  from  the  unconsolidated  joint  venture  was
     approximately  $2.9  million  (including  $1.0  million  relating  to lease
     termination  income) and $3.9 million (including $1.4 million relating to a
     gain from the sale of real estate which was acquired  from a related  party
     which did not  occur in 2004),  respectively.  The  occupancy  rate for the
     properties  owned by this joint  venture year to date through  December 31,
     2004 was approximately 78.7% compared to 100% at December 31, 2003.

     OTHER INCOME FROM CONTINUING PROPERTY OPERATIONS
     The  following  table  depicts the amounts of other income from  continuing
     operations for the years ended December 31, 2004 and 2003.

<TABLE>
<CAPTION>
                                                    December 31,
                                          ----------------------------------
                                              2004                2003             $ Change            % Change
                                          --------------      --------------     --------------      --------------
                                                          (dollars in thousands)
<S>                                          <C>                 <C>                <C>                  <C>
         Other income                         $6,913              $4,525             $2,388               52.8%
</TABLE>

                                     - 30 -
<PAGE>

     Other income of approximately  $6.9 million for the year ended December 31,
     2004  included  approximately  $4.3 million  from  termination  fees,  $1.2
     million from tenant bankruptcy settlements and $1.2 million from management
     fee income.  Other income of  approximately  $4.5 million for 2003 included
     approximately $2.2 million from tenant bankruptcy settlements, $1.4 million
     from  management  fee income,  $0.3 million  from utility  rebates and $0.2
     million from security deposit  forfeitures.  We do not consider termination
     fees and prior tenant bankruptcy settlements to be recurring items.

     EXPENSES FROM CONTINUING PROPERTY OPERATIONS
     The  following  table  reflects  the  decrease  in property  operating  and
     maintenance  expenses and real estate taxes from continuing  operations for
     the year ended  December 31, 2004 over property  operating and  maintenance
     expenses  and real estate  taxes from  continuing  operations  for the year
     ended  December 31, 2003 and the  percentage of total  decrease in expenses
     over the period that is represented by each group of properties.

<TABLE>
<CAPTION>
                                                    December 31,
                                          ----------------------------------
                                                                                                      % Change by     % of Total Net
                                               2004                2003            $ Change          Property Group       Change
                                          --------------      --------------     --------------      --------------   --------------
                                                          (dollars in thousands)
<S>                                         <C>                 <C>               <C>                   <C>                <C>
         Same Property (1)                   $17,698             $19,284           ($1,586)              (8.2%)             (7.6%)
         2003 Acquisitions (2)                 2,348               1,582               766               48.4%               3.7%
                                          --------------      --------------     --------------                       --------------
              Total/Overall                  $20,046             $20,866             ($820)              (3.9%)             (3.9%)
                                          ==============      ==============     ==============                       ==============
</TABLE>

     (1)  "Same  Property"  is defined as  properties  owned by us prior to 2003
          that we still owned as of December 31, 2004.
     (2)  Operating  expenses and real estate taxes for 2003 Acquisitions do not
          reflect  a  full  12  months  of  operations  in  2003  because  these
          properties were acquired at various times during 2003.

     Operating expenses and real estate taxes from continuing  operations,  on a
     combined basis, in 2004 decreased by ($0.8)  million,  or (3.9%),  from the
     year  ended  December  31,  2003.  Tenant  reimbursements  from  continuing
     operations in 2004 decreased by ($3.8) million,  or (20.1%),  from the year
     ended  December 31, 2003.  The overall  decrease in tenant  reimbursements,
     operating expenses and real estate taxes resulted primarily from reductions
     in assessed property values on existing  properties as a result of property
     tax  appeals  that we filed  under  California's  Proposition  8 and  lower
     occupancy during the periods  presented.  Total operating expenses and real
     estate taxes exceeded  tenant  reimbursements  because of vacancies,  which
     reached  approximately  2.3 million  rentable square feet by year-end 2004.
     Certain expenses such as property  insurance,  real estate taxes, and other
     fixed expenses are not recoverable from vacant properties.  At December 31,
     2004 our vacancy rate was 29%.

     General and administrative expenses in 2004 increased by approximately $0.7
     million,  or 51.9%,  from $1.3 million for the year ended December 31, 2003
     to $2.0  million for the year ended  December 31,  2004,  primarily  due to
     incurring  additional legal and accounting  expenses in connection with the
     resignation   of   PricewaterhouseCoopers   LLP,  our  former   independent
     accountants, the need to re-audit the consolidated financial statements for
     years 2001 and 2002 and audit 2003  results,  and  expenses  related to the
     compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

     The following  table depicts the amounts of depreciation  and  amortization
     expense of real  estate  from  continuing  operations  for the years  ended
     December 31, 2004 and 2003.

<TABLE>
<CAPTION>
                                                    December 31,
                                          ----------------------------------
                                              2004                2003             $ Change            % Change
                                          --------------      --------------     --------------      --------------
                                                          (dollars in thousands)
<S>                                         <C>                 <C>                 <C>                   <C>
         Depreciation & amortization         $21,347             $20,139             $1,208                6.0%
</TABLE>

     Depreciation  and  amortization  expense  of real  estate  from  continuing
     operations in 2004 increased by $1.2 million,  or 6.0%, from the year ended
     December 31, 2003. The increase was  attributable  to the  recognition of a
     full year of  depreciation  from the acquisition of eight R&D properties in
     2003. Of the $1.2 million increase in depreciation and amortization expense
     of real estate, approximately $0.7 million represented amortization expense
     for in place  leases  comprising  a  portion  of the  value  of the  assets
     acquired in the  acquisitions of the  Orchard-Trimble  property and the San
     Tomas Technology Park.

     The following table depicts the amounts of interest expense from operations
     for the years ended December 31, 2004 and 2003.

<TABLE>
<CAPTION>
                                                    December 31,
                                          ----------------------------------
                                                                                                      % Change by
                                                2004                2003           $ Change              Group
                                          --------------      --------------     --------------      --------------
                                                           (dollars in thousands)
<S>                                         <C>                 <C>                 <C>                   <C>
         Interest                            $17,581             $16,446             $1,135                6.9%
         Interest (related parties)            1,077               1,064                 13                1.2%
                                          --------------      --------------     --------------
              Total                          $18,658             $17,510             $1,148                6.6%
                                          ==============      ==============     ==============
</TABLE>

                                     - 31 -
<PAGE>

     Interest expense in 2004 increased by $1.1 million,  or 6.9%, from the year
     ended December 31, 2003.  The increased  expense  resulted from  additional
     debt that we incurred under a new $80 million  collateralized loan obtained
     from  Citicorp  USA,  Inc.  in  2003  and  a $40  million  line  of  credit
     established  with Cupertino  National Bank, the proceeds of which were used
     primarily for the  acquisition  of the San Tomas  Technology  Park in 2003.
     Interest expense (related parties) increased by $13,000, or 1.2%, primarily
     due to higher  interest  rates of 4.08% at December  31,  2004  compared to
     2.52% at December 31, 2003.

     The new debt  carries a higher  interest  rate than the Berg  Group line of
     credit, which it mainly replaced,  contributing to the increase in interest
     expense  for the year.  We  anticipate  additional  increases  in  interest
     expense as new debt is incurred in connection  with  property  acquisitions
     and as we draw on the Cupertino National Bank revolving line of credit.

     NET INCOME TO COMMON  STOCKHOLDERS AND NET INCOME TO MINORITY INTERESTS
     The following table depicts the amounts of earnings  attributable to common
     stockholders  and minority  interests for the years ended December 31, 2004
     and 2003.

<TABLE>
<CAPTION>
                                                         December 31,
                                             -------------------------------------
                                                                                                                % Change by
                                                  2004                  2003               $ Change                Group
                                             ----------------      ---------------      ----------------      ----------------
                                                               (dollars in thousands)
<S>                                              <C>                  <C>                 <C>                     <C>
         Net income to stockholders               $13,312              $16,212             ($ 2,900)               (17.9%)
         Net income to minority interests          66,100               80,836              (14,736)               (18.2%)
                                             ----------------      ---------------      ----------------
              Total                               $79,412              $97,048             ($17,636)               (18.2%)
                                             ================      ===============      ================
</TABLE>

     As  of  December  31,  2004  and  2003,  we  owned  a  controlling  general
     partnership  interest  of 17.16%,  21.63%,  16.14%  and 12.38% and  16.95%,
     21.61%, 15.98% and 12.37% in the four operating partnerships,  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.  We owned a
     17.26%  and  17.02%   general   partnership   interest  in  the   operating
     partnerships, taken as a whole, on a consolidated weighted average basis as
     of  December  31,  2004  and  2003,  respectively.  Net  income  to  common
     stockholders in 2004 decreased by ($2.9) million, or (17.9%), from the year
     ended December 31, 2003. Our net income  attributable to minority interests
     in 2004  decreased  by ($14.7)  million,  or  (18.2%),  from the year ended
     December  31,  2003.  The  decrease  in net income  attributable  to common
     stockholders and minority  interests was primarily due to lower income from
     operations as a result of the decrease in revenues and increase in expenses
     as discussed  above.  Minority  interest  represents the limited  partners'
     ownership interest of 82.74% and 82.98% in the operating partnerships, on a
     weighted average basis, as of December 31, 2004 and 2003, respectively. The
     decrease in the minority interest  percentage resulted from the issuance of
     additional  shares of common  stock  from the  exchange  of O.P.  Units for
     common  stock  by  minority  interest  holders  and the  exercise  of stock
     options.

     INCOME/(LOSS) FROM DISCONTINUED OPERATIONS
     The following table depicts the amounts of income/(loss)  from discontinued
     operations for the years ended December 31, 2004 and 2003.

<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                       -------------------------------------------------------------
                                                                                    2004                             2003
                                                                       -----------------------------     ---------------------------
                                                                                           (dollars in thousands)
<S>                                                                               <C>                                <C>
         (Loss)/Income attributable to discontinued operations                     ($2,644)                           $  519
         Minority interest in earnings attributable to discontinued operations       2,099                              (377)

                                                                       -----------------------------     ---------------------------
         Total (loss)/income from discontinued operations                          ($  545)                           $  142
                                                                       =============================     ===========================
</TABLE>

     In  accordance  with our  adoption  of SFAS 144,  in 2005 we sold three R&D
     properties  consisting of  approximately  342,000  rentable square feet and
     classified  the net gains on sale and  operating  results  of the  disposed
     properties  as  discontinued  operations.  As  of  December  31,  2004,  an
     impairment charge of approximately ($2.2) million was recorded for an asset
     held for sale to reduce the carrying  value of the asset to its fair value,
     less  selling  costs.  We sold this  property  on  January 5, 2005 for $8.5
     million, which is one of the three disposed R&D properties described above.
     SFAS 144 requires prior period  results of operations for these  properties
     to  be  restated  and  presented  in   discontinued   operations  in  prior
     consolidated statements of operations.

     We recognized total loss of ($2.6) million from discontinued operations, of
     which  ($0.5)  million  and  ($2.1)  million  were  attributable  to common
     stockholders  and  minority  interests,  respectively,  for the year  ended
     December 31, 2004.  For the year ended  December  31, 2003,  we  recognized
     total income from  discontinued  operations of $0.5 million.  The income to
     common  stockholders  and minority  interests  attributable to discontinued
     operation  from this  property in 2003 was  approximately  $0.1 million and
     $0.4 million, respectively.

                                     - 32 -

<PAGE>


     CHANGES IN FINANCIAL CONDITION

     YEAR ENDED DECEMBER 31, 2005.
     The most  significant  changes in our financial  condition in 2005 resulted
     from the  disposition of three R&D  properties,  the acquisition of one R&D
     property,  debt  refinancing and the exercise of stock options and exchange
     of O.P. Units for shares of the Company's common stock.

     During 2005, we sold three vacant R&D properties to unrelated third parties
     for a total  gross  sales  price  of  approximately  $27.9  million.  Those
     property dispositions  deducted  approximately 342,000 rentable square feet
     of space from our property  portfolio.  The proceeds of approximately $15.1
     million  from  one of the  three  vacant  R&D  property  dispositions  were
     classified as restricted  cash for use in tax-deferred  property  exchanges
     and were reflected on our consolidated balance sheets as restricted cash at
     December 31, 2005.  In addition to those three  property  dispositions,  we
     also acquired one vacant R&D property from an unrelated third party for the
     purchase price of  approximately  $14.0 million in a tax-deferred  exchange
     transaction.  This acquisition added approximately  204,000 rentable square
     feet to our property portfolio.

     Debt outstanding, including amounts due related parties, increased by $30.5
     million,  or 9.1%,  from $337.0  million as of December  31, 2004 to $367.5
     million as of December 31, 2005 due  primarily  to obtaining  two new fixed
     rate  collateralized  mortgage loans from Allianz Life Insurance Company of
     North America, which were used primarily to pay down the Citicorp loan, the
     Berg Group line of credit and the Cupertino National Bank line of credit.

     During the year ended December 31, 2005,  stock options to purchase  40,000
     shares of the Company's  common stock were exercised at $8.25 per share and
     stock options to purchase 15,000 shares of the Company's  common stock were
     exercised  at  $10.00  per  share.  Total  proceeds  to  the  Company  were
     approximately $0.5 million. This increased paid-in-capital by approximately
     $0.5 million.

     In 2005,  three limited partners  exchanged  213,600 O.P. Units for 213,600
     shares of the Company's common stock under the terms of the Exchange Rights
     Agreement  among the  Company and the  limited  partners  of the  operating
     partnerships  resulting in a reclassification of approximately $2.2 million
     from  minority  interest  to  paid-in-capital.  In 2005,  Carl E. Berg gave
     83,000 O.P. Units to charitable institutions that exchanged them for 83,000
     shares of the  Company's  common  stock  pursuant  to the  Exchange  Rights
     Agreement  resulting in a  reclassification  of approximately  $0.8 million
     from minority interest to paid-in-capital.

     The proceeds from the exercise of stock options and the  conversion of O.P.
     Units to shares of the Company's  common stock were applied to increase our
     percentage interest as general partner in the operating partnerships.

     YEAR ENDED DECEMBER 31, 2004.
     The most  significant  changes in our financial  condition in 2004 resulted
     from the  exercise  of stock  options and the  exchange  of O.P.  Units for
     shares of the Company's common stock.

     Debt  outstanding,  including  amounts due related  parties,  decreased  by
     ($3.9) million,  or (1.1%),  from $340.9 million as of December 31, 2003 to
     $337.0  million as of  December  31,  2004 due to  recurring  debt  service
     obligations. Interest rates continued to remain low in 2004.

     During the year ended December 31, 2004,  stock options to purchase a total
     of 20,000 shares of the Company's  common stock were exercised at $8.25 per
     share. Total proceeds to the Company were approximately $0.2 million.  This
     increased paid-in-capital by approximately $0.2 million.

     In 2004,  three limited partners  exchanged  124,500 O.P. Units for 124,500
     shares of the Company's common stock under the terms of the Exchange Rights
     Agreement  among the  Company and the  limited  partners  of the  operating
     partnerships  resulting in a reclassification of approximately $1.6 million
     from  minority  interest  to  paid-in-capital.  In 2004,  Carl E. Berg gave
     58,000 O.P. Units to charitable institutions that exchanged them for 58,000
     shares of the  Company's  common  stock  pursuant  to the  Exchange  Rights
     Agreement  resulting in a  reclassification  of approximately  $0.7 million
     from minority interest to paid-in-capital.

     The proceeds from the exercise of stock options and the  conversion of O.P.
     Units to shares of the Company's  common stock were applied to increase our
     percentage interest as general partner in the operating partnerships.

                                     - 33 -

<PAGE>


     LIQUIDITY AND CAPITAL RESOURCES

     In 2006 we anticipate a decline in operating  cash flows from our operating
     property  portfolio  compared  to 2005  because of  reduced  demand for R&D
     properties  in the Silicon  Valley,  lower rental rates for new and renewed
     leases  signed in 2005 and an increase  in vacant  properties  in 2005.  In
     addition,  if  we  are  unable  to  lease  a  significant  portion  of  the
     approximately  523,000 rentable square feet scheduled to expire in 2006 and
     current  available space, our operating cash flows will be further affected
     adversely.   In  addition,  if  we  conclude  agreements  for  early  lease
     terminations with JDS Uniphase, Fujitsu and Nortel Networks, there could be
     an  additional  377,000  rentable  square  feet of vacant  space.  With the
     expectation  of lower revenues for the full year of 2006, we expect our net
     operating  income to continue to decline from 2005.  We are also subject to
     risks of decreased occupancy through tenant defaults and bankruptcies,  and
     potential reduction in rental rates upon renewal of properties, which would
     result in reduction in cash flows from  operations  beyond the level we are
     anticipating  currently.  It is  reasonably  likely that vacancy  rates may
     continue to increase and effective  rental rates on new and renewed  leases
     may continue to decrease in 2006.

     We  expect  our  principal   source  of  liquidity  for   distributions  to
     stockholders and O.P. Unit holders,  debt service,  leasing commissions and
     recurring  capital  expenditures  to come from cash  provided by operations
     and/or the  borrowings  under the line of credit  with  Cupertino  National
     Bank. We expect these sources of liquidity to be adequate to meet projected
     distributions  to stockholders  and other presently  anticipated  liquidity
     requirements   in  2006.  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 cash and
     investments,  long-term secured and unsecured indebtedness and the issuance
     of  additional  equity  securities by us. As of December 31, 2005 and 2004,
     the Company's total debt as a percentage of total market capitalization was
     26.5% and  23.3%,  respectively.  We have the  ability  to meet  short-term
     obligations  or  other  liquidity  needs  based  on a line of  credit  with
     Cupertino National Bank and our existing cash reserves. In 2006, we will be
     obligated to make  payments  totaling  approximately  $10.4 million of debt
     principal  under mortgage  notes without regard to any debt  refinancing or
     new debt  obligations  that we might  incur,  or optional  payments of debt
     principal.

     On April 6, 2005, we obtained a $25.8 million collateralized  mortgage loan
     from Allianz Life  Insurance  Company of North America  ("Allianz  Loan I")
     that  bears a fixed  interest  rate at 5.56% and  originally  matures in 15
     years with principal payments amortized over 20 years. The mortgage loan is
     collateralized by one property. We paid approximately $0.25 million in loan
     fees and  financing  costs,  which  are  being  amortized  over the 20 year
     amended loan period, and used the proceeds primarily to pay down short-term
     debt and the Berg Group line of credit.  On July 26,  2005,  in  connection
     with the Allianz Loan II (see below), we entered into a "Loan  Modification
     Agreement"  with  Allianz,  which  extended  the  amortization  period  and
     maturity date of the Allianz Loan I from April 10, 2020 to August 10, 2025.
     This mortgage loan contains  standard loan covenants as defined in the loan
     agreement.  As of December 31, 2005, we were in compliance  with these loan
     covenants.

     On July 26, 2005, we obtained a $125 million  collateralized  mortgage loan
     from Allianz Life Insurance  Company of North America  ("Allianz Loan II").
     The Allianz  Loan II matures on August 10, 2025 and must be paid in full at
     that time,  unless payment is accelerated by reason of a default or sale of
     one or more of the properties that secure the loan. This loan bears a fixed
     interest rate of 5.22% and principal  payments are amortized over 20 years.
     The loan can be prepaid subject to certain yield maintenance provisions and
     is assumable  with the payment of an  assumption  fee. The mortgage loan is
     collateralized by eight properties.  We paid  approximately $0.9 million in
     loan fees and  financing  costs,  which will be amortized  over the 20 year
     loan  period.  The  proceeds  were used  primarily  to repay $77.4  million
     towards  the  Citicorp  loan,  reduce  approximately  $19.2  million of the
     Cupertino National Bank line of credit,  repay  approximately $13.0 million
     of the  Berg  Group  line of  credit,  retire  a 9.5%  mortgage  loan  from
     Washington Mutual with approximately $0.1 million of outstanding principal,
     and for other working capital needs. The Allianz Loans I and II now contain
     cross-default  provisions.   This  mortgage  loan  contains  standard  loan
     covenants as defined in the loan  agreement.  As of December  31, 2005,  we
     were in compliance with these loan covenants.

     On July 22,  2005,  we  entered  into a "Change  in Terms  Agreement"  with
     Cupertino  National Bank, which reduced the maximum borrowing amount on the
     Company's revolving line of credit facility with that bank from $40 million
     to $9 million.  In December 2005, we entered into another  "Change in Terms
     Agreement" with Cupertino National Bank that increased the facility from $9
     million to $10 million.  The line of credit bears an interest rate of LIBOR
     plus 1.75% and will expire in December  2006.  We incurred an annual fee of
     $10,000.  This line of credit contains certain financial loan and reporting
     covenants as defined in the loan  agreements.  As of December 31, 2005,  we
     were in compliance with these loan covenants.

     Effective  October 31, 2005, the Company and the Berg Group mutually agreed
     to terminate  the $20 million line of credit with the Berg Group.  The Berg
     Group  line of credit was  originally  scheduled  to mature in March  2006.
     Based on existing cash reserves and credit  facilities,  we determined that
     we no longer foresee a need for the Berg Group line of credit. There are no
     borrowings  currently  outstanding  under the Berg Group line of credit. We
     did not incur any fees or charges  for  terminating  the Berg Group line of
     credit.

                                     - 34 -
<PAGE>

     Cash and cash  equivalents  increased by  approximately  $29.9 million from
     $1.5  million as of December  31, 2004 to $31.4  million as of December 31,
     2005  primarily  from excess  proceeds of our debt  refinancing  loans with
     Allianz Life Insurance Company of North America (see above).

     Restricted  cash totaled  $16.7  million as of December  31, 2005.  Of this
     amount, $15.2 million represents proceeds recieved from a property sale and
     interest  income  held in a separate  cash  account at a trust  company for
     future use in tax-defered exchanges.  The remaining $1.5 million represents
     a bond we posted in the  REPUBLIC  PROPERTIES  CORPORATION  V. MISSION WEST
     PROPERTIES, L.P. litigation (see Item 3, Legal Proceedings).

     Since  1999,  we have  elected  to be taxed as a REIT  under  the  Internal
     Revenue Code of 1986. We currently  intend to continue  operating as a REIT
     in 2006.  As a REIT,  we are  subject  to a number  of  organizational  and
     operating  requirements,  including a requirement  to distribute 90% of our
     taxable income to our  stockholders.  Also as a REIT, we generally will not
     be subject to federal income taxes on our taxable income.

     Generally, our objective is to meet our short-term liquidity requirement of
     funding the payment of our current level of quarterly  common  dividends to
     stockholders  and O.P. Unit holders  through our net cash flows provided by
     operating activities,  less our recurring and nonrecurring property capital
     expenditures.   These  operating  capital   expenditures  are  the  capital
     expenditures  necessary to maintain the earnings  capacity of our operating
     assets over time.

     For 2006, we expect to maintain our current quarterly dividend payment rate
     to common  stockholders and O.P. Unit holders of $0.16 per share.  However,
     distributions  are declared at the discretion of our Board of Directors and
     are  subject to actual  cash  available  for  distribution,  our  financial
     condition,  capital  requirements  and such other factors,  as our Board of
     Directors deems relevant. See Item 1A, "Risk Factors - Stockholders are not
     assured of receiving cash distributions from us."

     On January 5, 2006, we paid dividends of $0.16 per share of common stock to
     all common  stockholders  of record as of December  31,  2005.  On the same
     date, the operating partnerships paid a distribution of $0.16 per O.P. Unit
     to all holders of O.P. Units.

     CONTRACTUAL OBLIGATIONS
     The following table  identifies our contractual  obligations as of December
     31, 2005 that will impact our liquidity and cash flow in future periods:

<TABLE>
<CAPTION>
                                        ------------ ------------ ------------- ------------ ------------ ------------- ------------
                                            2006         2007         2008          2009         2010      Thereafter       Total
                                        ------------ ------------ ------------- ------------ ------------ ------------- ------------
                                                                           (dollars in thousands)
<S>                                      <C>         <C>           <C>           <C>          <C>          <C>          <C>
         Long-Term Debt Obligations (1)   $10,411     $11,028       $121,605      $9,580       $10,125      $204,783     $367,532
         Operating Lease Obligations (2)       90          23              -           -             -             -          113
                                        ------------ ------------ ------------- ------------ ------------ ------------- ------------
         Total                            $10,501     $11,051       $121,605      $9,580       $10,125      $204,783     $367,645
                                        ============ ============ ============= ============ ============ ============= ============
</TABLE>

     (1)  Our long-term debt obligations are set forth in detail in the schedule
          below.

     (2)  Our  operating  lease  obligations  relate to a lease of our corporate
          office facility from a related party.

     At December 31, 2005, we had total  indebtedness  of  approximately  $367.5
     million, all of which is fixed rate mortgage debt.

                                     - 35 -
<PAGE>

The following table sets forth certain information regarding debt outstanding as
of December 31, 2005.

<TABLE>
<CAPTION>
                                                                                           At December 31,     Maturity   Interest
              Debt Description                           Collateral Properties                   2005            Date       Rate
---------------------------------------------  ------------------------------------------  -----------------  ----------  ----------
                                                                                            (dollars in thousands)
Line of Credit:
<S>                                           <C>                                            <C>                <C>          <C>
Cupertino National Bank                        Not Applicable                                        -           12/06          (1)
                                                                                           -----------------
Mortgage Notes Payable (related parties):      5300-5350 Hellyer Avenue, San Jose, CA         $ 10,051            6/10        7.650%
                                                                                           -----------------
Mortgage Notes Payable (2):
Prudential Insurance Company of America (3)    10300 Bubb Road, Cupertino, CA                  117,290           10/08        6.560%
                                               10500 North De Anza Blvd, Cupertino, CA
                                               4050 Starboard Drive, Fremont, CA
                                               45700 Northport Loop, Fremont, CA
                                               45738 Northport Loop, Fremont, CA
                                               450 National Ave, Mountain View, CA
                                               6311 San Ignacio Avenue, San Jose, CA
                                               6321 San Ignacio Avenue, San Jose, CA
                                               6325 San Ignacio Avenue, San Jose, CA
                                               6331 San Ignacio Avenue, San Jose, CA
                                               6341 San Ignacio Avenue, San Jose, CA
                                               6351 San Ignacio Avenue, San Jose, CA
                                               3236 Scott Blvd, Santa Clara, CA
                                               3560 Bassett Street, Santa Clara, CA
                                               3570 Bassett Street, Santa Clara, CA
                                               3580 Bassett Street, Santa Clara, CA
                                               1135 Kern Avenue, Sunnyvale, CA
                                               1212 Bordeaux Lane, Sunnyvale, CA
                                               1230 East Arques, Sunnyvale, CA
                                               1250 East Arques, Sunnyvale, CA
                                               1170 Morse Avenue, Sunnyvale, CA
                                               1600 Memorex Drive, Santa Clara, CA
                                               1688 Richard Avenue, Santa Clara, CA
                                               1700 Richard Avenue, Santa Clara, CA
                                               3540 Bassett Street, Santa Clara, CA
                                               3542 Bassett Street, Santa Clara, CA
                                               3544 Bassett Street, Santa Clara, CA
                                               3550 Bassett Street, Santa Clara, CA

Northwestern Mutual Life Insurance Company (4) 1750 Automation Parkway, San Jose, CA            91,417            1/13        5.640%
                                               1756 Automation Parkway, San Jose, CA
                                               1762 Automation Parkway, San Jose, CA
                                               6320 San Ignacio Avenue, San Jose, CA
                                               6540-6541 Via Del Oro, San Jose, CA
                                               6385-6387 San Ignacio Avenue, San Jose, CA
                                               2251 Lawson Lane, Santa Clara, CA
                                               1325 McCandless Drive, Milpitas, CA
                                               1650-1690 McCandless Drive, Milpitas, CA
                                               20605-20705 Valley Green Drive, Cupertino, CA

Allianz Life Insurance Company (I) (5)         5900 Optical Court, San Jose, CA                 25,269            8/25        5.560%

Allianz Life Insurance Company (II) (5)        5325-5345 Hellyer Avenue, San Jose, CA          123,505            8/25        5.220%
                                               1768 Automation Parkway, San Jose, CA
                                               2880 Scott Boulevard, Santa Clara, CA
                                               2890 Scott Boulevard, Santa Clara, CA
                                               2800 Scott Boulevard, Santa Clara, CA
                                               20400 Mariani Avenue, Cupertino, CA
                                               10450-10460 Bubb Road, Cupertino, CA
                                                                                           -----------------
                                                                                               357,481
                                                                                           -----------------
   Total                                                                                      $367,532
                                                                                           =================
</TABLE>

                                     - 36 -

<PAGE>


     (1)  Interest  rate equal to LIBOR plus 1.75%.  The  interest  rate for the
          Cupertino National Bank line of credit at December 31, 2005 was 6.14%.
          As of December  31, 2005,  we were in  compliance  with the  financial
          covenants under the loan agreement.

     (2)  Mortgage  notes payable  generally  require  monthly  installments  of
          interest  and  principal   ranging  from  $177  to  $840  (dollars  in
          thousands)  over various terms  extending  through the year 2025.  The
          weighted  average interest rate of mortgage notes payable was 5.84% at
          December 31, 2005.

     (3)  The Prudential  Insurance loan is payable in monthly  installments  of
          $827, which includes principal (based upon a 30-year amortization) and
          interest.  A limited  partner,  who is not a member of the Berg Group,
          has guaranteed  approximately $12 million of this debt. Costs and fees
          incurred with obtaining this loan aggregated approximately $900, which
          were  deferred  and  amortized  over  the  loan  period.  (dollars  in
          thousands)

     (4)  The  Northwestern  loan is payable in  monthly  installments  of $696,
          which  includes  principal  (based  upon a 20-year  amortization)  and
          interest.  Costs and fees incurred with obtaining this loan aggregated
          approximately  $664,  which were deferred and amortized  over the loan
          period. (dollars in thousands)

     (5)  The Allianz loans are payable in monthly installments of $1,017, which
          includes  principal (based upon a 20-year  amortization) and interest.
          Costs  and  fees  incurred  with  obtaining  these  loans   aggregated
          approximately  $1,125, which were deferred and amortized over the loan
          periods.  The Allianz loans  contain  certain  customary  covenants as
          defined in the loan  agreements.  As of December 31, 2005,  we were in
          compliance with these loan covenants. (dollars in thousands)

     At December 31, 2005, our debt to total market  capitalization ratio, which
     is computed as our total debt outstanding  divided by the sum of total debt
     outstanding  plus the market  value of common stock (based upon the closing
     price of $9.74 per share on December  30, 2005) on a fully  diluted  basis,
     including  the  conversion  of  all  O.P.  Units  into  common  stock,  was
     approximately  26.5%.  On December 30,  2005,  the last trading day for the
     year, total market capitalization was approximately $1.39 billion.

     At December 31, 2005,  the  outstanding  balance  remaining  under  certain
     demand notes that we owed to the operating  partnerships  was $1.7 million.
     The due date of the demand notes has been  extended to September  30, 2007.
     The principal of the demand notes,  along with the interest expense,  which
     is  interest  income  to  the  operating  partnerships,  is  eliminated  in
     consolidation  and is not included in the  corresponding  line items within
     the consolidated financial statements.  However, the interest income earned
     by the  operating  partnerships,  which  is  interest  expense  to  us,  in
     connection  with this debt,  is  included  in the  calculation  of minority
     interest as reported on the consolidated  statement of operations,  thereby
     reducing our net income by this same amount. At present, our only means for
     repayment  of this debt is through  distributions  that we receive from the
     operating  partnerships that are in excess of the amount of dividends to be
     paid to our stockholders.

     HISTORICAL CASH FLOWS

     COMPARISON OF THE YEAR ENDED  DECEMBER 31, 2005 TO THE YEAR ENDED  DECEMBER
     31, 2004
     Cash and cash equivalents were approximately  $31.4 million at December 31,
     2005, an increase of $29.9 million from $1.5 million at December 31, 2004.

     Net cash provided by operating  activities  for the year ended December 31,
     2005 was  approximately  $21.9  million,  compared to  approximately  $39.0
     million for the prior year.  The  decrease  in cash  provided by  operating
     activities resulted primarily from lower rental revenue with respect to the
     modification and extension of our lease with Microsoft, payments of leasing
     commissions  (included in other assets) that amounted to approximately $5.3
     million,  increased  in interest  expense,  lower  market  rental rates for
     renewed leases and the loss of several  tenants due to their lease default,
     cessation of  operations,  or  relocations  resulting in increased  vacancy
     rates from 29% to 33% that offset cash savings.

     Net cash used in investing  activities was approximately ($2.9) million for
     the year ended December 31, 2005, compared to approximately  ($1.5) million
     for the prior year. Cash used in investing  activities  during 2005 related
     to the  sale  of  three  vacant  R&D  properties  for  $27.5  million,  the
     acquisition  of one vacant R&D property for $14.2 million and new equipment
     and  improvements  to real estate of $1.1  million.  Cash used in investing
     activities  during 2004 related to new equipment and  improvements  to real
     estate of $1.5 million.  The proceeds of  approximately  $15.1 million from
     one of the three  vacant  R&D  property  dispositions  were  classified  as
     restricted  cash  for  use in  tax-deferred  property  exchanges  and  were
     reflected on our consolidated balance sheets as restricted cash at December
     31, 2005.

     Net cash provided by/(used) in financing activities was approximately $10.9
     million for the year ended December 31, 2005,  compared to ($40.1)  million
     for the year ended  December 31, 2004.  During 2005 and 2004,  we paid debt
     principal  and made  distributions  to holders of our common stock and O.P.
     Units utilizing cash generated from operating activities and other borrowed
     funds. During 2005,  financing activities included borrowing $150.8 million
     under  two new  collateralized  mortgage  loans,  which  were used to repay
     short-term  debt and the Berg  Group  line of  credit.  For the year  ended
     December  31,  2005,  we  paid  dividends  to  our  stockholders   totaling
     approximately $11.7 million compared to approximately $17.3 million for the
     year ended  December 31, 2004.  Distributions  made to O.P. Unit holders in
     excess of their share of earnings were approximately $8.4 million and $17.6
     million for the years ended December 31, 2005 and 2004,  respectively.  The
     overall increase in cash was primarily due to the excess proceeds from debt
     refinancing with Allianz Life Insurance Company of North America.

                                     - 37 -

<PAGE>


     COMPARISON OF THE YEAR ENDED  DECEMBER 31, 2004 TO THE YEAR ENDED  DECEMBER
     31, 2003
     Cash and cash equivalents were  approximately  $1.5 million at December 31,
     2004, a decrease of $2.6 million from $4.1 million at December 31, 2003.

     Net cash provided by operating  activities  for the year ended December 31,
     2004 was  approximately  $39.0  million,  compared to  approximately  $36.1
     million for the prior year.  The  increase  in cash  provided by  operating
     activities  resulted  primarily from the collection of accounts  receivable
     from a tenant bankruptcy  settlement that was accrued in 2003, decreases in
     prepaid  expenses and the decrease of deferred rent  receivable  where cash
     rent income  exceeded  GAAP income.  These  increased  cash  receipts  were
     partially offset by lower market rental rates, reductions in tenant expense
     reimbursements  and the loss of several tenants due to their lease default,
     cessation of  operations,  or  relocations  resulting in increased  vacancy
     rates that offset cash savings.

     Net cash used in investing  activities for  improvements to real estate was
     approximately ($1.5) million for the year ended December 31, 2004, compared
     to approximately  ($110) million for the prior year. Cash used in investing
     activities  during 2003 related to  financing  the  acquisition  of the San
     Tomas  Technology  Park  of $110  million  as  well  as new  equipment  and
     improvements to real estate of $1.4 million.

     Net cash (used  in)/provided  by  financing  activities  was  approximately
     ($40.1)  million for the year ended  December 31,  2004,  compared to $73.5
     million for the year ended December 31, 2003. During 2004 and 2003, we paid
     debt  principal and made  distributions  to holders of our common stock and
     O.P. Units  utilizing  cash  generated from operating  activities and other
     borrowed  funds.  In 2004 we drew down $3.3 million from our line of credit
     with the Berg Group. In 2003,  financing activities included borrowing $180
     million under two new collateralized  mortgage loans, of which $100 million
     was used to repay short-term debt and the Berg Group line of credit and $80
     million was used for the acquisition of the San Tomas  Technology Park. For
     the year ended  December 31, 2004,  we paid  dividends to our  stockholders
     totaling  approximately  $17.3  million  compared  to  approximately  $17.0
     million for the year ended  December 31, 2003.  Distributions  made to O.P.
     Unit holders in excess of their share of earnings were approximately  $17.6
     million and $2.8  million for the years ended  December  31, 2004 and 2003,
     respectively.

     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,  2000  through   December  31,  2005,  the  recurring
     tenant/building  improvement  costs and leasing  commissions  incurred with
     respect  to new  leases  and  lease  renewals  of the  properties  averaged
     approximately  $2.5 million annually.  We will have  approximately  523,000
     rentable  square  feet under  expiring  leases in 2006.  We expect that the
     average annual cost of recurring  tenant/building  improvements and leasing
     commissions,  related  to  these  properties,  will be  approximately  $2.0
     million during 2006. We believe we will recover  substantially all of these
     costs from the tenants under the new or renewed leases through  contractual
     increases in rental rates. Until we actually sign the leases,  however,  we
     cannot assure you that this will occur.  Capital expenditures may fluctuate
     in  any  given  period  subject  to  the  nature,  extent,  and  timing  of
     improvements  required  to  be  made  to  the  properties.  Tenant/building
     improvements  and leasing costs also may fluctuate in any given period year
     depending  upon factors such as the  property,  the term of the lease,  the
     type of lease  and the  overall  market  conditions.  We expect to meet our
     long-term liquidity  requirements for the funding of property  acquisitions
     and other material  non-recurring  capital  improvements  through long-term
     secured and unsecured  indebtedness  and the issuance of additional  equity
     securities  by the  Company,  but cannot be assured that we will be able to
     meet our  requirements  on  favorable  terms.  See "Policy  with Respect to
     Certain Activities - Financing Policies."

     FUNDS FROM OPERATIONS

     Funds from Operations ("FFO") is a non-GAAP  financial  measurement used by
     real estate investment trusts to measure and compare operating performance.
     As defined by NAREIT,  FFO  represents  net income (loss)  before  minority
     interest of O.P. Unit holders,  computed in accordance with GAAP, including
     non-recurring  events  other  than  "extraordinary  items"  under  GAAP and
     excluding  gains  and  losses  from  sales of  discontinued  operations  or
     depreciable operating properties, 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. FFO does include impairment
     losses for properties held for sale and held for use. Management  considers
     FFO to be an appropriate  supplemental  measure of the Company's  operating
     and financial performance because when compared year over year, it reflects
     the impact to  operations  from trends in occupancy  rates,  rental  rates,
     operating costs,  general and  administrative  expenses and interest costs,
     providing a  perspective  not  immediately  apparent  from net  income.  In
     addition,  management  believes that FFO provides useful  information about
     the Company's financial  performance when compared to other REITs since FFO
     is  generally  recognized  as  the  industry  standard  for  reporting  the
     operations of REITs.  We will still continue to use FFO as a measure of the
     Company's  performance.  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, nor is
     FFO  necessarily  indicative  of

                                     - 38 -
<PAGE>

     funds  available  to meet our cash needs,  including  our need to make cash
     distributions  to  satisfy  REIT  requirements.  For  example,  FFO  is not
     adjusted for  payments of debt  principal  required  under our debt service
     obligations.

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

     Furthermore,  FFO is not comparable to similarly entitled items reported by
     other REITs that do not define FFO exactly as we do.

     The FFO for the years ended December 31, 2005,  2004,  2003,  2002 and 2001
     are as follows:

<TABLE>
<CAPTION>
                                                                               For the Years Ended December 31,
                                                            ------------------------------------------------------------------------
                                                                2005           2004          2003           2002          2001
                                                            -------------- ------------- -------------- ------------- --------------
                                                                                     (dollars in thousands)
<S>                                                          <C>          <C>            <C>           <C>            <C>
        Net income to common stockholders                     $10,027      $ 13,312       $ 16,212      $ 17,115       $ 18,086
        Add:
            Minority interests (1)                             47,045        65,614         80,256        86,053         90,662
            Depreciation  and  amortization of real estate (2) 24,286        24,394         22,850        21,379         17,718
        Less:
            Gain on sales of joint venture assets or assets    (2,206)             -        (1,400)       (6,103)       (11,453)
                                                            -------------- ------------- -------------- ------------- --------------
        FFO                                                   $79,152      $103,320       $117,918      $118,444       $115,013
                                                            ============== ============= ============== ============= ==============
</TABLE>

     (1)  The minority  interest for third parties  totaling $479,  $486,  $581,
          $587 and $650 in 2005,  2004, 2003, 2002 and 2001,  respectively,  was
          deducted from total minority  interest in calculating FFO. (dollars in
          thousands)
     (2)  Also includes our portion of  depreciation  and  amortization  of real
          estate from our  unconsolidated  joint venture totaling $984, $874 and
          $874 in 2005, 2004 and 2003, respectively, and amortization of leasing
          commissions totaling $1,703,  $1,644, $1,203, $3,020 and $694 in 2005,
          2004,  2003,  2002 and 2001,  respectively.  Amortization  of  leasing
          commissions  is included in the property  operating,  maintenance  and
          real estate taxes line item in the Company's  consolidated  statements
          of operations. (dollars in thousands)

     OVERVIEW OF DISTRIBUTION POLICY

     We intend to make regular quarterly  distributions to stockholders and O.P.
     Unit holders based on our funds available for distributions. Our ability to
     make such  distributions  will be affected by numerous  factors  including,
     most  importantly,   the  receipt  of  distributions   from  the  operating
     partnerships.

     Funds  available for  distributions  does not represent cash generated from
     operating activities and is not necessarily indicative of cash available to
     fund cash  needs.  The actual  return  that we will  realize and the amount
     available for distributions to stockholders will be affected by a number of
     factors, including the revenues received from our properties, our operating
     expenses, debt service on borrowings, and planned and unanticipated capital
     expenditures.

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

     Distributions are determined by our Board of Directors and depend on actual
     cash  available  for  distributions,   our  financial  condition,   capital
     requirements,   the  annual   distribution   requirements  under  the  REIT
     provisions  of the Code and such other  factors  as the Board of  Directors
     deems  relevant.  For a  discussion  of the risk  that we will not meet our
     distribution objectives,  see Part I, Item 1A, "Risk Factors - Stockholders
     are not assured of receiving cash distributions from us."

     POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

     We have adopted policies with respect to investment,  financing,  conflicts
     of interest and other  activities.  These policies have been  formulated by
     our Board of  Directors,  are set forth in our charter,  bylaws,  operating
     partnership agreements or agreements with the Berg Group, and generally may
     be amended or revised from time to time,  subject to  applicable  agreement

                                     - 39 -
<PAGE>

     terms,  at the  discretion of the Board of Directors  without a vote of the
     stockholders. Among other things, these policies provide that:

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

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

     -    certain policies with respect to competition by and acquisitions  from
          the Berg Group are imposed  pursuant to provisions of the  acquisition
          agreement that cannot be amended or waived without the approval of the
          Independent Directors Committee of our Board of Directors;

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

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

     INVESTMENT POLICIES

     We expect to pursue our  business  and  investment  objectives  principally
     through  the  direct  ownership  by  the  operating   partnerships  of  our
     properties  and  future  acquired  properties.  Development  or  investment
     activities  are not limited to any specified  percentage of our assets.  We
     may also  participate  with other entities in property  ownership,  through
     joint ventures or other types of  co-ownership.  Equity  investments may be
     subject to existing  mortgage  financing and other  indebtedness  that have
     priority over our equity interests.

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

     FINANCING POLICIES

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

     We have adopted a policy of  maintaining  a  consolidated  ratio of debt to
     total  market  capitalization,  which  includes for this purpose the market
     value of all shares of common stock for which  outstanding  O.P.  Units are
     exchangeable,  of less than 50%. This ratio may not be exceeded without the
     approval  of more than 75% of our entire  Board of  Directors.  We also may
     determine to finance acquisitions through the exchange of properties or the
     issuance of additional O.P. Units in the operating partnerships,  shares of
     common stock or other securities.

     In the event that the Board of  Directors  determines  to raise  additional
     equity capital,  it has the authority,  without  stockholder  approval,  to
     issue additional  shares of common stock,  preferred stock or other capital
     stock,  including  securities senior to the common stock, in any manner and
     on such terms and for such consideration it deems appropriate, including in
     exchange  for  property.  In the event  that we issue any  shares of common
     stock or securities  convertible  into or exchangeable or exercisable

                                     - 40 -
<PAGE>

     for,  shares of common stock,  subject to limited  exceptions,  such as the
     issuance of common stock pursuant to any stock incentive plan adopted by us
     or pursuant to limited partners' exercise of the exchange rights or the put
     rights,  the limited  partners will have the right to purchase common stock
     or such  securities  in  order  to  maintain  their  respective  percentage
     interests  in us on a  Fully  Diluted  basis.  If the  Board  of  Directors
     determines that we will raise additional equity capital to fund investments
     by the  operating  partnerships,  we  will  contribute  such  funds  to the
     operating  partnerships  as a  contribution  to  capital  and  purchase  of
     additional general  partnership  interest;  however,  holders of O.P. Units
     will have the right to participate in such funding on a pro rata basis.  In
     the event  that  holders of O.P.  Units  sell  their O.P.  Units to us upon
     exercise of their put rights, we are authorized to raise the funds for such
     purchase by issuing  additional shares of common stock.  Alternatively,  we
     may issue  additional  shares of common  stock in exchange for the tendered
     O.P. Units.

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

     DISPOSITION POLICIES

     From time to time we may dispose of properties in our portfolio, subject to
     the required  approvals  as set forth  below.  The tax basis of the limited
     partners in the properties in the operating  partnerships is  substantially
     less than current fair market value. Accordingly,  prior to the disposition
     of  their  O.P.  Units,  upon a  disposition  of any of the  properties,  a
     disproportionately  large share of the gain for federal income tax purposes
     would be allocated to the limited partners.  Consequently, it may be in the
     interests of the limited  partners that we continue to hold the  properties
     in order to defer  such  taxable  gain.  In light of this tax  effect,  the
     operating partnership  agreements provide that, until December 29, 2008, or
     until the Berg Group  members and their  affiliates,  other than us and the
     operating partnerships,  beneficially own, in the aggregate,  less than 15%
     of the  outstanding  shares of common stock on a Fully  Diluted  basis,  if
     earlier,  Carl E.  Berg  and  Clyde  J.  Berg may  prohibit  the  operating
     partnerships from disposing of properties which they designate in a taxable
     transaction.  Mr.  Kontrabecki has a similar right with respect to seven of
     the  properties,  which  right  will lapse  before the end of the  ten-year
     period if his beneficial ownership interest falls below 750,000 O.P. Units.
     The limited  partners  may seek to cause us to retain the  properties  even
     when such action may not be in the interests of some, or a majority, of our
     stockholders.   The   operating   partnerships   will  be  able  to  effect
     "tax-deferred,"  like-kind  exchanges under Section 1031 of the Code, or in
     connection with other non-taxable  transactions,  such as a contribution of
     property to a new partnership,  without obtaining the prior written consent
     of  these  individuals.  The  approval  of a  majority  of  our  directors,
     including  Carl E. Berg or his  designee,  will be  required to sell all or
     substantially  all of our assets.  The consent of the holders of a majority
     of the O.P.  Units will be  required  to effect a sale or sales of all,  or
     substantially all, of the assets of any of the operating partnerships.

     IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     We do not believe that recently issued accounting standards will materially
     impact our financial position, results of operations, or cash flows.

     In December 2004, the FASB issued SFAS 123R,  "Share-Based  Payment" ("SFAS
     123R"),  which  addresses the  accounting  for employee and director  stock
     options. Statement 123R requires that the cost of all employee and director
     stock options, as well as other equity-based compensation arrangements,  be
     reflected in the financial  statements based on the estimated fair value of
     the  awards.  SFAS  123R is an  amendment  to SFAS 123 and  supersedes  APB
     Opinion 25 ("APB 25"). SFAS 123R is applicable to any award that is settled
     or measured in stock,  including  stock options,  restricted  stock,  stock
     appreciation  rights,  stock units,  and employee stock purchase  plans. We
     will adopt the requirements of SFAS 123R beginning 2006. We expect that the
     adoption  of this  standard  will  reduce our net income and  earnings  per
     share;  however,  it will have no impact on cash flow. Although we have not
     yet  determined  whether  the  adoption of SFAS 123R will result in amounts
     that are similar to the current  pro forma  disclosures  under SFAS 123, we
     are  evaluating  the  requirements  under SFAS 123R including the valuation
     methods and support for the assumptions  that underlie the valuation of the
     awards and the transition methods (modified  prospective  transition method
     or the modified  retrospective  transition  method).  Compensation  expense
     under SFAS 123R may differ  from pro forma  amounts  due to changes in fair
     value, different assumptions and treatment of forfeitures. Under SFAS 123R,
     we estimate that compensation  expense for 2006 will be approximately  $0.2
     million against earnings.

     In December  2004,  the FASB issued SFAS 153,  "Exchanges  of  Non-monetary
     Assets"  ("SFAS  153").  SFAS 153 amends the  guidance  in APB  Opinion 29,
     "Accounting for Non-monetary Transactions," to eliminate certain exceptions
     to the principle that exchanges of non-monetary assets be measured based on
     the fair value of the assets  exchanged.  SFAS 153 eliminates the exception
     for  non-monetary  exchanges of similar  productive  assets and replaces it
     with a general  exception for exchanges of non-monetary  assets that do not
     have  commercial  substance.  This statement is effective for  non-monetary
     asset exchanges in

                                     - 41 -
<PAGE>

     fiscal years beginning after June 15, 2005. The adoption of SFAS 153 is not
     expected  to have an  impact on our  consolidated  results  of  operations,
     financial position or cash flows.

     In May 2005,  the FASB  issued  SFAS  154,  "Accounting  Changes  and Error
     Corrections" ("SFAS 154"), to replace APB Opinion 20, "Reporting Accounting
     Changes in Interim  Financial  Statements" ("APB 20"). SFAS 154 changes the
     requirements for the accounting for and reporting of a change in accounting
     principle  and  requires   retrospective   application  to  prior  periods'
     financial  statements,  unless  it is  impracticable  to  determine  period
     specific effects or the cumulative  effect of the change.  SFAS 154 will be
     effective for accounting  changes and  corrections of errors made in fiscal
     years  beginning after December 15, 2005. The adoption of this statement is
     not  expected  to have a  material  effect on our  consolidated  results of
     operations or financial condition.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We do not  generally  hold market risk  sensitive  instruments  for trading
     purposes.  We use fixed and variable  rate debt to finance our  operations.
     Our exposure to market risk for changes in interest rates relates primarily
     to our current variable rate debt and our future debt  obligations.  We are
     vulnerable to  significant  fluctuations  of interest rates on our floating
     rate debt. We manage our market risk by monitoring  interest rates where we
     try to recognize the  unpredictability of the financial markets and seek to
     reduce  potentially  adverse effect on the results of our operations.  This
     takes  frequent  evaluation of available  lending rates and  examination of
     opportunities  to reduce  interest  expense  through  new  sources  of debt
     financing.  Several  factors  affecting  the  interest  rate  risk  include
     governmental   monetary  and  tax  policies,   domestic  and  international
     economics  and other  factors  that are beyond our control.  The  following
     table provides information about the principal cash flows, weighted average
     interest  rates,  and expected  maturity  dates for debt  outstanding as of
     December 31, 2005.  The current terms of this debt are described in Item 7,
     "Management's Discussion and Analysis of Financial Condition and Results of
     Operations - Liquidity and Capital  Resources."  Average interest rates are
     based on implied LIBOR for the respective time period. For fixed rate debt,
     we estimate  fair value by using  discounted  cash flow  analyses  based on
     borrowing rates for similar kinds of borrowing arrangements. The fair value
     of the  Company's  fixed rate debt at December  31, 2005 was  approximately
     $441.0 million.

     For fixed rate debt, the table presents the assumption that the outstanding
     principal  balance at December 31, 2005 will be paid according to scheduled
     principal  payments  and that we will  not  prepay  any of the  outstanding
     principal balance.

<TABLE>
<CAPTION>
                                                2006       2007       2008      2009      2010   Thereafter    Total   Fair Value
                                                ----       ----       ----      ----      ----   ----------    -----   ----------
                                                                            (dollars in thousands)
             FIXED RATE DEBT:
<S>                                         <C>        <C>       <C>         <C>      <C>         <C>       <C>         <C>
             Secured notes payable           $10,411    $11,028   $121,605    $9,580   $10,125     $204,783  $367,532    $441,008
             Weighted average interest rate    5.84%      5.84%      5.84%     5.84%     5.84%        5.84%
</TABLE>

     All of the debt is  denominated  in United  States  dollars.  The  weighted
     average interest rate for fixed rate debt was approximately 5.84% and 6.23%
     for  the  years  ended  December  31,  2005  and  2004,  respectively.  The
     difference in interest  expense  attributable to the average  interest rate
     difference  between 2004 and 2005 was $3.6  million,  which was a result of
     new debt obtained during 2005.

     The primary market risk we face is the risk of interest rate  fluctuations.
     The Cupertino National Bank line of credit,  which had a balance of zero at
     December 31, 2005, is tied to a LIBOR based interest rate. As a result,  we
     pay lower  rates of interest in periods of  decreasing  interest  rates and
     higher  rates of  interest  in periods of  increasing  interest  rates.  At
     December  31,  2005,  we had no interest  rate caps or  interest  rate swap
     contracts.

     In 2005 we entered into cash flow  interest  rate  derivative as a means to
     hedge  exposure to an  increase in interest  rates prior to securing a loan
     commitment in connection  with a refinancing of certain  variable rate debt
     to fixed  rate long term  mortgage  debt.  We  secured a 20 year fixed rate
     mortgage loan commitment for $125 million at 5.22% annual interest rate and
     closed  the  derivative  contracts.  Since  the  interest  rate  derivative
     contracts did not qualify as a designated  cash flow interest rate hedge in
     accordance with SFAS 133, we recorded an approximately  $0.8 million charge
     to interest expense in 2005.

     As of December  31, 2005,  we had no interest  rate risk since there was no
     variable rate debt outstanding.

                                     - 42 -

<PAGE>



ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                          MISSION WEST PROPERTIES, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                                   PAGE
                                                                                                                 ---------
<S>                                                                                                                <C>
Report of Independent Registered Public Accounting Firm  on Consolidated Financial Statements                       44
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting                45
Consolidated Balance Sheets as of December 31, 2005 and 2004                                                        46
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003                          47
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2005, 2004 and 2003                48
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003                          49
Notes to the Consolidated Financial Statements                                                                      50
Supplemental Financial Information                                                                                  70
Report of Independent Registered Public Accounting Firm  on Financial Statement Schedules                           72
Schedule III: Real Estate and Accumulated Depreciation as of December 31, 2005                                      74
Schedule III: Real Estate and Accumulated Depreciation as of December 31, 2004                                      76
</TABLE>

                                     - 43 -
<PAGE>



     REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED
                              FINANCIAL STATEMENTS



Board of Directors and Stockholders
Mission West Properties, Inc.
Cupertino, California

We have audited the  accompanying  consolidated  balance  sheets of Mission West
Properties,  Inc.  (the  "Company")  as of December  31, 2005 and 2004,  and the
related consolidated  statements of operations,  stockholders'  equity, and cash
flows for each of the three years in the period ended  December 31, 2005.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audit  to  obtain  reasonable  assurance  about  whether  the
consolidated  financial statements are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the  consolidated  financial  statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall consolidated  financial statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position  of Mission  West
Properties,  Inc.  at  December  31,  2005  and  2004,  and the  results  of its
operations  and its cash flows for each of the three  years in the period  ended
December 31, 2005, in conformity with accounting  principles  generally accepted
in the United States of America.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Mission West
Properties, Inc.'s internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated February 3, 2006 expressed an unqualified opinion
thereon.



                                                \S\ BDO Seidman, LLP


San Francisco, California
February 3, 2006


                                     - 44 -
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                  ON INTERNAL CONTROL OVER FINANCIAL REPORTING



Board of Directors and Stockholders
Mission West Properties, Inc.
Cupertino, California


We have audited management's assessment, included in the accompanying Management
Report  on  Internal  Control  over  Financial  Reporting,   that  Mission  West
Properties,  Inc. (the  "Company")  maintained effective  internal  control over
financial  reporting as of December 31, 2005,  based on criteria  established in
Internal  Control--Integrated  Framework  issued by the  Committee of Sponsoring
Organizations of the Treadway  Commission (the "COSO  criteria").  The Company's
management  is  responsible  for  maintaining  effective  internal  control over
financial  reporting  and for its  assessment of the  effectiveness  of internal
control over financial reporting. Our responsibility is to express an opinion on
management's  assessment  and an opinion on the  effectiveness  of the Company's
internal control over financial reporting based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain  reasonable  assurance  about whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects. Our audit included obtaining an understanding of internal control over
financial reporting,  evaluating management's assessment, testing and evaluating
the design and operating  effectiveness of internal control, and performing such
other  procedures as we considered  necessary in the  circumstances.  We believe
that our audit provides a reasonable basis for our opinion.

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion,  management's  assessment  that Mission  West  Properties,  Inc.
maintained  effective  internal control over financial  reporting as of December
31,  2005,  is  fairly  stated,  in all  material  respects,  based  on the COSO
criteria. Also, in our opinion, Mission West Properties, Inc. maintained, in all
material  respects,  effective  internal control over financial  reporting as of
December 31, 2005, based on the COSO criteria.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the consolidated balance sheets as
of  December  31,  2005 and 2004,  and the related  consolidated  statements  of
operations,  stockholders'  equity and  consolidated  cash flows for each of the
three years in the period ended December 31, 2005,  and the financial  statement
schedules listed in the accompanying index, of Mission West Properties, Inc. and
our reports dated February 3, 2006, expressed unqualified opinions thereon.


                                                \S\BDO Seidman, LLP


San Francisco, California
February 3, 2006




                                     - 45 -

<PAGE>


                          MISSION WEST PROPERTIES, INC.
                           CONSOLIDATED BALANCE SHEETS
             (dollars in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                     ASSETS
                                                                                             December 31,
                                                                             ---------------------------------------------
                                                                                     2005                    2004
                                                                             ----------------------  ---------------------
Real estate assets:
<S>                                                                              <C>                    <C>
  Land                                                                            $  273,933             $  273,663
  Buildings and improvements                                                         766,457                770,757
  Real estate related intangible assets                                               17,410                 18,284
                                                                             ----------------------  ---------------------
      Total investments in properties                                              1,057,800              1,062,704
  Less accumulated depreciation and amortization                                    (130,419)              (110,062)
  Assets held for sale, net of accumulated depreciation of $1,578 at 12/31/04              -                  8,221
                                                                             ----------------------  ---------------------
      Net investments in properties                                                  927,381                960,863

Cash and cash equivalents                                                             31,441                  1,519
Restricted cash                                                                       16,712                  1,551
Deferred rent receivable, net of $2,000 allowance at December 31, 2005 and 2004       19,218                 18,511
Investment in unconsolidated joint venture                                             3,263                  3,559
Other assets, net of accumulated amortization of  $5,170 and $5,667
   at December 31, 2005 and 2004                                                      25,362                 19,653
                                                                             ----------------------  ---------------------
    Total assets                                                                  $1,023,377             $1,005,656
                                                                             ======================  =====================


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
Mortgage notes payable                                                            $  357,481             $  292,822
Mortgage note payable (related parties)                                               10,051                 10,420
Line of credit (related parties)                                                           -                  9,560
Revolving line of credit                                                                   -                 24,208
Interest payable                                                                         321                    327
Security deposits                                                                      8,047                  8,544
Deferred rental income                                                                 6,103                 11,038
Liabilities related to assets held for sale                                                -                     14
Dividend/distribution payable                                                         16,725                 16,718
Accounts payable and accrued expenses                                                  8,952                  6,704
                                                                             ----------------------  ---------------------
    Total liabilities                                                                407,680                380,355
                                                                             ----------------------  ---------------------

Commitments and contingencies (Note 15)

Minority interests                                                                   500,682                512,089
                                                                             ----------------------  ---------------------
Stockholders' equity:
Preferred stock, $.001 par value, 20,000,000 shares authorized,
    none issued and outstanding                                                            -                      -
Common stock, $.001 par value, 200,000,000 shares authorized, 18,448,791
    and 18,097,191 shares issued and outstanding at December 31, 2005 and 2004            18                     18
Paid-in capital                                                                      138,038                134,539
Accumulated deficit                                                                  (23,041)               (21,345)
                                                                             ----------------------  ---------------------
    Total stockholders' equity                                                       115,015                113,212
                                                                             ----------------------  ---------------------
    Total liabilities and stockholders' equity                                    $1,023,377             $1,005,656
                                                                             ======================  =====================
</TABLE>

                 See notes to consolidated financial statements

                                     - 46 -
<PAGE>


                          MISSION WEST PROPERTIES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
             (dollars in thousands, except share and per share data)


<TABLE>
<CAPTION>
                                                                                    Years Ended December 31,
                                                               --------------------------------------------------------------------
                                                                       2005                    2004                   2003
                                                               ---------------------   ---------------------  ---------------------
Revenues:
<S>                                                                <C>                     <C>                    <C>
Rental revenue from real estate                                      $100,765                $119,339               $129,275
Tenant reimbursements                                                  14,762                  14,919                 18,683
Other income, including lease terminations, settlements and interest    4,606                   6,913                  4,525
                                                               ---------------------   ---------------------  ---------------------
                                                                      120,133                 141,171                152,483
Expenses:
Property operating, maintenance and real estate taxes                  19,478                  20,046                 20,866
Interest                                                               21,295                  17,581                 16,446
Interest (related parties)                                                972                   1,077                  1,064
General and administrative                                              1,910                   2,011                  1,324
Depreciation and amortization of real estate                           21,283                  21,347                 20,139
                                                               ---------------------   ---------------------  ---------------------
                                                                       64,938                  62,062                 59,839
                                                               ---------------------   ---------------------  ---------------------
Income before equity in earnings of unconsolidated joint
   venture and minority interests                                      55,195                  79,109                 92,644
Equity in earnings of unconsolidated joint venture, including
   $1,400 gain on sale of property acquired from related party in 2003    724                   2,947                  3,885
Minority interests                                                    (46,234)                (68,199)               (80,459)
                                                               ---------------------   ---------------------  ---------------------
Income from continuing operations                                       9,685                  13,857                 16,070
                                                               ---------------------   ---------------------  ---------------------
Discontinued operations, net of minority interests:
Gain from disposal of properties classified as discontinued operations    445                       -                      -
(Loss)/income attributable to discontinued operations                    (103)                   (545)                   142
                                                               ---------------------   ---------------------  ---------------------
Income/(loss) from discontinued operations                                342                    (545)                   142
                                                               ---------------------   ---------------------  ---------------------
Net income to common stockholders                                     $10,027                 $13,312                $16,212
                                                               =====================   =====================  =====================
Net income to minority interests                                      $47,524                 $66,100                $80,836
                                                               =====================   =====================  =====================
Income per share from continuing operations:
Basic                                                                 $0.53                   $0.77                  $0.90
                                                               =====================   =====================  =====================
Diluted                                                               $0.53                   $0.77                  $0.90
                                                               =====================   =====================  =====================
Income/(loss) per share from discontinued operations:
Basic                                                                 $0.02                  ($0.03)                 $0.01
                                                               =====================   =====================  =====================
Diluted                                                               $0.02                  ($0.03)                 $0.01
                                                               =====================   =====================  =====================
Net income per share to common stockholders:
Basic                                                                 $0.55                   $0.74                  $0.91
                                                               =====================   =====================  =====================
Diluted                                                               $0.55                   $0.74                  $0.91
                                                               =====================   =====================  =====================
Weighted average shares of common stock (basic)                     18,286,947              18,034,873             17,739,609
                                                               =====================   =====================  =====================
Weighted average shares of common stock (diluted)                   18,325,659              18,076,498             17,802,947
                                                               =====================   =====================  =====================
Weighted average O.P. Units                                         86,220,117              86,444,773             86,476,217
                                                               =====================   =====================  =====================
Outstanding common stock                                            18,448,791              18,097,191             17,894,691
                                                               =====================   =====================  =====================
Outstanding O.P. Units                                              86,088,095              86,384,695             86,398,064
                                                               =====================   =====================  =====================
</TABLE>

                 See notes to consolidated financial statements

                                     - 47 -
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                                   Total
                                                Shares of Common    Common     Paid-in-      Accumulated        Stockholders'
                                                Stock Outstanding   Stock      Capital         Deficit             Equity
                                               ------------------  --------  ------------  ---------------   -------------------

<S>                                              <C>                  <C>     <C>           <C>                 <C>
Balance, December 31, 2002                        17,487,329           $17     $128,295      ($17,926)           $110,386
Issuance of common stock upon option exercise        150,362                      1,014                             1,014
Issuance of common stock upon O.P. Unit conversion   257,000             1        2,827                             2,828
Dividends declared at $0.96 per share in 2003                                                 (17,050)            (17,050)
Net income                                                                                     16,212              16,212
                                               ------------------  --------  ------------  ---------------   -------------------
Balance, December 31, 2003                        17,894,691            18      132,136       (18,764)            113,390
Issuance of common stock upon option exercise         20,000                        165                               165
Issuance of common stock upon O.P. Unit conversion   182,500                      2,238                             2,238
Dividends declared at $0.88 per share in 2004                                                 (15,893)            (15,893)
Net income                                                                                     13,312              13,312
                                               ------------------  --------  ------------  ---------------   -------------------
Balance, December 31, 2004                        18,097,191            18      134,539       (21,345)            113,212
Issuance of common stock upon option exercise         55,000                        480                               480
Issuance of common stock upon O.P. Unit conversion   296,600                      3,019                             3,019
Dividends declared at $0.64 per share in 2005                                                 (11,723)            (11,723)
Net income                                                                                     10,027              10,027
                                               ------------------  --------  ------------  ---------------   -------------------
Balance, December 31, 2005                        18,448,791           $18     $138,038      ($23,041)           $115,015
                                               ==================  ========  ============  ===============   ===================
</TABLE>

                 See notes to consolidated financial statements

                                     - 48 -
<PAGE>


                          MISSION WEST PROPERTIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                                       Years Ended December 31,
                                                                    ---------------------------------------------------------------
                                                                           2005                  2004                 2003
                                                                    -------------------   -------------------  --------------------
Cash flows from operating activities:
<S>                                                                      <C>                  <C>                   <C>
Income from continuing operations                                          $9,685              $13,857               $16,070
Income/(loss) from discontinued operations                                    342                 (545)                  142
Adjustments to reconcile income from continuing operations to
   net cash provided by operating activities:
     Minority interest income from continuing operations                   46,234               68,199                80,459
     Minority interest income/(loss) from discontinued operations           1,290               (2,099)                  377
     Minority interest distributions                                      (47,524)             (66,100)              (80,836)
     Depreciation and amortization of real estate and in-place leases      21,283               21,347                20,139
     Depreciation and amortization from discontinued operations               316                  529                   635
     Amortization of above market lease                                     1,888                1,888                 1,416
     Gain from disposal of properties classified as discontinued operations(2,206)                   -                     -
     Equity in earnings of unconsolidated joint venture                      (724)              (2,947)               (3,885)
     Distributions from unconsolidated joint venture                        1,020                1,673                 2,000
     Interest earned on restricted cash                                      (100)                   -                     -
     Asset impairment charge attributable to discontinued operation             -                2,193                     -
Change in operating assets and liabilities, net of liabilities assumed:
     Deferred rent receivable                                                (707)                 459                (1,969)
     Other assets                                                          (5,709)               2,195                (1,453)
     Interest payable                                                          (6)                  (5)                   (5)
     Security deposits                                                       (497)              (1,690)                 (936)
     Deferred rental income                                                (4,935)              (1,685)                2,847
     Accounts payable and accrued expenses                                  2,248                1,701                 1,103
                                                                    -------------------   -------------------  --------------------
     Net cash provided by operating activities                             21,898               38,970                36,104
                                                                    -------------------   -------------------  --------------------
Cash flows from investing activities:
Improvements to real estate                                                (1,138)              (1,519)               (1,370)
Proceeds from sales of real estate                                         27,508                    -                     -
Purchase of real estate                                                   (14,184)                   -              (110,013)
Restricted cash held in escrow                                            (15,061)                   -                     -
Net proceeds from sale of TBI unconsolidated joint venture asset                -                    -                 1,400
                                                                    -------------------   -------------------  --------------------
     Net cash used in investing activities                                 (2,875)              (1,519)             (109,983)
                                                                    -------------------   -------------------  --------------------
Cash flows from financing activities:
Proceeds from mortgage loan payable                                       150,800                    -               180,000
Principal payments on mortgage notes payable                               (7,431)              (7,036)               (5,204)
Principal payments on mortgage notes payable (related parties)               (369)                (342)                 (316)
Net (payments)/proceeds under line of credit (related parties)             (9,560)               3,338               (61,471)
Payment on loan payable                                                   (78,710)                   -               (20,000)
Net (payments)/proceeds from revolving line of credit                     (24,208)                 243                   126
Restricted cash for bond                                                        -               (1,551)                    -
Financing costs                                                                 -                    -                  (863)
Net proceeds from exercise of stock options                                   480                  165                 1,014
Minority interest distributions in excess of earnings                      (8,435)             (17,586)               (2,805)
Dividends                                                                 (11,668)             (17,292)              (16,952)
                                                                    -------------------   -------------------  --------------------
     Net cash provided by/(used) in financing activities                   10,899              (40,061)               73,529
                                                                    -------------------   -------------------  --------------------
     Net increase/(decrease) in cash and cash equivalents                  29,922               (2,610)                 (350)
Cash and cash equivalents, beginning of year                                1,519                4,129                 4,479
                                                                    -------------------   -------------------  --------------------
Cash and cash equivalents, end of year                                    $31,441               $1,519                $4,129
                                                                    ===================   ===================  ====================
</TABLE>

            Refer to Note 14 for supplemental cash flow information.
                 See notes to consolidated financial statements

                                     - 49 -
<PAGE>

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


1.   ORGANIZATIONS AND FORMATION OF THE COMPANY

Mission  West   Properties,   Inc.  ("the  Company")  is  a  fully   integrated,
self-administered and self-managed real estate company that acquires and manages
R&D/office  properties  in the portion of the San  Francisco  Bay Area  commonly
referred  to  as  Silicon  Valley.  In  July  1998,  the  Company  purchased  an
approximate   12.11%  of  four  existing  limited   partnerships   (referred  to
collectively  as the  "operating  partnerships")  and obtained  control of these
partnerships  by becoming the sole general partner in each one effective July 1,
1998 for financial  accounting and reporting purposes.  The Company purchased an
approximate 12.11% interest in each of the operating  partnerships.  All limited
partnership  interests  in  the  operating   partnerships  were  converted  into
59,479,633  operating  partnership  ("O.P.") Units,  which represented a limited
partnership   ownership  interest  of  approximately  87.89%  of  the  operating
partnerships.  The  operating  partnerships  are the vehicles  through which the
Company holds its real estate investments,  makes real estate acquisitions,  and
generally conducts its business.

As of December 31,  2005,  the Company owns a  controlling  general  partnership
interest of 17.81%, 21.68%, 16.18% and 12.41% 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 17.50%  general  partnership
interest in the  operating  partnerships,  taken as a whole,  on a  consolidated
weighted average basis.

The  Company,  through the  operating  partnerships,  owns  interests in 107 R&D
properties at December 31, 2005, all of which are located in Silicon Valley.

BUSINESS SEGMENT INFORMATION
The Company's  primary  business is the  ownership and  management of R&D/office
real estate with a  geographic  concentration  in the Silicon  Valley of the San
Francisco  Bay Area.  Accordingly,  the Company has concluded it currently has a
single  reportable  segment for  Statement  of  Financial  Accounting  Standards
("SFAS") 131 purposes.

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,  the  operating  partnerships  (the
"Company").  All significant  intercompany  transactions have been eliminated in
consolidation.

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires  management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent  assets and liabilities at the dates of
the financial statements and the reported amounts of revenue and expenses during
the reporting  periods.  Accounting  and  disclosure  decisions  with respect to
material  transactions that are subject to significant  management  judgments or
estimates  include  impairment of long lived assets,  realizability  of deferred
rent  receivables,  and  allocation  of  purchase  price  relating  to  property
acquisitions and the related  depreciable  lives assigned.  Actual results could
differ materially from those estimates.

REAL ESTATE ASSETS AND RELATED INTANGIBLE ASSETS
Real  estate  assets  are  stated  at  cost.  Cost  includes   expenditures  for
improvements or replacements.  Maintenance and repairs are charged to expense as
incurred.

The  purchase  price  allocation  for property  acquisitions  is  determined  in
accordance   with  the   following   principles   under   SFAS  141,   "Business
Combinations":

The fair value of the tangible  assets of an acquired  property,  which includes
land,  building and building/tenant  improvements,  is determined by valuing the
property as if it were vacant, and the "as-if-vacant" value is then allocated to
land,  building and tenant  improvements based on management's  determination of
the relative  fair values of these assets.  Factors  considered by management in
performing  these  analyses  include  certain costs during the lease-up  periods
considering current market conditions and costs to execute similar leases. These
costs include estimates of lost rental revenue, leasing commissions,  and tenant
improvements.

                                     - 50 -

<PAGE>


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

In allocating the fair value of the identified intangible assets of the acquired
property,  above-market  in-place  lease value is recorded  based on the present
value, using an interest rate which reflects the risks associated with the lease
acquired,  of the  difference  between  (i) the  contractual  amounts to be paid
pursuant to the  in-place  lease and (ii)  management's  estimate of fair market
lease rate for the corresponding in-place lease, measured over a period equal to
the remaining  non-cancelable  lease term. The  capitalized  above-market  lease
value,  included in real estate related  intangible  assets,  is amortized as an
offset to rental  revenue  from real  estate over the  remaining  non-cancelable
lease term. The value of in-place leases, exclusive of the value of above-market
in-place  lease,  is  amortized  to expense  over the  remaining  non-cancelable
periods of the respective  leases. If a lease were to be terminated prior to its
stated  expiration,  all  unamortized  amounts  relating  to that lease would be
written off in the period that the lease is terminated.

DEPRECIATION AND AMORTIZATION
Depreciation and amortization are computed using the  straight-line  method over
estimated useful lives as follows:

<TABLE>
<CAPTION>
<S>                                                                        <C>
Building shell & base building improvements of newly acquired properties    - Weighted average composite life of 40 years
Base building improvements made subsequent to initial property acquisition  - 25 years
Tenant improvements and furniture and fixtures                              - Lesser of life of asset, generally 5-10 years,
                                                                              or term of lease
Above-market and in-place lease value                                       - Term of lease
</TABLE>

IMPAIRMENT OF LONG-LIVED ASSETS
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  in accordance  with SFAS 144,  "Accounting  for the  Impairment and
Disposal of Long-Lived  Assets." If the carrying amount of the asset,  including
any  intangible  assets  associated  with  that  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
estimated fair value. If impairment is recognized,  the reduced  carrying amount
of the asset will be accounted for as its new cost. For a depreciable asset, the
new cost will be depreciated over the asset's remaining useful life.  Generally,
fair values are estimated using discounted cash flow, replacement cost or market
comparison  analyses.  The analysis that the Company prepares in connection with
determining if there may be any asset  impairment  loss under SFAS 144 considers
several assumptions:  holding period of ten years, 36 months lease up period and
cap rate  ranging  from 8% to 9%.  The  process  of  evaluating  for  impairment
requires  estimates  as to future  events and  conditions,  which are subject to
varying market and economic factors, such as the vacancy rates, rental rates and
operating  costs for R&D  facilities  in the  Silicon  Valley  area and  related
submarkets.  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. In connection with the January 2005 sale of an
asset,  an impairment loss of  approximately  ($2,193) was recorded for the year
ended  December 31, 2004 and is classified in  discontinued  operations,  net of
minority  interests.  No  impairment  losses were  recorded  for the years ended
December 31, 2005 or 2003.

DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
The Company has adopted SFAS 144, which  addresses the financial  accounting for
the  disposal  of long  lived  assets.  SFAS 144  requires  that the  results of
operations  and gains or  losses  on the sale of  property  sold  subsequent  to
December 31, 2001 that were not classified as held for sale at December 31, 2001
as well as the results of operations  from  properties  that were  classified as
held for sale  subsequent  to December  31, 2001 be  presented  in  discontinued
operations  if both the  following  criteria are met: (a) the operation and cash
flows  of the  property  have  been (or will  be)  eliminated  from the  ongoing
operations of the Company as a result of the disposal  transaction;  and (b) the
Company  will not have any  significant  involvement  in the  operations  of the
property  after the disposal  transaction.  SFAS 144 also requires  prior period
results of  operations  for these  properties  to be restated  and  presented in
discontinued operations in prior consolidated statements of operations.

An asset is generally  classified as held for sale once management has committed
to an action to sell the asset, the asset is available for immediate sale in its
present  condition  (subject to terms that are usual and  customary for sales of
such  assets),  an active  program to locate a buyer is  initiated,  the sale is
probable,  the  asset is being  actively  marketed  for sale at a price  that is
reasonable  in  relation  to its  current  fair value and  actions  required  to
complete the plan indicate that it is unlikely that  significant  changes to the
plan will be made or that the plan will be withdrawn.  Properties  for sale with
significant  contingencies  that  may  prevent  their  sale,  such as  obtaining
rezoning  approval  from the city,  are not  classified as assets held for sale.
Upon the  classification  of a real estate asset as held for sale,  the carrying
value of the asset is  reduced  to the  lower of its net book  value or its fair
value, less costs to sell the asset.  Subsequent to the classification of assets
as held for sale,  no further  depreciation  expense is  recorded.  Real  estate
assets  held for sale are stated  separately  on the  accompanying  consolidated
balance sheets.  Effective  January 1, 2002 (through the  implementation of SFAS
144),  the  operating  results of real estate  assets held for sale and sold are
reported as discontinued operations in the accompanying  consolidated statements
of

                                     - 51 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
             (Dollars in thousands, except share and per share data)

operations. The income/(loss) from discontinued operations includes the revenues
and  expenses,   including  depreciation,   associated  with  the  assets.  This
classification   of  operating  results  as  discontinued   operations   applies
retroactively  for all periods  presented for assets designated as held for sale
subsequent  to  January  1,  2002.  Additionally,  gains  and  losses  on assets
designated as held for sale subsequent to January 1, 2002 are classified as part
of discontinued operations.

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  one  or  two  financial
institutions,  and at times,  such  balances  may be in  excess  of the  Federal
Deposit Insurance Corporation insurance limit.

RESTRICTED CASH
Restricted cash totaled $16,712 as of December 31, 2005. Of this amount, $15,161
represents  proceeds received from a property sale and interest income held in a
separate  cash  account  at a  trust  company  for  future  use in  tax-deferred
exchanges.  The  remaining  $1,551  represents a bond the Company  posted in the
Republic Properties Corporation v. Mission West Properties, L.P. litigation (see
Note 15).

OTHER ASSETS
Included in other assets are costs  associated with obtaining debt financing and
commissions  associated  with new leases.  Such debt  financing  costs are being
amortized  over the term of the associated  debt, by a method that  approximates
the  effective   interest  method  and  such  lease  commissions  are  amortized
straight-line  over the term of the related  lease.  If the lease is  terminated
prior  to the  end of the  lease  term,  the  Company  charges  any  unamortized
capitalized  lease  commission  cost to expense in the period  that the lease is
terminated.  Also included in other assets are obligation  receivables  from the
Berg Group of approximately  $7,494 to construct a building at 245 Caspian Drive
in  Sunnyvale,  California  and $2,529 in tenant  improvements  at 5345  Hellyer
Avenue in San Jose, California (see Note 12).

MINORITY INTERESTS
Minority interests represent the limited partnership  interests in the operating
partnerships.  Minority  interest in net income is  calculated by taking the net
income of the operating  partnerships (on a stand-alone basis) multiplied by the
respective minority interest ownership percentage.

REVENUE RECOGNITION
Rental  income  is  derived  from   operating   leases  and  recognized  on  the
straight-line method of accounting required by GAAP 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  Receivable on the  consolidated  balance  sheets.  Certain lease
agreements   contain   terms  that  provide  for   additional   rents  based  on
reimbursement  of certain costs including  property  operating,  maintenance and
real  estate  taxes.  These  additional  rents from  tenant  reimbursements  are
reflected on the accrual basis.

Rental revenue is affected if existing tenants  terminate or amend their leases.
The Company tries to identify  tenants who may be likely to declare  bankruptcy,
cease  operations  or otherwise  terminate  leases prior to the end of the lease
term,  such as tenants who do not occupy all or a large  portion of the property
being leased.  By anticipating  these events in advance,  the Company expects to
take steps to  minimize  their  impact on its  reported  results  of  operations
through lease  renegotiations and other appropriate  measures.  Reserves against
Deferred Rent  Receivable are estimated by management  based on known  financial
conditions of tenants and management's  estimate of net  realizeability  of such
receivables  based on  existing  or  expected  negotiations  with  tenants.  The
Company's  judgments and estimations about tenants' capacity to continue to meet
their lease  obligations  will affect the rental  revenue  recognized.  To date,
actual reductions in revenue as a result of early  terminations and the tenants'
inability  to pay have been within  management's  estimates.  However,  material
differences  may result in the amount and timing of our rental  revenue  for any
period if we made different judgments or estimations.

Lease  termination  fees are  recognized  in other income when there is a signed
termination  letter agreement,  all of the conditions of the agreement have been
met,  the  tenant  is no  longer  occupying  the  property  and the  termination
consideration is probable of collection. These fees are paid by tenants who want
to terminate their lease  obligations  before the end of the contractual term of
the lease. There is no way of predicting or forecasting the timing or amounts of
future lease termination fees.

                                     - 52 -

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

The  Company  recognizes  income  from  rent,  tenant  reimbursements  and lease
termination fees and other income once all of the following  criteria are met in
accordance with SEC Staff Accounting Bulletin 104 "Revenue Recognition":

-    the agreement has been fully executed and delivered;
-    services have been rendered;
-    the amount is fixed and determinable; and
-    the collectability is reasonably assured.

INCOME TAXES
The Company has been taxed as a real estate  investment trust ("REIT") under the
Internal  Revenue Code of 1986,  as amended,  (the "Code")  commencing  with the
taxable year ended  December 31, 1999.  In order for the Company to qualify as a
REIT, it must distribute  annually at least 90% of its REIT taxable  income,  as
defined  in  the  Code,  to its  stockholders  and  comply  with  certain  other
requirements. Accordingly, for the years ended December 31, 2005, 2004 and 2003,
no  provision  for federal  income taxes has been  included in the  accompanying
consolidated financial statements.

For the years ended  December 31, 2005 and 2004, the Company's  total  dividends
paid or payable to the  stockholders  represent  89% of ordinary  income and 11%
return  of  capital  and  98% of  ordinary  income  and 2%  return  of  capital,
respectively,  for income tax purposes (unaudited).  For the year ended December
31, 2003,  the Company's  total  dividends  paid or payable to the  stockholders
represented  98% of  ordinary  income  and 2% return of  capital  for income tax
purposes (unaudited).

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

ACCOUNTING FOR STOCK-BASED COMPENSATION
SFAS 123, "Accounting for Stock-Based  Compensation,"  encourages,  but does not
require  companies  to  record   compensation  cost  for  stock-based   employee
compensation  plans at fair value. The Company has chosen to continue to account
for  stock-based  compensation  using the intrinsic  value method  prescribed in
Accounting  Principles Board Opinion ("APB") 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.

The following  table  illustrates the unaudited pro forma effect on consolidated
net income available to common stockholders and consolidated  earnings per share
if the fair value method had been applied to all  outstanding and unvested stock
options for the last three years.

<TABLE>
<CAPTION>
                                                                                     Years Ended December 31,
                                                                 ------------------------------------------------------------------
                                                                        2005                   2004                   2003
                                                                 --------------------   --------------------  ---------------------
                                                                           (dollars in thousands, except per share data)
<S>                                                                   <C>                    <C>                    <C>
         Historical net income to common stockholders                  $10,027                $13,312                $16,212
         Add back compensation expense for stock options included
            in historical net income to common stockholders                  -                      -                      -
         Deduct compensation expense for stock options
            determined under fair value based method                      (161)                  (176)                  (235)
         Allocation of expense to minority interest                        134                    145                    195
                                                                 --------------------   --------------------  ---------------------
         Pro forma net income to common stockholders                   $10,000                $13,281                $16,172
                                                                 --------------------   --------------------  ---------------------
         Earnings per share - basic:
         Historical net income to common stockholders                    $0.55                  $0.74                  $0.91
         Pro forma net income to common stockholders                     $0.55                  $0.74                  $0.91
         Earnings per share - diluted:
         Historical net income to common stockholders                    $0.55                  $0.74                  $0.91
         Pro forma net income to common stockholders                     $0.55                  $0.73                  $0.91
</TABLE>

                                     - 53 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
             (Dollars in thousands, except share and per share data)

Options were granted to four employees and three non-employee directors totaling
710,000 in 2005,  which  options  vest monthly for 33 months from date of grant,
subject to continued  employment  or other  service to the Company.  Each option
grant  has a term of six  years  from  the  date of  grant  subject  to  earlier
termination in certain events related to termination of employment.  The options
were granted at an exercise price of $10.00 per share.  The estimated fair value
of the  options  granted in 2005 was $1.12 per share on the date of grant  using
the Black-Scholes option pricing model with the following assumptions:  dividend
yield of 6.4%,  volatility  of 21.97%,  risk free rates of 4.2% and an  expected
life of six years. There were no stock options granted in 2004 and 2003.

In April 2005, the Company's  Compensation  Committee of the Board of Directors,
in accordance with the provisions of the 2004 Equity Incentive Plan, unanimously
approved the following awards of dividend equivalent rights ("DER's"), each such
DER  representing the current right to receive the dividend paid on one share of
the Company's common stock, when paid by the Company:

-    The  three  non-employee  outside  directors  each  received  45,000  DER's
     effective as of the second quarter of 2005,  which will remain in effect as
     long as the individual continues to serve on the Board of Directors; and

-    Key employees of the Company received a total of 155,000 DER's effective as
     of the  second  quarter of 2005,  which will  remain in effect for each key
     employee as long as he continues to be employed by the Company.

A total of 290,000  DER's were  awarded by the  Company's  Board of Directors in
April 2005. In the fourth quarter 2005, the Company  accrued  approximately  $46
for DER  compensation  expense.  The Company  expects  these awards to result in
additional annual  compensation  expense of approximately $186 based on the most
recent quarterly dividend of $0.16 per share of common stock.

FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,  accounts
receivable,  accounts payable,  and debt.  Considerable  judgment is required in
interpreting  market data to develop estimates of fair value.  Accordingly,  the
estimates  presented  herein are not necessarily  indicative of the amounts that
the Company could  realize in a current  market  exchange.  The use of different
market assumptions and/or estimation methodologies may have a material effect on
the  estimated  fair  value  amounts.   Cash  and  cash  equivalents,   accounts
receivable,  and accounts payable are carried at amounts that approximate  their
fair values due to their short-term maturities. For fixed rate debt, the Company
estimates fair value by using  discounted  cash flow analyses based on borrowing
rates  for  similar  kinds of  borrowing  arrangements.  The  fair  value of the
Company's  fixed rate debt at December  31, 2005 was  approximately  $441,008 as
compared to its carrying value of $367,532.

RECLASSIFICATIONS
Certain amounts from prior year's  consolidated  financial  statements have been
reclassified to conform to the  presentation of the current year's  consolidated
financial statements.

CONCENTRATION OF CREDIT RISK
The Company's properties are not geographically diverse, and its tenants operate
primarily in the  information  technology  industry.  Additionally,  because the
properties  are leased to 72 tenants at December 31, 2005,  default by any major
tenant could  significantly  impact the results of the  consolidated  total. One
tenant,  Microsoft  Corporation,  accounted for approximately  10.0%,  18.1% and
16.3% of the Company's cash rental income for the years ended December 31, 2005,
2004 and 2003,  respectively,  of total cash rental  income.  Cash rental income
from Microsoft Corporation was $10,089,  $21,997 and $21,151 for the years ended
December 31, 2005, 2004 and 2003,  respectively.  Future minimum rents from this
tenant are $113,059.  One other tenant accounted for approximately  12.4%, 10.8%
and 10.0% of the Company's  cash rental income for the years ended  December 31,
2005, 2004 and 2003,  respectively,  of total cash income. During 2005, seven of
the Company's tenants relocated or ceased operations.

NEW ACCOUNTING PRONOUNCEMENTS
In  December  2004,  the FASB  issued SFAS 123R,  "Share-Based  Payment"  ("SFAS
123R"),  which addresses the accounting for employee and director stock options.
Statement  123R  requires  that  the cost of all  employee  and  director  stock
options, as well as other equity-based compensation  arrangements,  be reflected
in the financial  statements  based on the  estimated  fair value of the awards.
SFAS 123R is an amendment to SFAS 123 and  supersedes APB Opinion 25 ("APB 25").
SFAS 123R is  applicable  to any award  that is settled  or  measured  in stock,
including stock options,  restricted stock,  stock  appreciation  rights,  stock
units,   and  employee  stock  purchase  plans.   The  Company  will  adopt  the
requirements  of SFAS 123R beginning 2006. The Company expects that the adoption
of this standard will reduce its net income and earnings per share;  however, it
will

                                     - 54 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
             (Dollars in thousands, except share and per share data)

have no impact on cash flow. Although the Company has not yet determined whether
the adoption of SFAS 123R will result in amounts that are similar to the current
pro  forma   disclosures   under  SFAS  123,  the  Company  is  evaluating   the
requirementsunder  SFAS 123R including the valuation methods and support for the
assumptions that underlie the valuation of the awards and the transition methods
(modified prospective transition method or the modified retrospective transition
method).  Compensation cost under FAS 123R may differ from pro forma amounts due
to changes in fair value,  different  assumptions  and treatment of forfeitures.
Under SFAS 123R, the Company estimates that  compensation  expense for 2006 will
be approximately $0.2 million against earnings.

In December 2004, the FASB issued SFAS 153,  "Exchanges of Non-monetary  Assets"
("SFAS 153").  SFAS 153 amends the guidance in APB Opinion 29,  "Accounting  for
Non-monetary  Transactions,"  to eliminate  certain  exceptions to the principle
that exchanges of non-monetary assets be measured based on the fair value of the
assets exchanged.  SFAS 153 eliminates the exception for non-monetary  exchanges
of  similar  productive  assets and  replaces  it with a general  exception  for
exchanges of  non-monetary  assets that do not have commercial  substance.  This
statement  is  effective  for  non-monetary  asset  exchanges  in  fiscal  years
beginning  after June 15, 2005. The adoption of SFAS 153 is not expected to have
an  impact  on the  Company's  consolidated  results  of  operations,  financial
position or cash flows.

In  May  2005,  the  FASB  issued  SFAS  154,   "Accounting  Changes  and  Error
Corrections"  ("SFAS  154"),  to replace APB Opinion 20,  "Reporting  Accounting
Changes in Interim  Financial  Statements"  ("APB  20").  SFAS 154  changes  the
requirements  for the  accounting  for and  reporting of a change in  accounting
principle and requires  retrospective  application to prior  periods'  financial
statements,  unless it is  impracticable to determine period specific effects or
the cumulative  effect of the change.  SFAS 154 will be effective for accounting
changes and  corrections of errors made in fiscal years beginning after December
15,  2005.  The  adoption of this  statement  is not expected to have a material
effect  on  the  Company's  consolidated  results  of  operations  or  financial
condition.

3.   DEFERRED RENT ALLOWANCE

The following table  represents  activity in the deferred rent allowance for the
years ended December 31, 2005, 2004 and 2003.

<TABLE>
<CAPTION>
                                                                                          Provision
                                                 Beginning       Against                   Ending
                                                  Balance       Revenues    Charge-off     Balance
                                               -------------- ------------ ------------ -------------
                                                               (dollars in thousands)
<S>                                               <C>           <C>          <C>           <C>
         Year ended December 31, 2003              $2,000        $2,552       $2,552        $2,000
         Year ended December 31, 2004              $2,000        $1,313       $1,313        $2,000
         Year ended December 31, 2005              $2,000          $785         $785        $2,000
</TABLE>

4.   STOCK TRANSACTIONS

As of December 31, 2005 and 2004,  $1,706 and $1,588 remained  outstanding under
notes  issued  in  connection  with  the  Company's   purchase  of  its  general
partnership  interests in 1998 (the "demand  notes"),  respectively.  The demand
notes which accrue interest at 7.25%,  along with the interest expense (interest
income to the operating  partnerships),  are eliminated in consolidation and are
not included in the corresponding  line items within the consolidated  financial
statements.  However, the interest income earned by the operating  partnerships,
which is interest  expense to the  Company,  in  connection  with this debt,  is
included in the calculation of minority interest as reported on the consolidated
statement of operations,  thereby reducing the Company's net income by this same
amount. The Company and the operating partnerships have agreed to extend the due
date of the demand notes to September 30, 2007. At present,  the Company's  only
means for  repayment  of this debt is through  distributions  received  from the
operating  partnerships  in excess of the amount of  dividends to be paid to the
Company's stockholders.

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

                                     - 55 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
             (Dollars in thousands, except share and per share data)

all of the eligible limited partners in one year exceeds $1 million, the Company
or  the  operating   partnerships  is  entitled  in  its  discretion  to  reduce
proportionately  the number of O.P.  Units to be  acquired  from each  tendering
limited   partner  so  that  the  total   purchase  price  does  not  exceed  $1
million.During  the year ended  December  31,  2005,  stock  options to purchase
40,000  shares of the Company's  common stock were  exercised at $8.25 per share
and stock options to purchase  15,000 shares of the Company's  common stock were
exercised at $10.00 per share.  Total proceeds to the Company were approximately
$480.

During the year ended  December 31, 2004,  stock  options to purchase a total of
20,000 shares of the Company's  common stock were  exercised at $8.25 per share.
Total proceeds to the Company were approximately $165.

During the year ended December 31, 2003, stock options to purchase 60,362 shares
of the  Company's  common  stock  were  exercised  at $4.50  per share and stock
options to purchase  90,000 shares of the Company's  common stock were exercised
at $8.25 per share. Total proceeds to the Company were approximately $1,014.

In 2005 and 2004,  296,600 and 182,500 O.P. Units were exchanged for 296,600 and
182,500 shares of the Company's common stock,  respectively,  under the terms of
the Exchange Rights  Agreement among the Company and all limited partners of the
operating partnerships.

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 82.50% and 82.74%,  on a weighted average basis, of
the  ownership  interests  in the real  estate  operations  of the Company as of
December 31, 2005 and 2004, respectively. Minority interest in earnings has been
calculated  by  taking  the  net  income  of the  operating  partnerships  (on a
stand-alone  basis)  multiplied by the respective  minority  interest  ownership
percentage.

The operating  partnerships have ownership  interests of 83.33%, 75% and 50% and
act as the  managing  member  in  three  separate  joint  ventures,  which  were
established to hold  properties.  The operating  partnerships  control the joint
ventures,  and  accordingly,  these  joint  ventures  are  consolidated  in  the
Company's consolidated financial statements.  The minority interest in the joint
ventures is  reflected  as a component  of  minority  interest of the  operating
partnerships.  For the years ended  December  31,  2005,  2004 and 2003,  income
associated  with the minority  interests  held by the third parties of the three
consolidated joint ventures was $479, $486 and $581, respectively.

6.   REAL ESTATE

PROPERTY DISPOSITIONS
In 2005, the Company  completed the sale of three R&D  properties  consisting of
342,350  rentable  square feet,  which include the R&D  properties at 3120 Scott
Boulevard, Santa Clara, California, 405 Tasman Drive, Sunnyvale,  California and
800 Embedded Way, San Jose,  California.  A loss of  approximately  ($2,193) was
realized on the sales price of $8,500 for the 3120 Scott Boulevard  property and
was provided for in the fourth quarter 2004 as an asset impairment  charge under
discontinued   operations,   net  of  minority   interests.   A  total  gain  of
approximately  $2,206 was  recognized  in 2005 and  classified  as  discontinued
operations,  net of minority interests,  on the total sales price of $19,355 for
the 405 Tasman  Drive and 800  Embedded  Way  properties.  The gain from the 405
Tasman  Drive  sale was  recognized  based on the  installment  method of profit
recognition  since the buyer did not make a  sufficient  initial  down  payment.
Proceeds of approximately $15,061 from the 800 Embedded Way sale were classified
as restricted cash to be used in tax-deferred  property exchanges as of December
31, 2005.

PROPERTY ACQUISITION
In 2005, the Company acquired a 203,800 rentable square foot vacant R&D property
located at 5521 Hellyer Avenue in San Jose,  California.  The purchase price for
the property was approximately $14,026. The Company allocated the purchase price
to land, building,  and building  improvements based upon the estimated relative
fair values of such assets. Since the property was acquired vacant, there was no
purchase price allocation to lease intangible assets.

                                     - 56 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
             (Dollars in thousands, except share and per share data)

BERG LAND HOLDINGS OPTION AGREEMENT
Under the terms of the Berg Land Holdings Option Agreement, the Company, through
the  operating  partnerships,  has the option to acquire any future R&D property
developed by the Berg Group on land currently owned or optioned, or acquired for
these purposes in the future,  directly or indirectly,  by Carl E. Berg or Clyde
J. Berg. At present,  there are  approximately  90 acres of Silicon Valley land,
including  land under  development,  owned  directly or under 50% joint  venture
entities  by certain  members of the Berg Group that are subject to 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, O.P. Units
valued at the  average  closing  price of the  shares of common  stock  over the
30-trading-day  period preceding the acquisition  date. To date, the Company has
completed  20  acquisitions  under  the  Berg  Land  Holdings  Option  Agreement
representing   approximately   1,992,000  rentable  square  feet.  The  acquired
properties cost approximately  $205,188,  for which the Company issued 7,933,849
O.P  Units  and  assumed  debt of  approximately  $118,042.  Upon the  Company's
exercise of an option to purchase any of the future R&D  property  developments,
the acquisition  price will equal the sum of (a) the full  construction  cost of
the building;  plus (b) 10% of the full construction cost of the building;  plus
(c) interest at LIBOR (London  Interbank  Offered Rate) plus 1.65% on the amount
of the full construction cost of the building for the period from the date funds
were  disbursed by the  developer to the close of escrow;  plus (d) the original
acquisition  cost of the parcel on which the  improvements  will be constructed,
which range from $8.50 to $20.00 per square foot for land currently owned;  plus
(e) 10% per annum of the amount of the original  acquisition  cost of the parcel
from the later of January 1, 1998 or the seller's  acquisition date to the close
of escrow;  minus (f) the aggregate principal amount of all debt encumbering the
acquired  property,  or a  lesser  amount  as  approved  by the  members  of the
Independent Directors committee of the Company's Board of Directors.  Generally,
the Company will not acquire any  projects  until they are fully  completed  and
leased.

No  estimate  can be given at this time as to the total  cost to the  Company to
acquire future  projects under the Berg Land Holdings Option  Agreement,  or the
timing as to when the Company  will acquire  such  projects.  In addition to any
projects  currently  under  development,  the  Company  has the right to acquire
future  developments  by the  Berg  Group on up to 74  additional  acres of land
currently  controlled by the Berg Group,  which could support  approximately 1.2
million  square feet of new  developments.  Under the Berg Land Holdings  Option
Agreement,  as long as the Berg Group ownership in the Company and the operating
partnerships taken as a whole is at least 65%, the Company also has an option to
purchase all land acquired,  directly or indirectly, by Carl E. Berg or Clyde J.
Berg in the future which has not been  improved  with  completed  buildings  and
which  is  zoned  for,  intended  for or  appropriate  for  R&D,  office  and/or
industrial  development  or  use  in  the  states  of  California,  Oregon,  and
Washington.

Although the Company has the right to acquire the new properties available to it
under the  terms of the Berg Land  Holdings  Option  Agreement,  there can be no
assurance that the Company  actually will consummate any intended  transactions.
Furthermore,  the  Company  has not yet  determined  the means by which it would
acquire and pay for any such properties or the impact of any of the acquisitions
on its business,  results of operations,  financial  condition or available cash
for distribution.

Given the economic  downturn in the Silicon Valley,  the Company may not be able
to maintain historical levels of growth from acquisitions of new developments in
the future.

                                     - 57 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
             (Dollars in thousands, except share and per share data)

7.   DEBT

The following table sets forth certain information regarding debt outstanding as
of December 31, 2005 and 2004.

<TABLE>
<CAPTION>
                                                                                   Balance
        Debt Description                 Collateral Properties                  At December 31,         Maturity Date  Interest Rate
--------------------------------- --------------------------------------- ----------------------------- -------------- -------------
                                                                              2005            2004
--------------------------------- --------------------------------------- ----------------------------- -------------- -------------
                                                                             (dollars in thousands)
Line of Credit:
<S>                              <C>                                       <C>             <C>               <C>           <C>
Berg Group (related parties)      2033-2043 Samaritan Drive, San Jose, CA          -        $  9,560            (1)           (1)
                                  2133 Samaritan Drive, San Jose, CA      -------------  --------------
                                  2233-2243 Samaritan Drive, San Jose, CA
                                  1310-1450 McCandless Drive, Milpitas, CA
                                  1795-1845 McCandless Drive, Milpitas, CA

Cupertino National Bank (2)       Not Applicable                                   -          24,208          12/06           (2)
                                                                          -------------  --------------
Mortgage Notes Payable
   (related parties):             5300-5350 Hellyer Avenue, San Jose, CA      10,051          10,420           6/10         7.650%
                                                                          -------------  --------------
Mortgage Notes Payable: (3)
Washington Mutual                 10460 Bubb Road, Cupertino, CA                   -             154            (4)         9.500%
Prudential Insurance Company
   of America (5)                 10300 Bubb Road, Cupertino, CA             117,290         119,441          10/08         6.560%
                                  10500 North De Anza Blvd, Cupertino, CA
                                  4050 Starboard Drive, Fremont, CA
                                  45700 Northport Loop, Fremont, CA
                                  45738 Northport Loop, Fremont, CA
                                  450 National Ave, Mountain View, CA
                                  6311 San Ignacio Avenue, San Jose, CA
                                  6321 San Ignacio Avenue, San Jose, CA
                                  6325 San Ignacio Avenue, San Jose, CA
                                  6331 San Ignacio Avenue, San Jose, CA
                                  6341 San Ignacio Avenue, San Jose, CA
                                  6351 San Ignacio Avenue, San Jose, CA
                                  3236 Scott Blvd, Santa Clara, CA
                                  3560 Bassett Street, Santa Clara, CA
                                  3570 Bassett Street, Santa Clara, CA
                                  3580 Bassett Street, Santa Clara, CA
                                  1135 Kern Avenue, Sunnyvale, CA
                                  1212 Bordeaux Lane, Sunnyvale, CA
                                  1230 E. Arques, Sunnyvale, CA
                                  1250 E. Arques, Sunnyvale, CA
                                  1170 Morse Avenue, Sunnyvale, CA
                                  1600 Memorex Drive, Santa Clara, CA
                                  1688 Richard Avenue, Santa Clara, CA
                                  1700 Richard Avenue, Santa Clara, CA
                                  3540 Bassett Street, Santa Clara, CA
                                  3542 Bassett Street, Santa Clara, CA
                                  3544 Bassett Street, Santa Clara, CA
                                  3550 Bassett Street, Santa Clara, CA
Northwestern Mutual Life
        Insurance Co. (6)         1750 Automation Parkway, San Jose, CA       91,417          94,517           1/13         5.640%
                                  1756 Automation Parkway, San Jose, CA
                                  1762 Automation Parkway, San Jose, CA
                                  6320 San Ignacio Avenue, San Jose, CA
                                  6540-6541 Via Del Oro, San Jose, CA
                                  6385-6387 San Ignacio Ave., San Jose, CA
                                  2251 Lawson Lane, Santa Clara, CA
                                  1325 McCandless Drive, Milpitas, CA
                                  1650-1690 McCandless Drive, Milpitas, CA
                                  20605-20705 Valley Green Dr., Cupertino, CA

Citicorp USA, Inc.                2001 Walsh Avenue, Santa Clara, CA               -          78,710            (2)           (2)
                                  2880 Scott Boulevard, Santa Clara, CA
                                  2890 Scott Boulevard, Santa Clara, CA
                                  2770-2800 Scott Boulevard, Santa Clara, CA
                                  2220 Central Expressway, Santa Clara, CA
                                  2300 Central Expressway, Santa Clara, CA
                                  2330 Central Expressway, Santa Clara, CA
                                  20400 Mariani Avenue, Cupertino, CA

Allianz Life Insurance Co. (I)(7) 5900 Optical Court, San Jose, CA            25,269               -           8/25         5.560%

Allianz Life Insurance Co. (II)(7)5325-5345 Hellyer Avenue, San Jose, CA     123,505               -           8/25         5.220%
                                  1768 Automation Parkway, San Jose, CA
                                  2880 Scott Boulevard, Santa Clara, CA
                                  2890 Scott Boulevard, Santa Clara, CA
                                  2800 Scott Boulevard, Santa Clara, CA
                                  20400 Mariani Avenue, Cupertino, CA
                                  10450-10460 Bubb Road, Cupertino, CA
                                                                          -------------  --------------
                                                                             357,481         292,822
                                                                          -------------  --------------
   Total                                                                    $367,532        $337,010
                                                                          =============  ==============
</TABLE>

                                     - 58 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
             (Dollars in thousands, except share and per share data)

(1)  The debt owed to the Berg Group under the line of credit carries a variable
     interest  rate  equal to LIBOR  plus  1.30% and is payable in full in March
     2006. The interest rate was 4.08% at December 31, 2004.  Effective  October
     31, 2005,  the Berg Group line of credit was  terminated  based on a mutual
     agreement  between the Company and the Berg Group.  Based on existing  cash
     reserves and credit  facilities,  the Company  determined that it no longer
     foresees a need for the Berg Group line of credit.  There are no borrowings
     currently  outstanding under the Berg Group line of credit. The Company did
     not  incur any fees or  charges  for  terminating  the Berg  Group  line of
     credit.

(2)  Interest rate for the Cupertino  National Bank line of credit is LIBOR plus
     1.75%. The interest rate for the Cupertino  National Bank line of credit at
     December 31, 2005 and 2004 was 6.14% and 4.29%,  respectively.  On July 22,
     2005, the Company entered into a "Change in Terms Agreement" with Cupertino
     National Bank, which reduced the maximum  borrowing amount on the Company's
     revolving  line of credit  facility  with that bank from $40  million to $9
     million.  In December  2005,  the Company  entered into another  "Change in
     Terms  Agreement" with Cupertino  National Bank that increased the facility
     from $9 million to $10 million.  The Cupertino National Bank line of credit
     contains certain  financial loan and reporting  covenants as defined in the
     loan agreement. As of December 31, 2005, the Company was in compliance with
     these loan covenants. The interest rate for the Citicorp USA, Inc. mortgage
     loan at December 31, 2004 was 4.18%. The Citicorp loan was paid off in July
     2005 with proceeds received from the Allianz Loan II.

(3)  Mortgage notes payable generally  require monthly  installments of interest
     and  principal  ranging  from $177 to $840  over  various  terms  extending
     through the year 2025. The weighted average interest rate of mortgage notes
     payable was 5.84% and 6.23% at December 31, 2005 and 2004, respectively.

(4)  The  Washington  Mutual  mortgage loan was paid off in its entirety in July
     2005. It was  collateralized  by one property located at 10460 Bubb Road in
     Cupertino,  California. This property was added as additional collateral to
     the Allianz Loan II.

(5)  The Prudential  Insurance loan is payable in monthly  installments of $827,
     which includes principal (based upon a 30-year  amortization) and interest.
     A limited  partner,  who is not a member of the Berg Group,  has guaranteed
     approximately  $12,000 of this debt. Costs and fees incurred with obtaining
     this loan aggregated  approximately $900, which were deferred and amortized
     over the loan  period.  The  Prudential  loan  contains  certain  customary
     covenants as defined in the loan  agreement.  As of December 31, 2005,  the
     Company was in compliance with these loan covenants.

(6)  The  Northwestern  loan is payable in monthly  installments of $696,  which
     includes principal (based upon a 20-year amortization) and interest.  Costs
     and fees incurred with obtaining this loan aggregated  approximately  $664,
     which were deferred and amortized  over the loan period.  The  Northwestern
     loan contains certain customary covenants as defined in the loan agreement.
     As of December  31,  2005,  the Company was in  compliance  with these loan
     covenants.

(7)  The Allianz  loans are  payable in monthly  installments  of $1,017,  which
     includes principal (based upon a 20-year amortization) and interest.  Costs
     and fees  incurred  with  obtaining  these loans  aggregated  approximately
     $1,125,  which were  deferred  and  amortized  over the loan  periods.  The
     Allianz loans contain  certain  customary  covenants as defined in the loan
     agreements.  As of December 31, 2005,  the Company was in  compliance  with
     these loan covenants.


The following  information  is an update of obtained  mortgage notes payable and
other debt  transaction  that  occurred  during  2005.  For  additional  details
regarding the Company's  mortgage notes payable and other debt outstanding as of
December 31, 2005, see Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations.

ALLIANZ LOAN I
On April 6, 2005, the Company  obtained a $25,800  collateralized  mortgage loan
from Allianz Life  Insurance  Company of North America  ("Allianz  Loan I"). The
Allianz Loan I originally  matures on April 10, 2020 and must be paid in full at
that time unless  payment is  accelerated  by reason of a default or sale of the
property that secures the loan. The Company paid approximately $252 in loan fees
and financing  costs,  which are being  amortized  over the 20 year amended loan
period, and used the proceeds primarily to pay down short-term debt and the Berg
Group line of credit.  On July 26, 2005, in connection with the Allianz Loan II,
the Company entered into a "Loan  Modification  Agreement"  with Allianz,  which
extended the  amortization  period and maturity  date of the Allianz Loan I from
April 10,  2020 to August 10,  2025.  This loan bears a fixed  interest  rate of
5.56% and principal  payments are amortized over 20 years.  The mortgage loan is
collateralized by one property.

ALLIANZ LOAN II
On July 27, 2005, the Company obtained a $125,000  collateralized  mortgage loan
from Allianz Life  Insurance  Company of North America  ("Allianz Loan II"). The
Allianz  Loan II matures on August  10,  2025,  and must be paid in full at that
time,  unless  payment  is  accelerated  by reason  of a default  or sale of any
property that secures the loan.  This loan bears a fixed  interest rate of 5.22%
and  principal  payments  are  amortized  over 20 years.  The  mortgage  loan is
collateralized by eight properties.  The Company paid approximately $874 in loan
fees and  financing  costs,  which  are  being  amortized  over the 20 year loan
period, and used the proceeds primarily to pay down short-term debt and the Berg
Group line of credit.

INTEREST RATE DERIVATIVE
In 2005, the Company  entered into cash flow interest rate derivative as a means
to hedge  exposure to an  increase  in  interest  rates prior to securing a loan
commitment in connection  with a  refinancing  of certain  variable rate debt to
fixed rate long term  mortgage  debt.  The Company  secured a 20 year fixed rate
mortgage loan  commitment for $125,000 at 5.22% annual  interest rate and closed
the derivative  contracts.  Since the interest rate derivative contracts did not
qualify as a designated  cash flow interest  rate hedge in accordance  with SFAS
133, Accounting for Derivative  Instruments and Hedging Activities,  the Company
recorded an approximately $834 charge to interest expense in 2005.

                                     - 59 -

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

CUPERTINO NATIONAL BANK LINE OF CREDIT
The Company entered into a "Change in Terms  Agreement" with Cupertino  National
Bank on July 22,  2005,  which  reduced  the  maximum  borrowing  amount  on the
Company's  revolving  line of credit  facility  with that bank from  $40,000  to
$9,000.  On December 22, 2005, the Company entered into another "Change in Terms
Agreement" with Cupertino  National Bank that increased the facility from $9,000
to $10,000.  The line of credit  bears an interest  rate of LIBOR plus 1.75% and
will expire in December 2006.

Scheduled principal payments on debt as of December 31, 2005 are as follows:

<TABLE>
<CAPTION>
                                                  Fixed Rate Debt
                                            (Including Related Parties)
                                         ----------------------------------
<S>                                                 <C>
         December 31, 2006                           $ 10,411
         December 31, 2007                             11,028
         December 31, 2008                            121,605
         December 31, 2009                              9,580
         December 31, 2010                             10,125
         Thereafter                                   204,783
                                         ----------------------------------
                                                     $367,532
                                         ==================================
</TABLE>

8.   OPERATING PARTNERSHIP AND STOCKHOLDER DISTRIBUTIONS

Holders of the  Company's  common stock and O.P.  Units are entitled to dividend
distributions  as determined  and declared by the Company's  Board of Directors.
Under the Exchange Rights  Agreement  limited  partners have the right to tender
O.P.  Units to the Company,  and, at the Company's  election,  to receive common
stock on a one-for-one basis at then-current  market value, an equivalent amount
of cash,  or a  combination  of cash and common  stock in exchange  for the O.P.
Units  tendered,  subject to the 9% overall  ownership limit imposed on non-Berg
Group stockholders under the Company's charter document, or the overall 20% Berg
Group  ownership  limit,  as the case may be. O.P.  Unit holders are entitled to
vote when their  O.P.  Units are  converted  to shares of the  Company's  common
stock.  Once in each  12-month  period  beginning  each December 29, the limited
partners, other than Carl E. Berg and Clyde J. Berg, may exercise a put right to
sell their O.P.  Units to the  operating  partnerships  at a price  equal to the
average  market  price  of the  common  stock  for  the  10-trading  day  period
immediately  preceding the date of tender.  Upon any exercise of the put rights,
the Company will have the  opportunity  for a period of 15 days to elect to fund
the purchase of the O.P. Units and purchase additional general partner interests
in the operating  partnerships  for cash,  unless the purchase  price exceeds $1
million in the aggregate for all tendering limited partners,  in which case, the
operating  partnerships  or the Company will be entitled,  but not required,  to
reduce  proportionally  the  number  of O.P.  Units  to be  acquired  from  each
tendering  limited  partner so that the total purchase price is not more than $1
million.

During 2005,  the Company,  as general  partner of the  operating  partnerships,
declared  quarterly  distributions  aggregating  $0.64 per common share and O.P.
Unit for total  distributions of $66,886,  including  $16,725 payable in January
2006. Total distributions attributable to O.P. Units owned by various members of
the Berg Group were $50,209.

During 2004,  the Company,  as general  partner of the  operating  partnerships,
declared  quarterly  distributions  aggregating  $0.88 per common share and O.P.
Unit for total  distributions of $91,944,  including  $16,718 payable in January
2005.  During  the fourth  quarter of 2004,  the  Company's  Board of  Directors
reduced the quarterly dividend distribution from $0.24 per common share and O.P.
Unit to $0.16 per common share and O.P. Unit. Total  distributions  attributable
to O.P. Units owned by various members of the Berg Group were $69,075, which was
financed by the Company as a draw on the Berg Group line of credit.

During 2003,  the Company,  as general  partner of the  operating  partnerships,
declared  quarterly  distributions  aggregating  $0.96 per common share and O.P.
Unit for total  distributions of $100,064,  including $25,031 payable in January
2004. Total distributions attributable to O.P. Units owned by various members of
the Berg Group were $75,230,  which was financed by the Company as a draw on the
Berg Group line of credit.

9.   EQUITY-BASED COMPENSATION AND RETIREMENT INVESTMENT PLANS

The Company's 1997 Stock Option Plan ("1997 Plan") was approved by the Company's
stockholders  on November  10,  1997.  On  November  24,  2004,  the 2004 Equity
Incentive  Plan ("2004  Plan") was approved by the  Company's  stockholders  and
replaced the 1997 Plan. The Company's board of directors  approved the 2004 Plan
in September 2004. No further options are available or will be granted under the
1997 Plan. In replacing the 1997 Plan, the 2004 Plan:

                                     - 60 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
             (Dollars in thousands, except share and per share data)

-    transferred up to 3,991,089  remaining  shares available for issuance under
     the Company's 1997 Plan and terminated the 1997 Plan for any new grants;
-    transferred  up to an  additional  767,000  shares  subject to  outstanding
     options under the 1997 Plan if they expire without being exercised; and
-    includes the ability to grant  restricted  stock,  restricted  stock units,
     performance  units,  dividend  equivalent  rights,  and  other  stock-based
     compensation,  including O.P. Units of the Operating Partnerships,  as well
     as incentive and non-statutory stock options.

The 2004 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 2004  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 3,281,089  shares of common stock may be granted under the
2004 Plan, subject to equitable adjustments to reflect certain corporate events.

Options were granted to four employees and three non-employee directors totaling
710,000 in 2005. No options were granted in 2004 and 2003.

The  remaining  contractual  lives of  unexercised  options  granted  range from
December 2006 to April 2011.

The following table shows the combined activity and detail for the 1997 and 2004
Plans for each of the three years in the period ended December 31, 2005.

<TABLE>
<CAPTION>
                                                                  Weighted Average
                                                   Number          Exercise Price
                                                 of Options           Per Share
                                               ---------------    ------------------
<S>                                             <C>                   <C>
         Balance, December 31, 2002                950,362             $10.65
              Options exercised                   (150,362)             $6.74
              Options cancelled                    (13,000)            $13.00
                                               ---------------
         Balance, December 31, 2003                787,000             $11.36
              Options exercised                    (20,000)             $8.25
                                               ---------------
         Balance, December 31, 2004                767,000             $11.44
              Options granted                      710,000             $10.00
              Options exercised                    (55,000)             $8.73
                                               ---------------
         Balance, December 31, 2005              1,422,000             $10.83
                                               ===============
</TABLE>


The following table summarizes information regarding options outstanding for the
2004 Plan at December 31, 2005:

<TABLE>
<CAPTION>
                                             Options Outstanding            Options Exercisable    Options Not Exercisable
                                     --------------------------------------------------------------------------------------
                                                     Weighted
                                                      Average     Weighted                 Weighted                Weighted
                                                     Remaining     Average                  Average                 Average
                                                    Contractual   Exercise                 Exercise                Exercise
          Range of Exercise Prices      Options    Life in Years    Price     Options        Price     Options       Price
         ------------------------------------------------------------------------------------------------------------------
<S>                                   <C>               <C>       <C>        <C>           <C>        <C>          <C>
         $8.25                            80,000         1.00       $8.25      80,000        $8.25           -           -
         $10.00                          695,000         5.33      $10.00     221,665       $10.00     473,335      $10.00
         $11.33                          375,000         3.33      $11.33     291,667       $11.33      83,333      $11.33
         $13.00                          272,000         0.83      $13.00     272,000       $13.00           -           -
                                     ------------                         ------------             ------------
         $8.25 to $13.00               1,422,000         3.70      $10.83     865,332       $11.23     556,668      $10.20
                                     ============                         ============             ============
</TABLE>

                                     - 61 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
             (Dollars in thousands, except share and per share data)

None of the options  granted are  contingent  upon the attainment of performance
goals or subject to other  restrictions.  As of December 31,  2005,  outstanding
options to purchase  865,332 shares of common stock were  exercisable,  but only
80,000  options  were  "in-the-money"  based  on the  closing  price of $9.74 at
December 30, 2005, the last trading day of the year.

The 2004 Plan allows the  Company to grant to  employees  and  directors a wider
range of awards  than is  permitted  under the 1997 Plan,  including  restricted
stock,   stock  grants,   restricted  stock  units,   performance  units,  other
stock-based compensation, including O.P. Units exchangeable for shares of common
stock, and dividend  equivalent rights,  which will help the Company achieve its
goal of attracting, retaining and motivating its personnel which is necessary to
build the Company's  infrastructure,  achieve the Company's  business  goals and
enhance  stockholder  value.  No options or awards may be granted under the 2004
Plan after November 24, 2014.

Awards and options  granted under the 2004 Plan may be granted to any employees,
non-employee  directors or  consultants  of the Company and any  corporation  or
other entity affiliated with the Company,  including the Operating Partnerships.
Only employees of the Company or a corporate  subsidiary  may receive  incentive
stock options.  Options can be granted to non-employee directors and consultants
of the Company and to  employees  of the Company or a corporate  subsidiary.  No
individual  may  receive in any one  calendar  year  awards  covering  more than
500,000 of the total number of shares of stock.

The options  generally  are granted at the fair  market  value of the  Company's
common  shares at the date of grant,  vest over a four-to-six  year period,  are
exercisable upon vesting and expire  six-to-eight  years from the date of grant.
The exercise price for all incentive stock options under the 2004 Plan shall not
be less than the fair market value of the  underlying  common shares at the time
the option was granted.

Under the 2004 Plan,  each  non-employee  member of the board of  directors  who
became or  becomes a member of the board of the  directors  after  November  24,
2004,  the date on which the Plan was  approved by the  Company's  stockholders,
will receive  automatically  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.  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.  In addition,  the board of
directors may authorize annual option grants or awards to non-employee directors
in the board's  discretion as long as the number of shares or equivalent  number
of  underlying  shares of common stock in the case of certain  awards,  does not
exceed 50,000 per year. A disinterested majority of the board also may authorize
additional  options  and awards to a director  serving as a  Committee  chair or
providing  other  extraordinary  service  to the  Board.  The 2004 Plan  further
provides that upon an  acquisition  of the Company in which more than 50% of the
total voting power of the Company's outstanding securities is transferred to the
acquirer or acquiring parties, options and awards held by non-employee directors
will vest in full and become exercisable prior to their expiration.

The board of directors  may  terminate the 2004 Plan at any earlier time or make
modifications of the 2004 Plan as it deems advisable. Awards and options granted
at any time during the term of the 2004 Plan will not expire  solely  because of
the  termination of the 2004 Plan, and no amendment or  modification of the 2004
Plan shall affect the terms of any outstanding  award unless the board expressly
provides otherwise.  Termination or amendment of the 2004 Plan may not adversely
affect the rights of the recipient of an award  without his or her consent.  The
Compensation  Committee  of the  Board of  Directors  may amend the terms of any
option or award previously granted, but such amendment may not impair the rights
of the recipient without his or her consent.

A total of 3,281,089  shares of common stock are reserved for issuance under the
2004 Plan. At no time may the number of shares issued  pursuant to or subject to
outstanding  awards  granted under the 2004 Plan exceed this number,  subject to
the  provisions  for increase and  adjustment set forth in the 2004 Plan. If any
option or award expires,  terminates or is cancelled  without being exercised in
full,  or any other award is  forfeited,  the shares  forfeited or not purchased
will be available for future grant of awards.

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,  based upon management's discretion. A participant's  contribution
to the Plan is 100% vested and non-forfeitable. A participant will become vested
in 100% of the Company's  contributions after two years of eligible service. For
the years ended December 31, 2005, 2004 and 2003, the

                                     - 62 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
             (Dollars in thousands, except share and per share data)

Company recognized $103, $92 and $92 of expense for employer  contributions made
in connection with this Plan, respectively.

10.  NET INCOME PER SHARE

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

The computation for weighted average shares is detailed below:


<TABLE>
<CAPTION>
                                                                    Year Ended              Year Ended              Year Ended
                                                                December 31, 2005        December 31, 2004       December 31, 2003
                                                                --------------------     -------------------     -------------------
<S>                                                                 <C>                     <C>                     <C>
         Weighted average shares outstanding (basic)                 18,286,947              18,034,873              17,739,609
         Incremental shares from assumed option exercise                 38,712                  41,625                  63,338
                                                                --------------------     -------------------     -------------------
         Weighted average shares outstanding (diluted)               18,325,659              18,076,498              17,802,947
                                                                ====================     ===================     ===================
</TABLE>

Outstanding  options to purchase  647,000,  272,000 and 647,000  shares in 2005,
2004 and 2003,  respectively,  were excluded from the computation of diluted net
income per share under the  treasury  stock method  because the option  exercise
price was greater  than the weighted  average  exercise  price of the  Company's
common stock during the respective periods. The outstanding O.P. Units have been
excluded from the diluted net income per share  calculation as there would be no
effect on the diluted net income per share since the minority  interests'  share
of income  would also be added back to net income.  O.P.  Units  outstanding  at
December 31, 2005 and 2004 were 86,088,095 and 86,384,695, respectively.

11.  OTHER INCOME

Other income,  including interest,  was approximately  $4,606, $6,913 and $4,525
for the years ended December 31, 2005, 2004 and 2003, respectively. For the year
ended December 31, 2005, termination fees, prior tenant bankruptcy  settlements,
management  fee  income,   interest  income  and  security  deposit  forfeitures
accounted for approximately $2,407, $108, $949, $567 and $455, respectively,  of
other income.  For the year ended  December 31, 2004,  termination  fees,  prior
tenant   bankruptcy   settlements  and  management  fee  income   accounted  for
approximately $4,250, $1,199 and $1,219, respectively,  of other income. For the
year ended December 31, 2003, prior tenant  bankruptcy  settlements,  management
fee income,  utility  rebates and security  deposit  forfeitures  accounted  for
approximately  $2,231,  $1,383,  $381 and $181  respectively,  of other  income.
Management fee is paid by the tenant to the landlord for the  administration and
supervision of the property.

12.  RELATED PARTY TRANSACTIONS

As of December 31, 2005 and 2004, the Berg Group owned 77,490,528 and 77,577,528
O.P.  Units,  respectively,  of the total  86,088,095 and 86,384,695  O.P. Units
issued and outstanding,  respectively.  The Berg Group's interest in the Company
represents  74.1% and 74.2% of the  Company as of  December  31,  2005 and 2004,
respectively,  assuming  conversion of the O.P.  Units into common shares of the
Company.

The Company periodically  acquires unleased properties,  which include land, the
building  shell and base  building  improvements,  from the Berg Group under the
Berg Group Land Holdings Options  Agreement.  These  acquisitions  from the Berg
Group are made for  properties  where the Company has  previously  identified  a
tenant,  and in conjunction with the  acquisition,  the Company executes a lease
agreement  with the  tenant.  In many of the  acquisitions  from the Berg Group,
lease commissions  relating to these leasing activities conducted by the Company
are paid by the Berg Group and reimbursed by the Company in connection  with the
acquisition.  These lease commissions are recorded separately in other assets on
the Company's consolidated balance sheets.

The Company did not acquire any properties from the Berg Group in 2005 or 2004.

DEBT WITH THE BERG GROUP
As of  December  31,  2005  and  2004,  debt  in the  amount  of $0 and  $9,560,
respectively, was due the Berg Group under the line of credit. Effective October
31, 2005,  the Company and the Berg Group  mutually  agreed to terminate the $20
million  line of credit with the Berg  Group.  The Berg Group line of credit was
originally  scheduled to mature in March 2006.  Based on existing  cash reserves
and credit facilities,  the Company determined that it no longer foresees a need
for the Berg Group line

                                     - 63 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
             (Dollars in thousands, except share and per share data)

of credit.  The Company did not incur any fees or charges  for  terminating  the
Berg  Group  line of  credit.  Additionally,  in 2005 and  2004,  the  operating
partnerships   declared   distributions  of  $0.64  and  $0.88  per  O.P.  Unit,
respectively.  Distributions  paid to various members of the Berg Group in 2005,
2004 and 2003 were $50,209, $69,075 and $75,224, respectively.  Interest expense
incurred  in  connection  with the Berg Group line of credit was $188,  $266 and
$227 for the years ended December 31, 2005, 2004 and 2003, respectively.

As of  December  31, 2005 and 2004,  debt in the amount of $10,051 and  $10,420,
respectively,  was due the Berg Group under a mortgage note  established May 15,
2000 in  connection  with the  acquisition  of a 50% interest in Hellyer  Avenue
Limited  Partnership,  the obligor  under the mortgage  note.  The mortgage note
bears  interest  at  7.65%,  and is due in ten  years  with  principal  payments
amortized over 20 years.  Interest  expense incurred in connection with the Berg
Group  mortgage  note was $784,  $811 and $837 for the years ended  December 31,
2005, 2004 and 2003, respectively.

TRANSFER OF INTEREST TO BERG GROUP IN CONSOLIDATED JOINT VENTURE
In July 2000, the Hellyer Avenue Limited Partnership ("Hellyer LP") was formally
organized as a California limited  partnership  between Mission West Properties,
L.P. ("MWP"), of which the Company as the managing general partner, and Republic
Properties  Group ("RPC"),  an unaffiliated  third party, as general partner and
limited partners.  MWP was designated as the managing general partner of Hellyer
LP. For a 50%  ownership  interest  in Hellyer  LP, RPC agreed to cause  Stellex
Microwave Systems,  Inc. ("Stellex") to provide a 15-year lease on approximately
160,000 square foot R&D buildings to be constructed by Berg & Berg  Enterprises,
Inc. ("BBE") on land owned by another Berg Group member.

As part of the  transaction,  MWP acquired the  underlying  land pursuant to the
Berg Land  Holdings  Option  Agreement  for a price of $5.7  million  by issuing
659,223 OP units to the Berg Group  entity  that  owned the  property.  Further,
under the terms of the Hellyer LP partnership agreement MWP then contributed the
land to the partnership at an agreed value of $9.6 million,  which amount was to
be  amortized  and paid to MWP in the form of income and cash flow  preferences.
The transaction was reviewed and approved by the Independent Directors Committee
of the Company's Board of Directors.

In connection with the  transaction,  BBE built and paid for all improvements on
the land.  The total cost of the R&D  building,  exclusive of  specified  tenant
improvements  obligations,  was approximately $11.4 million. Hellyer LP issued a
note for the amount of those  construction  costs to BBE, which note was secured
by the buildings.

Because RPC's interest in Hellyer LP was  attributable  solely to its commitment
to obtain  Stellex  as a tenant  for the  property,  the  partnership  agreement
provided that if a payment  default  occurred within the first five years of the
Stellex lease, RPC would lose 100% of its interest in the partnership,  and if a
payment default occurred during the second five year period under the lease, RPC
would lose 50% of its interest in Hellyer LP.

Pursuant to RPC's  commitment to Hellyer LP Stellex  executed a lease  agreement
obligating  Stellex,  among other things,  to pay monthly rent starting at $1.60
per square foot on a triple net basis for 15 years and to reimburse  BBE for the
tenant improvement  obligations,  which ultimately totaled  approximately  $10.5
million.

Under the lease terms,  Stellex was  obligated to reimburse  BBE in full for the
tenant  improvement costs no later than August 25, 2000. Several days before the
due  date,  representatives  of  Stellex  met  with  representatives  of MWP and
informed them that Stellex could not pay the balance due BBE. Stellex  requested
MWP  immediately to draw down the letter of credit as a result of default on the
tenant improvement payment required under the lease.

On  September  1, 2000,  MWP, as the general  partner of Hellyer LP,  ceased all
allocations  of income and cash flow to RPC and  exercised  the right  under the
partnership  agreement  to cancel  RPC's  entire  interest  in the  partnership.
Following  discussions with and approval by the Independent Directors Committee,
the Company  authorized  the  transfer  of RPC's  interest in Hellyer LP to BBE.
Under the Berg Land  Holdings  Option  Agreement and the  Acquisition  Agreement
dated as of May 14, 1998, the  Independent  Directors  Committee of the Board of
Directors had the right,  but not the obligation,  to reacquire on behalf of the
Company  the  property  interest  and the related  distributions  related to the
property  interest at any time.  The transfer  was  effective as of September 1,
2000.

In January 2002,  Stellex was acquired  through its  bankruptcy  proceeding by a
division of Tyco Corporation. In connection with the acquisition of Stellex, the
purchaser  assumed the lease with Hellyer LP, agreed to comply with all terms of
lease and  reimbursed  BBE for the tenant  improvements,  as required  under the
lease agreement and the Bankruptcy Court order.

                                     - 64 -
<PAGE>

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

Since the inception of Hellyer LP, the Company has accounted for the  properties
owned by the  partnership  on a  consolidated  basis,  with  reductions  for the
minority interest held by the minority partner (first RPC and then BBE). In each
period,  the Company has accrued  amounts  payable by Hellyer LP to the minority
interest  partner,  including  BBE prior to  payment.  BBE's  share of  earnings
allocated to its 50% minority interest was $711, $682 and $400 in 2005, 2004 and
2003, respectively. As of December 31, 2005, accumulated cash flow distributions
from Hellyer LP totaling approximately $2.9 million were accrued and distributed
to BBE. If the  Company's  litigation  with RPC is  ultimately  decided in RPC's
favor,  the Company  anticipates that BBE may be required to return RPC's former
interest in Hellyer LP and all prior  distributions  to RPC. As a result of this
uncertainty,  in October 2003,  the Company  recorded such  distributions  as an
account  receivable  from  BBE,  which  is  included  in other  assets,  with an
offsetting account payable to BBE.

If the litigation is ultimately decided in favor of the Company, the Independent
Directors  Committee  of the  Board  of  Directors  has the  right,  but not the
obligation,  to acquire on behalf of the  Company  the former RPC  interest  and
related  distributions from BBE under the terms of the Berg Land Holdings Option
Agreement and the Acquisition Agreement between the Company and the Berg Group.

ACQUISITION OF CARL E. BERG'S INTEREST IN UNCONSOLIDATED JOINT VENTURE
In July 1999,  an  unrelated  party,  TBI,  advised Carl E. Berg that TBI had an
option to purchase  approximately  78.89 acres of unimproved  land zoned for R&D
development  in  Morgan  Hill at $2.50 per  square  foot  that  would  expire in
approximately six months. TBI offered Mr. Berg a 50% interest in the development
of this land if Mr. Berg provided 100% financing for the land at 0% interest for
three years. Mr. Berg advised TBI of his obligation to offer all R&D development
opportunities  on the West Coast to the Company and further advised TBI that the
Company's  Independent  Directors  Committee must approve the acquisition of any
properties and that the Company's policy was only to acquire properties that are
leased  pursuant to the Berg Land Holdings  Option  Agreement.  The  development
joint venture between TBI and the Berg Group  proceeded on that basis.  Building
construction was financed through loans  facilitated by the Berg Group. In early
2003,  TBI formed  TBI-MSW,  a new  limited  partnership,  to own all the leased
buildings.  The Berg Group offered its 50%  non-controlling  limited partnership
interest in TBI-MSW to the Company at cost plus an annual interest rate of 7% on
the funds  advanced  by the Berg  Group  which  amounted  to $1.8  million.  The
Independent  Directors  Committee and the Berg Group agreed to use a 7% interest
rate  instead of the rate and fees  specified in the Berg Land  Holdings  Option
Agreement  because the  transaction  differed  from the  standard  build-to-suit
development  specified  under that  agreement.  TBI-MSW  owned four fully leased
buildings  totaling  approximately  593,000  rentable square feet. The buildings
were subject to mortgage loans totaling $53.6 million. The Independent Directors
Committee approved the Company's acquisition of the Berg Group's 50% interest in
the joint  venture,  effective  January 1, 2003. The  development  joint venture
between the Berg Group and TBI retained two vacant shell R&D  buildings and five
unimproved  lots. In April 2003,  Comcast,  Inc.  offered to purchase one of the
vacant  buildings  and two acres of adjoining  land from the  development  joint
venture for net proceeds of $2.8 million, after debt repayment. Prior to sale of
the property,  TBI-MSW  acquired this property at no cost under the terms of the
Berg Land Holdings Option Agreement, and the Company received a net distribution
of $1.4 million from the sale. The  transaction  was approved by the Independent
Directors  Committee.  The Berg Group  continues  to own a 50%  interest  in the
remaining vacant building and five unimproved lots.

BERG CONTROLLED  ENTITIES HAVE FINANCIAL INTERESTS IN CERTAIN TENANTS THAT LEASE
SPACE FROM THE COMPANY
During December 31, 2005, 2004 and 2003, Carl E. Berg or entities  controlled by
Mr. Berg held financial interests in several companies that lease space from the
operating  partnerships,  which  include  three  companies  where Mr. Berg has a
greater than 10% ownership  interest.  These related  tenants  occupy a total of
approximately 48,000 rentable square feet and contributed $731, $866 and $904 in
rental  revenue  in 2005,  2004 and  2003,  respectively.  Under  the  Company's
Charter,  bylaws and agreements with the Berg Group,  the individual  members of
the Berg Group are  prohibited  from  acquiring  shares of the Company's  common
stock if such acquisition would result in their beneficial  ownership percentage
of  the  Company's  common  stock  causing  the  Company  to  violate  any  REIT
qualification requirement.

BERG GROUP COMMITMENT TO COMPLETE FUTURE IMPROVEMENTS AND BUILDING IN CONNECTION
WITH  CERTAIN  ACQUISITIONS  FROM THE BERG  GROUP  UNDER THE BERG LAND  HOLDINGS
OPTION AGREEMENT
The Berg Group has an approximately  $2.5 million commitment to complete certain
tenant  improvements in connection  with the Company's 2002  acquisition of 5345
Hellyer Avenue in San Jose, California. The Company recorded this portion of its
purchase  consideration  paid  to  the  Berg  Group  as an  Other  Asset  on its
Consolidated  Balance Sheets. The Berg Group plans to satisfy this commitment to
complete certain tenant improvements when requested by the Company following the
approval of the Independent Directors Committee.

                                     - 65 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
             (Dollars in thousands, except share and per share data)

The Berg Group has an  approximately  $7.5  million  commitment  to  complete an
approximately  75,000 to 90,000  square  foot  building in  connection  with the
Company's 2001  acquisition of 245 Caspian Drive in Sunnyvale,  California which
is  comprised  of  approximately  three acres of  unimproved  land.  The Company
recorded this portion of its purchase consideration paid to the Berg Group as an
Other Asset on its Consolidated  Balance Sheets. The Berg Group plans to satisfy
this commitment to construct a building when requested by the Company  following
the approval of the Independent Directors Committee.

LAND LEASE RENT REIMBURSEMENT TO CARL E. BERG
One tenant is currently  leasing four R&D buildings from the Company and is also
leasing raw land from Carl E. Berg.  Total rent from the tenant is paid directly
to the Company,  which  includes the land rent. The Company  reimburses  Carl E.
Berg $85 per month for the land rent portion.

LEASING AND OVERHEAD REIMBURSEMENTS PROVIDED BY BERG CONTROLLED ENTITY
The Company  currently  leases  office  space owned by Berg & Berg  Enterprises,
Inc., an affiliate of Carl E. Berg and Clyde J. Berg. Rental amount and overhead
reimbursements  paid to Berg & Berg  Enterprises,  Inc.  were $90 for each  year
ended December 31, 2005, 2004 and 2003.

13.  FUTURE MINIMUM RENTS

The  Company,  through the  operating  partnerships,  owns  interests in 107 R&D
properties  that are leased to tenants under net  operating  leases with initial
terms extending to the year 2020, and are typically  subject to fixed increases.
Generally,  the leases grant tenants  renewal  options.  Future minimum  rentals
under non-cancelable  operating leases as of December 31, 2005, excluding tenant
reimbursements of expenses, are as follows:

<TABLE>
<CAPTION>
         Year                    Minimum Rent
         --------------------------------------------
                            (dollars in thousands)
<S>                              <C>
         2006                     $ 99,743
         2007                       86,183
         2008                       70,344
         2009                       64,448
         2010                       57,056
         Thereafter                152,808
                          ---------------------------
         Total                    $530,582
                          ===========================
</TABLE>

14.  SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest was  approximately  $21,842,  $18,363 and $17,146 for the
years ended December 31, 2005, 2004 and 2003, respectively.

Amounts of  approximately  $50,223,  $75,326 and $75,224 were due the Berg Group
for distributions  declared to O.P. Unit holders during the years ended December
31, 2005, 2004 and 2003, respectively,  and were treated as draws under the Berg
Group line of credit.

For the years ended  December  31,  2005,  2004 and 2003,  296,600,  182,500 and
257,000 O.P. Units were exchanged for 296,600, 182,500 and 257,000 shares of the
Company's  common stock,  respectively,  under the terms of the Exchange  Rights
Agreement  among  the  Company  and  all  limited   partners  of  the  operating
partnerships.  These non-cash  transactions were valued at approximately $3,019,
$2,238  and  $2,826  for the  years  ended  December  31,  2005,  2004 and 2003,
respectively, based on the market closing price on the day of the transactions.

15.  COMMITMENTS AND CONTINGENCIES

The Company and the operating  partnerships,  from time to time,  are parties to
litigation arising out of the normal course of business. Management is not aware
of any  litigation  against the Company and believes the ultimate  outcome would
not have a material  adverse  effect on the cash flows,  consolidated  financial
position or results of  operations  of the  Company.  The  Company is  currently
involved in the following legal  proceedings,  and does not believe the ultimate
outcome of any of these  proceedings  will have a material adverse effect on its
financial condition or operating results.

                                     - 66 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
             (Dollars in thousands, except share and per share data)

REPUBLIC PROPERTIES  CORPORATION (RPC) V. MISSION WEST PROPERTIES,  L.P., IN THE
CIRCUIT COURT OF MARYLAND FOR BALTIMORE CITY CASE NO.  24-C-00-005675.  RPC is a
former partner with Mission West Properties,  L.P. in the Hellyer Avenue Limited
Partnership.  In April 2004,  the Circuit  Court for  Baltimore  City,  Maryland
issued a  Memorandum  Opinion in the case.  Following  a review of the  Maryland
Court's  decision,  our  legal  counsel  advised  us to  request a review of the
decision by the Maryland  Appeals Court. A Maryland Appeals Court or any further
court  decision  that may not rule in favor of Mission West  Properties  L.P. in
this matter will not have a material adverse affect on our financial statements.
In July 2004 RPC attached the  Company's  bank  account for  approximately  $1.1
million.  Following  a July  2004  hearing  in  Superior  Court of the  State of
California  for the County of Santa  Clara the  parties  agreed that the Company
will  post a $1.5  million  bond and RPC will  remove  the  attachment  from the
Company's  bank account until final  resolution  of the appeal in Maryland.  The
Company  posted  a $1.5  million  bond  in  August  2004  and  classified  it as
restricted  cash as of December 31, 2004 and 2005.  In February 2001 the Company
filed a suit against RPC in Superior  Court of the State of  California  for the
County  of Santa  Clara  Case No.  CV  796249  which  has  been  stayed  pending
resolution of the Maryland case. In December  2005,  the Maryland  Supreme Court
heard the appeal filed by RPC. The Maryland  Supreme  Court has not rendered its
decision. See Item 3, Legal Proceedings.

THE GLOBAL  CROSSING  ESTATE  REPRESENTATIVE,  FOR  ITSELF  AND THE  LIQUIDATING
TRUSTEE OF THE GLOBAL  CROSSING  LIQUIDATING  TRUST V. MISSION WEST  PROPERTIES,
L.P. IN UNITED STATES  BANKRUPTCY  COURT SOUTHERN  DISTRICT OF NEW YORK CASE NO.
02-40188 (REG). The Company is vigorously opposing this claim which asserts that
certain  payments made in the ordinary  course of business within 90 days of the
Global Crossing bankruptcy filing were alleged preference  payments.  The amount
of the  claim is $815.  In  addition,  the  Global  debtors  and the  Creditor's
Committee  filed an  objection  to the  unsecured  claim  filed by Mission  West
Properties in the Global cases for $16,711.  Discovery continues by both parties
and no trial date has been set.

GUARANTEES
Under its  articles  of  incorporation  and  bylaws,  the  Company has agreed to
indemnify its officers and directors for certain events or  occurrences  arising
as a result of the officer or director's  serving in such capacity.  The maximum
potential  amount of future payments the Company could be required to make under
these  indemnification   agreements  is  unlimited.  The  Company  believes  the
estimated  fair value of these  indemnification  agreements  is minimal  and has
recorded no liabilities for these agreements as of December 31, 2005.

The Company also enters into  indemnification  provisions  under its  agreements
with other companies in its ordinary course of business, typically with lenders,
joint venture  partners,  contractors,  and tenants.  Under these provisions the
Company  typically  agrees to indemnify and hold harmless the indemnified  party
for losses suffered or incurred by the indemnified  party as a result of certain
kinds  of  activities  or  inactions  of  the  Company.   These  indemnification
provisions  generally  survive  termination  of the  underlying  agreement.  The
maximum  potential  amount of future  payments the Company  could be required to
make under these  indemnification  provisions is unlimited.  The Company has not
incurred  material  costs to defend  lawsuits or settle claims  related to these
indemnification agreements. As a result, the Company believes the estimated fair
value of these agreements is minimal.  Accordingly,  the Company has recorded no
liabilities for these agreements as of December 31, 2005.

SEISMIC ACTIVITY
The  Company's  properties  are  located  in an active  seismic  area of Silicon
Valley.  Insurance  policies  currently  maintained  by the Company do not cover
seismic activity, although they do cover losses from fires after an earthquake.

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

                                     - 67 -

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

BERG LAND HOLDINGS OPTION AGREEMENT
In  April  2005,  the Berg  Group  disclosed  the  receipt  of an offer  from an
unrelated  party to purchase a portion of the Piercy & Hellyer land comprised of
approximately 10 acres in San Jose,  California that is subject to the Berg Land
Holdings  Option  Agreement  with the Company.  The  prospective  purchaser  has
disclosed  its intention to develop "for sale"  industrial  type  buildings.  In
light of the  overcapacity  in the Silicon Valley R&D properties  market and the
Company's current inventory of available  buildings for lease in this submarket,
the  Independent  Directors  Committee,  which  is  responsible  for  reviewing,
evaluating and authorizing  action with respect to any  transaction  between the
Company  and  any  member  of  the  Berg  Group,   authorized  removal  of  this
approximately  10-acre  parcel of land from the scope of the Berg Land  Holdings
Option Agreement,  subject to the completion of the sale to the unrelated party.
In making this determination,  the Independent  Directors Committee considered a
number of factors,  including risks and other potentially  adverse  consequences
that could be associated with acquiring undeveloped land for future development.
In the event this parcel of land is not sold to this prospective purchaser,  the
parcel  would  not be  deemed  to be  removed  from the  scope of the Berg  Land
Holdings  Option  Agreement  and would  remain  eligible  for  potential  future
acquisition by the Company, under the Berg Land Holdings Option Agreement.

In light of the  overcapacity in the Silicon Valley R&D properties  market,  the
Berg Group currently is seeking local government approval of a proposed rezoning
of  the  160-acre  Evergreen  site  to  permit  residential   development  on  a
substantial portion of the site. The Independent  Directors Committee,  which is
responsible for reviewing, evaluating and authorizing action with respect to any
transaction  between the  Company  and any member of the Berg Group,  authorized
removal of the Evergreen  site from the scope of the Berg Land  Holdings  Option
Agreement,  subject to the completion of the rezoning of the 160-acre  Evergreen
site,  or  portion  thereof,  for  residential   development.   In  making  this
determination,  the  Independent  Directors  Committee  considered  a number  of
factors,  including risks and other potentially adverse  consequences that could
be associated with large scale residential development  activities.  Any portion
of the Evergreen site that is not rezoned as residential  property is not deemed
to be removed  from the scope of the Berg Land  Holdings  Option  Agreement  and
would  remain  eligible for  potential  future  acquisition  under the Berg Land
Holdings Option Agreement.

16.  REAL ESTATE ASSET HELD FOR SALE AND DISCONTINUED OPERATIONS

Effective  January  1, 2002,  the  Company  adopted  SFAS 144,  which  addresses
financial accounting and reporting for the impairment and disposal of long lived
assets.  In general,  income or loss  attributable to the operations and sale of
property and the operations  related to property held for sale are classified as
discontinued  operations in the  consolidated  statements of  operations.  Prior
period consolidated  statements of operations presented in this report have been
reclassified  to reflect the income or loss related to properties that were held
for sale or sold and presented as  discontinued  operations  for the years ended
December 31, 2005, 2004 and 2003.  Additionally,  all periods  presented in this
report  will  likely  require  further  reclassification  in future  periods  if
additional properties are held for sale or property sales occur.

As of December 31, 2005,  there were no properties  under contract to be sold or
otherwise  disposed  of which  would  qualify  as assets  held for  sale.  As of
December 31, 2005, the Company had contracts to sell certain properties totaling
approximately  274,000  rentable  square feet located in Sunnyvale and San Jose,
California,  for a total sales price of $51,250, which properties had a net book
value of $28,360 at that date. Notwithstanding the existence of these contracts,
the closings of these sales are contingent upon the buyers  obtaining  approvals
from local  governments  to re-zone the  properties  from  office/industrial  to
residential  use. Thus, the properties do not qualify as assets held for sale in
accordance with SFAS 144.

There was one property under contract to be sold or otherwise  disposed of which
did  qualify as an asset held for sale as of  December  31,  2004.  Based on the
expected  net  proceeds of the sale of that  property,  the Company  recorded an
asset impairment charge of ($2,193) in 2004. The property was sold for $8,500 in
January  2005.  The Company  decided to sell the property  after an  unsolicited
offer was made from an unrelated third party.

In 2005,  the Company sold three  properties  for a total sales price of $27,855
(including  the one sold in  January  2005)  resulting  in a net gain of $2,206.
Condensed  results  of  operations  for these  properties  for the  years  ended
December 31, 2005, 2004 and 2003 are as follows:

                                     - 68 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
             (Dollars in thousands, except share and per share data)


<TABLE>
<CAPTION>
                                                                                          Years Ended December 31,
                                                                       -------------------------------------------------------------
                                                                              2005                  2004                  2003
                                                                       ------------------    ------------------    -----------------
         Revenues:                                                                        (dollars in thousands)
<S>                                                                        <C>                    <C>                  <C>
            Rental revenue from real estate                                 $   14                 $  565               $ 1,464
            Tenant reimbursements                                                1                    118                   188
            Other income                                                         -                      4                     1
                                                                       ------------------    ------------------    -----------------
               Total revenues                                                   15                    687                 1,653

         Expenses:
            Property operating, maintenance and real estate taxes              273                    609                   499
            Depreciation of real estate                                        316                    529                   635
            Asset impairment charge                                              -                  2,193                     -
                                                                       ------------------    ------------------    -----------------
              Total expenses                                                   589                  3,331                 1,134

         (Loss)/income from discontinued operations                           (574)                (2,644)                  519
         Gain from disposal of discontinued operations                       2,206                      -                     -
         Minority interest in (earnings)/loss from discontinued operations  (1,290)                 2,099                  (377)
                                                                       ------------------    ------------------    -----------------
         Income/(loss) from discontinued operations                         $  342                ($  545)              $    142
                                                                       ==================    ==================    =================
</TABLE>

For the years ended December 31, 2005, 2004 and 2003,  income from  discontinued
operations  included  results of operations  from three  properties sold in 2005
(also see Note 6).

17.  PROPERTY ACQUISITIONS

For real estate acquired subsequent to June 30, 2001, the effective date of SFAS
141,  "Business  Combinations,"  the fair value of the real  estate  acquired is
allocated to the acquired  tangible  assets,  consisting  of land,  building and
building/tenant improvements,  and identified intangible assets and liabilities,
including the value of the above or below market leases and in-place leases.

See Note 12 for discussion of property acquisitions from the Berg Group.

In 2005, the Company acquired a 203,800 rentable square foot vacant R&D property
located at 5521 Hellyer Avenue in San Jose,  California.  The purchase price for
the property was approximately $14,026. The Company allocated the purchase price
to land, building,  and building  improvements based upon the estimated relative
fair values of such assets. Since the property was acquired vacant, there was no
purchase price allocation to lease intangible assets.

In 2003,  the  Company  acquired  the San Tomas  Technology  Park  property  for
$110,013,  which was financed  through new third party debt and an existing line
of  credit.   The  purchase  price  was  allocated  to  long-lived  assets,  one
above-market in-place lease and the value of in-place leases as follows:

<TABLE>
<CAPTION>
<S>                                        <C>
         Land                               $ 41,698
         Buildings and improvements           50,031
         Above-market in-place lease          11,172
         In-place leases                       7,112
                                            ---------
         Total cash purchase price          $110,013
                                            =========
</TABLE>

The results of operations of the San Tomas Technology Park have been included in
the  Company's   consolidated   statements  of  operations  since  the  date  of
acquisition.  The  intangible  assets are being  amortized  over the  applicable
remaining lease terms. Amortization related to above-market leases for the years
ended  December  31,  2005,  2004  and  2003  was  $1,888,  $1,888  and  $1,416,
respectively,  and was  recorded  as a  reduction  of rental  revenue  from real
estate.  Amortization  expense related to in-place leases of $1,444,  $1,762 and
$881 was  recorded  for the  years  ended  December  31,  2005,  2004 and  2003,
respectively.  During 2005,  approximately  $874 became fully  amortized and the
asset cost and related accumulated amortization were removed from the accounts.

                                     - 69 -

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

Details of real estate related  intangible  assets at December 31, 2005 and 2004
are as follows:

<TABLE>
<CAPTION>
                                                              2005          2004
                                                          ----------------------------
                                                              (dollars in thousands)
<S>                                                         <C>           <C>
         Amortizable Intangible Assets:
         Above-market lease                                  $11,172       $11,172
         In-place leases                                       6,238         7,112
                                                          ----------------------------
         Gross real estate related intangible assets          17,410        18,284
         Less accumulated amortization                        (8,405)       (5,947)
                                                          ----------------------------
         Net real estate related intangible assets           $ 9,005       $12,337
                                                          ============================
</TABLE>

The  estimated  aggregate  amortization  expense  for the  real  estate  related
intangible assets for each of the five succeeding fiscal years is as follows:

<TABLE>
<CAPTION>
                                                        Estimated
                               Estimated            Above Market Lease
                             In-place Lease            Amortization             Estimated
         Year             Amortization (expense)     (revenue off-set)      Total Amortization
         -----------------------------------------------------------------------------------------
                                                   (dollars in thousands)
<S>                              <C>                     <C>                     <C>
         2006                     $1,285                  $1,888                  $3,173
         2007                      1,205                   1,888                   3,093
         2008                        311                   1,888                   2,199
         2009                        196                     315                     511
         2010                         29                       -                      29
                           -----------------------------------------------------------------------
         Total                    $3,026                  $5,979                  $9,005
                           =======================================================================
</TABLE>

18.  SUPPLEMENTAL FINANCIAL INFORMATION (Unaudited)

Quarterly  financial  information for the year ended December 31, 2005 (1) is as
follows:

<TABLE>
<CAPTION>
                                                                               For the Three Months Ended
                                                      March 31,              June 30,           September 30,         December 31,
                                                                                      (Unaudited)
                                                 -----------------------------------------------------------------------------------
<S>                                                  <C>                   <C>                   <C>                  <C>
     Rental revenue from continuing operations           $26,247               $25,104               $24,692              $24,722
     Income before gain on sales of assets, equity
        in earnings of unconsolidated joint venture
        and minority interests                           $14,324               $15,084               $12,433              $13,353
     Income from continuing operations                   $ 2,444               $ 2,729               $ 2,174              $ 2,337
     (Loss)/income from discontinued operations         ($    36)             ($    34)              $   277              $   136
     Net income                                          $ 2,408               $ 2,695               $ 2,451              $ 2,473
     Per share data:
        Basic net income per share                         $0.13                 $0.15                 $0.13                $0.13
        Diluted net income per share                       $0.13                 $0.15                 $0.13                $0.13
     Weighted average shares of common stock (basic)  18,110,524            18,257,982            18,356,278           18,418,855
     Weighted average shares of common stock (diluted)18,136,797            18,283,058            18,407,891           18,432,819
</TABLE>

Quarterly  financial  information for the year ended December 31, 2004 (1) is as
follows:

<TABLE>
<CAPTION>
                                                                               For the Three Months Ended
                                                        March 31,              June 30,           September 30,         December 31,
                                                                                      (Unaudited)
                                                 -----------------------------------------------------------------------------------
<S>                                                  <C>                   <C>                   <C>                  <C>
     Rental revenue from continuing operations           $31,210               $29,821               $29,494              $28,814
     Income before gain on sales of assets, equity
        in earnings of unconsolidated joint venture
        and minority interests                           $20,065               $22,200               $18,437              $18,407
     Income from continuing operations                   $ 3,486               $ 3,830               $ 3,192              $ 3,348
     Income/(loss) from discontinued operations          $    37              ($    35)             ($    19)            ($   527)
     Net income                                          $ 3,523               $ 3,795               $ 3,173              $ 2,821
     Per share data:
        Basic net income per share                         $0.20                 $0.21                 $0.18                $0.16
        Diluted net income per share                       $0.19                 $0.21                 $0.18                $0.16
     Weighted average shares of common stock (basic)  17,969,416            18,016,356            18,071,484           18,081,321
     Weighted average shares of common stock (diluted)18,075,262            18,079,139            18,098,174           18,104,454
</TABLE>

     (1)  The summation of the quarterly financial data may not equal the annual
          number reported on the consolidated financial statements of operations
          due to rounding differences.

                                     - 70 -
<PAGE>
                          MISSION WEST PROPERTIES, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
             (Dollars in thousands, except share and per share data)

19.  SUBSEQUENT EVENTS

On January 5, 2006,  the  Company  paid  dividends  of $0.16 per share of common
stock to all common  stockholders of record as of December 31, 2005. On the same
date, the operating  partnerships  paid a distribution of $0.16 per O.P. Unit to
all holders of O.P. Units.

In January 2006, the Company entered into a lease termination agreement with one
tenant that has a lease expiring in 2010 for a termination fee of  approximately
$1,164,  which will be recorded in 2006 revenue. In the event that the tenant is
or  becomes  the  subject  of  a  bankruptcy  petition,   whether  voluntary  or
involuntary,  within  90  days  after  the  tenant  makes  the  payment  and the
settlement  amount that the Company receives is adjudicated to be a preferential
transfer,  the Company will be entitled to assert a claim against the tenant for
the full amount of its claim, including any amounts the Company may be compelled
to return to the tenant's  estate,  and the Company  shall be free to pursue the
full amount of the tenant's remaining obligations to the Company.

On March 9, 2006, the Company acquired a fully leased  office/R&D  property with
approximately 96,000 rentable square feet located at 233 South Hillview Drive in
Milpitas,  California from Sipex  Corporation.  The total  acquisition price for
this  property  was  approximately  $13,450  and was  funded  from the  proceeds
received  from the 800 Embedded  Way  property  sale,  which was  classified  as
restricted cash as of December 31, 2005 (unaudited).

                                     - 71 -
<PAGE>

           REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
                         FINANCIAL STATEMENT SCHEDULES



Board of Directors and Stockholders
Mission West Properties, Inc.
Cupertino, California

The audits  referred to in our report  dated  February  3, 2006  relating to the
consolidated  financial  statements of Mission West  Properties,  Inc., which is
contained  in Item 8 of this  Form  10-K  included  the  audit of the  financial
statement  schedules listed in the accompanying index. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial  statement  schedules based upon our
audits.


In our  opinion  such  financial  statement  schedules  present  fairly,  in all
material respects, the information set forth therein.


                                                \S\ BDO Seidman, LLP


San Francisco, California
February 3, 2006

                                     - 72 -
<PAGE>






                               INTENTIONALLY BLANK




                                     - 73 -
<PAGE>


                          MISSION WEST PROPERTIES, INC.
                                  Schedule III
             Real Estate and Accumulated Depreciation & Amortization
                                December 31, 2005
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                               Initial Cost                          Total Cost
                                                          ----------------------     Cost      -----------------------
                                              December 31,           Buildings   Subsequent to              Buildings
                                                2005                    and      Construction/                and
Property Name                 City           Encumbrances   Land    Improvements  Acquisition     Land    Improvements     Total
-------------------------------------------- ------------ --------- ------------ ------------- ---------- ------------ ------------
<S>                          <C>               <C>       <C>         <C>             <C>      <C>         <C>          <C>
5300-5350 Hellyer Avenue      San Jose    C     $10,051   $ 5,742     $ 11,442                 $  5,742     $ 11,442    $  17,184
10401-10411 Bubb Road         Cupertino   A                   633        3,078                      633        3,078        3,711
45365 Northport Loop          Fremont                       2,447        5,711        $   11      2,447        5,722        8,169
45700 Northport Loop          Fremont     F                 1,184        5,760             7      1,184        5,767        6,951
45738 Northport Loop          Fremont     F                   891        4,338             5        891        4,343        5,234
4050 Starboard Drive          Fremont     F                 1,329        6,467             8      1,329        6,475        7,804
3501 W. Warren Ave/Fremont    Fremont                       1,866        9,082         1,213      1,866       10,295       12,161
48800 Milmont Blvd            Fremont                       1,013        4,932                    1,013        4,932        5,945
4750 Patrick Henry Drive      Santa Clara                   1,604        7,805           153      1,604        7,958        9,562
3520 Bassett Street           Santa Clara D                 1,104        5,371                    1,104        5,371        6,475
3530 Bassett Street           Santa Clara B,D                 849        4,133                      849        4,133        4,982
5850-5870 Hellyer Avenue      San Jose                      2,787        6,502           112      2,787        6,614        9,401
5750 Hellyer Avenue           San Jose                      3,266        3,354                    3,266        3,354        6,620
800 Embedded Way              San Jose                      1,794            -                    1,794            -        1,794
5500 Hellyer Avenue           San Jose                      4,735       12,484            39      4,735       12,523       17,258
5550 Hellyer Avenue           San Jose                      3,261        3,478                    3,261        3,478        6,739
5400 Hellyer Avenue           San Jose                      3,238        5,007           215      3,238        5,222        8,460
5325 Hellyer Avenue           San Jose    H                 4,684       10,230            40      4,684       10,270       14,954
5345 Hellyer Avenue           San Jose    H                 4,866        5,822                    4,866        5,822       10,688
5905-5965 Silver Crk Valley RdSan Jose                      8,437       17,316                    8,437       17,316       25,753
5905-5965 Silver Crk Valley RdSan Jose                      3,438        2,727                    3,438        2,727        6,165
855 Embedded Way              San Jose    K                 3,289        6,521            68      3,289        6,589        9,878
1065-1105 La Avenida St       Mtn View                     46,832      109,275            65     46,832      109,340      156,172
1750 Automation Parkway       San Jose    G                 4,789       11,174           315      4,789       11,489       16,278
1756 Automation Parkway       San Jose    G                 4,378       10,216            15      4,378       10,231       14,609
1762 Automation Parkway       San Jose    G                 4,804       12,224            20      4,804       12,244       17,048
1768 Automation Parkway       San Jose    H                 8,195       19,121            14      8,195       19,135       27,330
255 Caspian Drive             Sunnyvale                     3,491        7,160         1,672      3,491        8,832       12,323
245 Caspian Drive             Sunnyvale                     5,894            -                    5,894            -        5,894
5970 Optical Court            San Jose                      2,758        8,395                    2,758        8,395       11,153
5900 Optical Court            San Jose    H                 3,634       12,677            83      3,634       12,760       16,394
2630 Orchard Parkway          San Jose                      2,931        5,863            22      2,931        5,885        8,816
2610 Orchard Parkway          San Jose    J                 2,615        5,231                    2,615        5,231        7,846
55 West Trimble Road          San Jose    J                 4,435        8,869                    4,435        8,869       13,304
2001 Walsh Avenue             Santa Clara E,I               4,610        5,245                    4,610        5,245        9,855
2880 Scott Boulevard          Santa Clara E,H,I            14,501       25,501                   14,501       25,501       40,002
2890 Scott Boulevard          Santa Clara E,H,I             3,081       10,844                    3,081       10,844       13,925
2770-2800 Scott Boulevard     Santa Clara E,H               7,138        7,075             2      7,138        7,077       14,215
2300 Central Expressway       Santa Clara E,I               2,390       14,418                    2,390       14,418       16,808
2220 Central Expressway       Santa Clara E,I               3,304        3,427           162      3,304        3,589        6,893
2330 Central Expressway       Santa Clara E                 3,673        3,932                    3,673        3,932        7,605
2251 Lawson Lane              Santa Clara G                 1,952        9,498                    1,952        9,498       11,450
1230 East Arques              Sunnyvale   F                   540        2,628            39        540        2,667        3,207
1250 East Arques              Sunnyvale   F                 1,335        6,499                    1,335        6,499        7,834
20400 Mariani Avenue          Cupertino   H                 1,670        8,125                    1,670        8,125        9,795
10500 De Anza Blvd            Cupertino   F                 7,666       37,304                    7,666       37,304       44,970
20605-20705 Valley Green      Cupertino   G                 3,490       16,984                    3,490       16,984       20,474
10300 Bubb Road               Cupertino   F                   635        3,090                      635        3,090        3,725
10440 Bubb Road               Cupertino                       434        2,112            61        434        2,173        2,607
10460 Bubb Road               Cupertino   H                   994        4,838         1,325        994        6,163        7,157
1135 Kern Avenue              Sunnyvale   F                   407        1,982                      407        1,982        2,389
450 National Avenue           Mtn View    F                   611        2,973            50        611        3,023        3,634
3301 Olcott Street            Santa Clara                   1,846        8,984                    1,846        8,984       10,830
2800 Bayview Avenue           Fremont                       1,070        5,205            60      1,070        5,265        6,335
5521 Hellyer Avenue           San Jose                      4,534        9,650                    4,534        9,650       14,184
6850 Santa Teresa Blvd        San Jose                        377        1,836           819        377        2,655        3,032
6810 Santa Teresa Blvd        San Jose                      2,567        5,991           234      2,567        6,225        8,792
140-160 Great Oaks Blvd       San Jose                      1,402        6,822           755      1,402        7,577        8,979
6541 Via del Oro/6385 San Ig  San Jose    G                 1,039        5,057            91      1,039        5,148        6,187

</TABLE>

<PAGE>

                          MISSION WEST PROPERTIES, INC.
                                  Schedule III
             Real Estate and Accumulated Depreciation & Amortization
                                December 31, 2005
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                   Accumulated
                                                   Depreciation        Date of       Depreciable
Property Name                 City                & Amortization     Acquisition        Life
--------------------------------------------     ----------------  ---------------  -------------
<S>                          <C>                       <C>            <C>                <C>
5300-5350 Hellyer Avenue      San Jose    C             $ 1,610         5/00              L
10401-10411 Bubb Road         Cupertino   A                 579         7/98              L
45365 Northport Loop          Fremont                       758        10/00              L
45700 Northport Loop          Fremont     F               1,082         7/98              L
45738 Northport Loop          Fremont     F                 817         7/98              L
4050 Starboard Drive          Fremont     F               1,216         7/98              L
3501 W. Warren Ave/Fremont    Fremont                     1,954         7/98              L
48800 Milmont Blvd            Fremont                       926         7/98              L
4750 Patrick Henry Drive      Santa Clara                 1,595         7/98              L
3520 Bassett Street           Santa Clara D               1,008         7/98              L
3530 Bassett Street           Santa Clara B,D               776         7/98              L
5850-5870 Hellyer Avenue      San Jose                    1,168        11/98              L
5750 Hellyer Avenue           San Jose                      370         8/01              L
800 Embedded Way              San Jose                        -         3/00              L
5500 Hellyer Avenue           San Jose                    1,531         2/01              L
5550 Hellyer Avenue           San Jose                      418         6/01              L
5400 Hellyer Avenue           San Jose                      808         7/00              L
5325 Hellyer Avenue           San Jose    H               1,317         1/01              L
5345 Hellyer Avenue           San Jose    H                 705         1/02              L
5905-5965 Silver Crk Valley RdSan Jose                    1,948         7/01              L
5905-5965 Silver Crk Valley RdSan Jose                      290        10/01              L
855 Embedded Way              San Jose    K                 804         5/01              L
1065-1105 La Avenida Street   Mtn View                   18,449         4/99              L
1750 Automation Parkway       San Jose    G               1,867         7/99              L
1756 Automation Parkway       San Jose    G               1,544         1/00              L
1762 Automation Parkway       San Jose    G               1,771         4/00              L
1768 Automation Parkway       San Jose    H               2,440        12/00              L
255 Caspian Drive             Sunnyvale                   1,334         4/00              L
245 Caspian Drive             Sunnyvale                       -         4/01              L
5970 Optical Court            San Jose                      420        12/03              L
5900 Optical Court            San Jose    H               1,146         7/02              L
2630 Orchard Parkway          San Jose                      565         3/02              L
2610 Orchard Parkway          San Jose    J                 502         3/02              L
55 West Trimble Road          San Jose    J                 851         3/02              L
2001 Walsh Avenue             Santa Clara E,I             1,071         4/03              L
2880 Scott Boulevard          Santa Clara E,H,I           3,197         4/03              L
2890 Scott Boulevard          Santa Clara E,H,I           1,101         4/03              L
2770-2800 Scott Boulevard     Santa Clara E,H               487         4/03              L
2300 Central Expressway       Santa Clara E,I             5,712         4/03              L
2220 Central Expressway       Santa Clara E,I               286         4/03              L
2330 Central Expressway       Santa Clara E                 270         4/03              L
2251 Lawson Lane              Santa Clara G               1,782         7/98              L
1230 East Arques              Sunnyvale   F                 524         7/98              L
1250 East Arques              Sunnyvale   F               1,219         7/98              L
20400 Mariani Avenue          Cupertino   H               1,526         7/98              L
10500 De Anza Blvd            Cupertino   F               6,998         7/98              L
20605-20705 Valley Green      Cupertino   G               3,188         7/98              L
10300 Bubb Road               Cupertino   F                 581         7/98              L
10440 Bubb Road               Cupertino                     415         7/98              L
10460 Bubb Road               Cupertino   H               1,119         7/98              L
1135 Kern Avenue              Sunnyvale   F                 375         7/98              L
450 National Avenue           Mtn View    F                 562         7/98              L
3301 Olcott Street            Santa Clara                 1,687         7/98              L
2800 Bayview Avenue           Fremont                       997         7/98              L
5521 Hellyer Avenue           San Jose                      110         2/05              L
6850 Santa Teresa Blvd        San Jose                      648         7/98              L
6810 Santa Teresa Blvd        San Jose                    1,042         3/99              L
140-160 Great Oaks Blvd       San Jose                    1,497         7/98              L
6541 Via del Oro/6385 San Ig  San Jose    G                 949         7/98              L
</TABLE>

                                     - 74 -

<PAGE>
<TABLE>
<CAPTION>
                                                               Initial Cost                          Total Cost
                                                          ----------------------     Cost      -----------------------
                                              December 31,           Buildings   Subsequent to              Buildings
                                                2005                    and      Construction/                and
Property Name                 City           Encumbrances   Land    Improvements  Acquisition     Land    Improvements     Total
-------------------------------------------- ------------ --------- ------------ ------------- ---------- ------------ ------------
<C>                          <C>               <C>       <C>          <C>           <C>       <C>          <C>        <C>
6311-6351 San Ignacio Avenue  San Jose    F                 6,246       30,396           170      6,246       30,566       36,812
6320-6360 San Ignacio Avenue  San Jose    G                 2,616       12,732           439      2,616       13,171       15,787
75 E. Trimble Rd/2610 N.1st StSan Jose                      3,477       16,919            85      3,477       17,004       20,481
2033-2243 Samaritan Drive     San Jose                      5,046       24,556           154      5,046       24,710       29,756
1170 Morse Avenue             Sunnyvale   F                   658        3,201                      658        3,201        3,859
3236 Scott Blvd               Santa Clara F                 1,234        6,005                    1,234        6,005        7,239
1212 Bordeaux Lane            Sunnyvale   F                 2,250       10,948                    2,250       10,948       13,198
1325-1810 McCandless Drive    Milpitas    G                13,994       66,213         1,420     13,994       67,633       81,627
1600 Memorex Drive            Santa Clara F                 1,221        5,940            11      1,221        5,951        7,172
1688 Richard Avenue           Santa Clara F                 1,248        2,913             6      1,248        2,919        4,167
1700 Richard Avenue           Santa Clara F                 1,727        4,030                    1,727        4,030        5,757
3506-3510 Bassett Street      Santa Clara D                   943        4,591           116        943        4,707        5,650
3540-3544 Bassett Street      Santa Clara F,D               1,565        7,615           189      1,565        7,804        9,369
3550 Bassett Street           Santa Clara F,D               1,079        5,251            33      1,079        5,284        6,363
3560 Bassett Street           Santa Clara F,D               1,075        5,233             8      1,075        5,241        6,316
3570-3580 Bassett Street      Santa Clara F,D               1,075        5,233                    1,075        5,233        6,308
   Prudential Ins. Co. of America Loan    F     117,290
   Northwestern Mutual Life Ins. Co.      G      91,417
   Allianz Life Insurance Company         H     148,774
                                             ------------ ---------   ---------- ------------- ---------- ------------ ------------
                                               $367,532  $273,933     $773,561      $10,306    $273,933     $783,867   $1,057,800
                                             ============ =========   ========== ============= ========== ============ ============
</TABLE>


<TABLE>
<CAPTION>
                                                   Accumulated
                                                   Depreciation        Date of       Depreciable
Property Name                 City                & Amortization     Acquisition        Life
--------------------------------------------     ----------------  ---------------  -------------
<C>                          <C>                     <C>               <C>               <C>
6311-6351 San Ignacio Avenue  San Jose    F               5,809         7/98              L
6320-6360 San Ignacio Avenue  San Jose    G               2,497         7/98              L
75 E. Trimble Rd/2610 N.1st StSan Jose                    3,240         7/98              L
2033-2243 Samaritan Drive     San Jose                    4,652         7/98              L
1170 Morse Avenue             Sunnyvale   F                 602         7/98              L
3236 Scott Blvd               Santa Clara F               1,128         7/98              L
1212 Bordeaux Lane            Sunnyvale   F               2,056         7/98              L
1325-1810 McCandless Drive    Milpitas    G              12,854         7/98              L
1600 Memorex Drive            Santa Clara F               1,096         7/98              L
1688 Richard Avenue           Santa Clara F                 550         9/98              L
1700 Richard Avenue           Santa Clara F                 650         8/99              L
3506-3510 Bassett Street      Santa Clara D                 915         7/98              L
3540-3544 Bassett Street      Santa Clara F,D             1,473         7/98              L
3550 Bassett Street           Santa Clara F,D             1,012         7/98              L
3560 Bassett Street           Santa Clara F,D               989         7/98              L
3570-3580 Bassett Street      Santa Clara F,D               984         7/98              L
   Prudential Ins. Co. of America Loan    F
   Northwestern Mutual Life Ins. Co.      G
   Allianz Life Insurance Company         H
                                                 ----------------
                                                      $130,419
                                                 ================
</TABLE>

(A)  16.67% of this property's ownership is held by unaffiliated parties outside
     the operating partnerships of the Company.
(B)  25% of this property's  ownership is held by  unaffiliated  parties outside
     the operating partnerships of the Company.
(C)  50% of this  property's  ownership  is held by an  affiliated  party  since
     September 2000.
(D)  Part of the property group referred to as the Triangle Technology Park.
(E)  Part of the property group referred to as the San Tomas Technology Park.
(F)  Encumbered by the $117,290  Prudential  Insurance Company of America loan -
     full amount of loan shown at the bottom of the schedule.
(G)  Encumbered by the $91,417 Northwestern Mutual Life Insurance Company loan -
     full amount of loan shown at the bottom of the schedule.
(H)  Encumbered  by the  $148,774  Allianz  Life  Insurance  Company loan - full
     amount of loan shown at the bottom of the schedule.
(I)  Purchase price allocated to real estate related  intangible assets pursuant
     to SFAS 141 amounted to $18,284.  Approximately $874 was fully amortized in
     2005  and the  asset  cost and its  related  accumulated  amortization  was
     removed from the accounts.
(J)  Purchase price allocated to real estate related  intangible assets pursuant
     to SFAS 141 amounted to $1,367.  The amount was fully amortized in 2004 and
     the asset cost and its related  accumulated  amortization  was removed from
     the accounts.
(K)  This  property was sold in October 2005.  The Company  retained  32.5%,  or
     approximately 7.9 acres, of raw land.
(L)  Depreciation is computed based on the following estimated lives:
     1.   Building shell and base building tenant improvements of newly acquired
          properties  are being  depreciated  on a  weighted  average  composite
          useful life of 40 years.
     2.   Real estate intangible assets allocated pursuant to SFAS 141 are being
          amortized over the remaining life of the underlying leases.
     3.   Tenant improvements, furniture and fixtures are being depreciated over
          their estimated useful lives ranging from 5 to 10 years.


                                     - 75 -

<PAGE>







                          MISSION WEST PROPERTIES, INC.
                                  Schedule III
             Real Estate and Accumulated Depreciation & Amortization
                                December 31, 2004
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                               Initial Cost                          Total Cost
                                                          ----------------------     Cost      -----------------------
                                              December 31,           Buildings   Subsequent to              Buildings
                                                2004                    and      Construction/                and
Property Name                 City           Encumbrances   Land    Improvements  Acquisition     Land    Improvements     Total
-------------------------------------------- ------------ --------- ------------ ------------- ---------- ------------ ------------
<C>                          <C>               <C>       <C>         <C>             <C>       <C>         <C>          <C>
5300-5350 Hellyer Avenue      San Jose    E     $10,420   $ 5,742     $ 11,442                  $ 5,742     $ 11,442     $ 17,184
10401-10411 Bubb Road         Cupertino   A                   633        3,078                      633        3,078        3,711
45365 Northport Loop          Fremont                       2,447        5,711        $   11      2,447        5,722        8,169
45700 Northport Loop          Fremont     B                 1,184        5,760             7      1,184        5,767        6,951
45738 Northport Loop          Fremont     B                   891        4,338             5        891        4,343        5,234
4050 Starboard Drive          Fremont     B                 1,329        6,467             8      1,329        6,475        7,804
3501 W. Warren Ave/Fremont    Fremont                       1,866        9,082         1,053      1,866       10,135       12,001
48800 Milmont Blvd            Fremont                       1,013        4,932                    1,013        4,932        5,945
4750 Patrick Henry Drive      Santa Clara                   1,604        7,805           153      1,604        7,958        9,562
3520 Bassett Street           Santa Clara C                 1,104        5,371                    1,104        5,371        6,475
3530 Bassett Street           Santa Clara C,D                 849        4,133                      849        4,133        4,982
5850-5870 Hellyer Avenue      San Jose                      2,787        6,502                    2,787        6,502        9,289
5750 Hellyer Avenue           San Jose                      3,266        3,354                    3,266        3,354        6,620
800 Embedded Way              San Jose                      5,508       12,134            16      5,508       12,150       17,658
5500 Hellyer Avenue           San Jose                      4,735       12,484            39      4,735       12,523       17,258
5550 Hellyer Avenue           San Jose                      3,261        3,478                    3,261        3,478        6,739
5400 Hellyer Avenue           San Jose                      3,238        5,007           215      3,238        5,222        8,460
5325 Hellyer Avenue           San Jose                      4,684       10,231            40      4,684       10,271       14,955
5345 Hellyer Avenue           San Jose                      4,866        5,822                    4,866        5,822       10,688
5905-5965 Silver Crk Valley RdSan Jose                      8,437       17,317                    8,437       17,317       25,754
5905-5965 Silver Crk Valley RdSan Jose                      3,438        2,727                    3,438        2,727        6,165
855 Embedded Way              San Jose                      3,289        6,521            68      3,289        6,589        9,878
1065-1105 La Avenida Street   Mtn View                     46,832      109,275            65     46,832      109,340      156,172
1750 Automation Parkway       San Jose    H                 4,789       11,174           315      4,789       11,489       16,278
1756 Automation Parkway       San Jose    H                 4,378       10,216            15      4,378       10,231       14,609
1762 Automation Parkway       San Jose    H                 4,804       12,224            20      4,804       12,244       17,048
1768 Automation Parkway       San Jose                      8,195       19,121            14      8,195       19,135       27,330
255 Caspian Drive             Sunnyvale                     3,491        7,160         1,559      3,491        8,719       12,210
245 Caspian Drive             Sunnyvale                     5,894            -                    5,894            -        5,894
5970 Optical Court            San Jose                      2,758        8,395                    2,758        8,395       11,153
5900 Optical Court            San Jose                      3,634       12,677            83      3,634       12,760       16,394
2630 Orchard Parkway          San Jose                      2,931        5,863            22      2,931        5,885        8,816
2610 Orchard Parkway          San Jose    K                 2,615        5,231                    2,615        5,231        7,846
55 West Trimble Road          San Jose    K                 4,435        8,869                    4,435        8,869       13,304
2001 Walsh Avenue             Santa Clara G,I,J             4,610        5,245                    4,610        5,245        9,855
2880 Scott Boulevard          Santa Clara G,I,J            14,501       25,501                   14,501       25,501       40,002
2890 Scott Boulevard          Santa Clara G,I,J             3,081       10,844                    3,081       10,844       13,925
2770-2800 Scott Boulevard     Santa Clara G,I               7,138        7,075             2      7,138        7,077       14,215
2300 Central Expressway       Santa Clara G,I,J             2,390       14,418                    2,390       14,418       16,808
2220 Central Expressway       Santa Clara G,I,J             3,304        4,301           162      3,304        4,463        7,767
2330 Central Expressway       Santa Clara G,I               3,673        3,932                    3,673        3,932        7,605
2251 Lawson Lane              Santa Clara H                 1,952        9,498                    1,952        9,498       11,450
1230 East Arques              Sunnyvale   B                   540        2,628            39        540        2,667        3,207
1250 East Arques              Sunnyvale   B                 1,335        6,499                    1,335        6,499        7,834
3120 Scott Blvd               Santa Clara M                 2,044        7,755                    2,044        7,755        9,799(N)
20400 Mariani Avenue          Cupertino   I                 1,670        8,125                    1,670        8,125        9,795
10500 De Anza Blvd            Cupertino   B                 7,666       37,304                    7,666       37,304       44,970
20605-20705 Valley Green      Cupertino   H                 3,490       16,984                    3,490       16,984       20,474
10300 Bubb Road               Cupertino   B                   635        3,090                      635        3,090        3,725
10440 Bubb Road               Cupertino                       434        2,112            61        434        2,173        2,607
10460 Bubb Road               Cupertino             154       994        4,838         1,161        994        5,999        6,993
1135 Kern Avenue              Sunnyvale   B                   407        1,982                      407        1,982        2,389
405 Tasman Drive              Sunnyvale                       550        2,676            90        550        2,766        3,316
450 National Avenue           Mtn View    B                   611        2,973                      611        2,973        3,584
3301 Olcott Street            Santa Clara                   1,846        8,984                    1,846        8,984       10,830
2800 Bayview Avenue           Fremont                       1,070        5,205            60      1,070        5,265        6,335
6850 Santa Teresa Blvd        San Jose                        377        1,836           820        377        2,656        3,033
6810 Santa Teresa Blvd        San Jose                      2,567        5,991            12      2,567        6,003        8,570
</TABLE>

<PAGE>
                          MISSION WEST PROPERTIES, INC.
                                  Schedule III
             Real Estate and Accumulated Depreciation & Amortization
                                December 31, 2004
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                   Accumulated
                                                   Depreciation        Date of       Depreciable
Property Name                 City                & Amortization     Acquisition        Life
--------------------------------------------     ----------------  ---------------  -------------
<C>                          <C>                      <C>             <C>                <C>
5300-5350 Hellyer Avenue      San Jose    E            $ 1,323          5/00              L
10401-10411 Bubb Road         Cupertino   A                502          7/98              L
45365 Northport Loop          Fremont                      613         10/00              L
45700 Northport Loop          Fremont     B                938          7/98              L
45738 Northport Loop          Fremont     B                708          7/98              L
4050 Starboard Drive          Fremont     B              1,054          7/98              L
3501 W. Warren Ave/Fremont    Fremont                    1,490          7/98              L
48800 Milmont Blvd            Fremont                      803          7/98              L
4750 Patrick Henry Drive      Santa Clara                1,375          7/98              L
3520 Bassett Street           Santa Clara C                873          7/98              L
3530 Bassett Street           Santa Clara C,D              673          7/98              L
5850-5870 Hellyer Avenue      San Jose                   1,005         11/98              L
5750 Hellyer Avenue           San Jose                     286          8/01              L
800 Embedded Way              San Jose                   1,488          3/00              L
5500 Hellyer Avenue           San Jose                   1,223          2/01              L
5550 Hellyer Avenue           San Jose                     321          6/01              L
5400 Hellyer Avenue           San Jose                     652          7/00              L
5325 Hellyer Avenue           San Jose                   1,053          1/01              L
5345 Hellyer Avenue           San Jose                     562          1/02              L
5905-5965 Silver Crk Valley RdSan Jose                   1,515          7/01              L
5905-5965 Silver Crk Valley RdSan Jose                     222         10/01              L
855 Embedded Way              San Jose                     632          5/01              L
1065-1105 La Avenida Street   Mtn View                  15,715          4/99              L
1750 Automation Parkway       San Jose    H              1,580          7/99              L
1756 Automation Parkway       San Jose    H              1,286          1/00              L
1762 Automation Parkway       San Jose    H              1,462          4/00              L
1768 Automation Parkway       San Jose                   1,960         12/00              L
255 Caspian Drive             Sunnyvale                  1,035          4/00              L
245 Caspian Drive             Sunnyvale                      -          4/01              L
5970 Optical Court            San Jose                     210         12/03              L
5900 Optical Court            San Jose                     818          7/02              L
2630 Orchard Parkway          San Jose                     416          3/02              L
2610 Orchard Parkway          San Jose    K                371          3/02              L
55 West Trimble Road          San Jose    K                629          3/02              L
2001 Walsh Avenue             Santa Clara G,I,J            654          4/03              L
2880 Scott Boulevard          Santa Clara G,I,J          1,979          4/03              L
2890 Scott Boulevard          Santa Clara G,I,J            687          4/03              L
2770-2800 Scott Boulevard     Santa Clara G,I              310          4/03              L
2300 Central Expressway       Santa Clara G,I,J          3,623          4/03              L
2220 Central Expressway       Santa Clara G,I,J            892          4/03              L
2330 Central Expressway       Santa Clara G,I              172          4/03              L
2251 Lawson Lane              Santa Clara H              1,545          7/98              L
1230 East Arques              Sunnyvale   B                453          7/98              L
1250 East Arques              Sunnyvale   B              1,057          7/98              L
3120 Scott Blvd               Santa Clara M              1,578 (N)      7/98              L
20400 Mariani Avenue          Cupertino   I              1,323          7/98              L
10500 De Anza Blvd            Cupertino   B              6,066          7/98              L
20605-20705 Valley Green      Cupertino   H              2,764          7/98              L
10300 Bubb Road               Cupertino   B                503          7/98              L
10440 Bubb Road               Cupertino                    353          7/98              L
10460 Bubb Road               Cupertino                    944          7/98              L
1135 Kern Avenue              Sunnyvale   B                325          7/98              L
405 Tasman Drive              Sunnyvale                    452          7/98              L
450 National Avenue           Mtn View    B                484          7/98              L
3301 Olcott Street            Santa Clara                1,463          7/98              L
2800 Bayview Avenue           Fremont                      858          7/98              L
6850 Santa Teresa Blvd        San Jose                     544          7/98              L
6810 Santa Teresa Blvd        San Jose                     876          3/99              L
</TABLE>

                                     - 76 -
<PAGE>

<TABLE>
<CAPTION>
                                                               Initial Cost                          Total Cost
                                                          ----------------------     Cost      -----------------------
                                              December 31,           Buildings   Subsequent to              Buildings
                                                2004                    and      Construction/                and
Property Name                 City           Encumbrances   Land    Improvements  Acquisition     Land    Improvements     Total
-------------------------------------------- ------------ --------- ------------ ------------- ---------- ------------ ------------
<C>                          <C>              <C>       <C>          <C>             <C>      <C>          <C>        <C>
140-160 Great Oaks Blvd       San Jose                      1,402        6,822           755      1,402        7,577        8,979
6541 Via del Oro/6385 San Ig  San Jose    H                 1,039        5,057                    1,039        5,057        6,096
6311-6351 San Ignacio Ave     San Jose    B                 6,246       30,396           170      6,246       30,566       36,812
6320-6360 San Ignacio Ave     San Jose    H                 2,616       12,732           439      2,616       13,171       15,787
75 E. Trimble Rd/2610 N.1st StSan Jose                      3,477       16,919            85      3,477       17,004       20,481
2033-2243 Samaritan Drive     San Jose    F       9,560     5,046       24,556           154      5,046       24,710       29,756
1170 Morse Avenue             Sunnyvale   B                   658        3,201                      658        3,201        3,859
3236 Scott Blvd               Santa Clara B                 1,234        6,005                    1,234        6,005        7,239
1212 Bordeaux Lane            Sunnyvale   B                 2,250       10,948                    2,250       10,948       13,198
1325-1810 McCandless Drive    Milpitas    F,H              13,994       66,213         1,363     13,994       67,576       81,570
1600 Memorex Drive            Santa Clara B                 1,221        5,940            11      1,221        5,951        7,172
1688 Richard Avenue           Santa Clara B                 1,248        2,913             6      1,248        2,919        4,167
1700 Richard Avenue           Santa Clara B                 1,727        4,030                    1,727        4,030        5,757
3506-3510 Bassett Street      Santa Clara C                   943        4,591           116        943        4,707        5,650
3540-3544 Bassett Street      Santa Clara B,C               1,565        7,615           189      1,565        7,804        9,369
3550 Bassett Street           Santa Clara B,C               1,079        5,251            33      1,079        5,284        6,363
3560 Bassett Street           Santa Clara B,C               1,075        5,233             8      1,075        5,241        6,316
3570-3580 Bassett Street      Santa Clara B,C               1,075        5,233                    1,075        5,233        6,308
   Prudential Ins. Co. of America Loan    B     119,441
   Northwestern Mutual Life Ins. Co.      H      94,517
   Citicorp USA, Inc.                     I      78,710
                                             ------------ --------- ------------ ------------- ---------- ------------ ------------
                                               $312,802  $275,707     $787,352        $9,444   $275,707     $796,796   $1,072,503(N)
                                             ============ ========= ============ ============= ========== ============ ============
</TABLE>


<TABLE>
<CAPTION>
                                                   Accumulated
                                                   Depreciation        Date of       Depreciable
Property Name                 City                & Amortization     Acquisition        Life
--------------------------------------------     ----------------  ---------------  -------------
<C>                          <C>                     <C>               <C>               <C>
140-160 Great Oaks Blvd       San Jose                   1,255          7/98              L
6541 Via del Oro/6385 San Ig  San Jose    H                823          7/98              L
6311-6351 San Ignacio Ave     San Jose    B              5,025          7/98              L
6320-6360 San Ignacio Ave     San Jose    H              2,149          7/98              L
75 E. Trimble Rd/2610 N.1st StSan Jose                   2,804          7/98              L
2033-2243 Samaritan Drive     San Jose    F              3,923          7/98              L
1170 Morse Avenue             Sunnyvale   B                522          7/98              L
3236 Scott Blvd               Santa Clara B                978          7/98              L
1212 Bordeaux Lane            Sunnyvale   B              1,782          7/98              L
1325-1810 McCandless Drive    Milpitas    F,H           11,059          7/98              L
1600 Memorex Drive            Santa Clara B                946          7/98              L
1688 Richard Avenue           Santa Clara B                476          9/98              L
1700 Richard Avenue           Santa Clara B                549          8/99              L
3506-3510 Bassett Street      Santa Clara C                790          7/98              L
3540-3544 Bassett Street      Santa Clara B,C            1,275          7/98              L
3550 Bassett Street           Santa Clara B,C              876          7/98              L
3560 Bassett Street           Santa Clara B,C              857          7/98              L
3570-3580 Bassett Street      Santa Clara B,C              853          7/98              L
   Prudential Ins. Co. of America Loan    B
   Northwestern Mutual Life Ins. Co.      H
   Citicorp USA, Inc.                     I
                                                 ----------------
                                                      $111,640(N)
                                                 ================
</TABLE>


(A)  16.67% of this property's ownership is held by unaffiliated parties outside
     the operating partnerships of the Company.
(B)  Encumbered by the $119,441  Prudential  Insurance Company of America loan -
     full amount of loan shown at the bottom of the schedule.
(C)  Part of the property group referred to as the Triangle Technology Park.
(D)  25% of this property's  ownership is held by  unaffiliated  parties outside
     the operating partnerships of the Company.
(E)  50% of this  property's  ownership  is held by an  affiliated  party  since
     September 2000.
(F)  Three  properties at Samaritan Drive and two properties at McCandless Drive
     are  encumbered  by the $9,560  debt due the Berg  Group  under the line of
     credit.
(G)  Part of the property group referred to as the San Tomas Technology Park.
(H)  Encumbered by the $94,517 Northwestern Mutual Life Insurance Company loan -
     full amount of loan shown at the bottom of the schedule.
(I)  Encumbered  by the $78,710  Citicorp  USA,  Inc. loan - full amount of loan
     shown at the bottom of the schedule.
(J)  Purchase price allocated to real estate related  intangible assets pursuant
     to SFAS 141 amounted to $18,284.
(K)  Purchase price allocated to real estate related  intangible assets pursuant
     to SFAS 141 amounted to $1,367.  The amount was fully amortized in 2004 and
     the asset cost and its related  accumulated  amortization  was removed from
     the accounts.
(L)  Depreciation is computed based on the following estimated lives:
     1.   Building shell and base building tenant improvements of newly acquired
          properties  are being  depreciated  on a  weighted  average  composite
          useful life of 40 years.
     2.   Real estate intangible assets allocated pursuant to SFAS 141 are being
          amortized over the remaining life of the underlying  leases.
     3.   Tenant improvements, furniture and fixtures are being depreciated over
          their estimated useful lives ranging from 5 to 10 years.
(M)  This  property was  designated as asset held for sale at December 31, 2004.
     Upon the classification of real estate asset as held for sale, the carrying
     value of the asset is  reduced  to the  lower of its net book  value or its
     fair value,  less selling  costs.  Accordingly,  the carrying value of 3120
     Scott Blvd. reflects a write-down of $2,193. In January 2005, this property
     was sold for a total sale price of $8,500.
(N)  Investments in properties of $1,072,053  include one property held for sale
     of $9,799.  Accumulated  depreciation and amortization of $111,640 includes
     accumulated depreciation from one property held for sale of $1,578. The net
     book  value of the  property  held for sale of $8,221 is  reflected  on the
     consolidated  balance  sheets as of December 31, 2004. See Note to Schedule
     III below.

                                     - 77 -

<PAGE>




                          MISSION WEST PROPERTIES, INC.
                              NOTE TO SCHEDULE III
                           December 31, 2005 and 2004
                             (dollars in thousands)

1.   Reconciliation of real estate and accumulated depreciation and
     amortization:

<TABLE>
<CAPTION>
                                                                                          2005                       2004
                                                                                 ------------------------   ------------------------
Real estate investments:
<S>                                                                                  <C>                        <C>
   Balance at beginning of year                                                       $1,072,503                 $1,074,994
   Additions                                                                              15,151                      1,421
   Dispositions                                                                          (28,980)                         -
   Reclassification                                                                         (874)                    (1,719)
   Impairment charge                                                                           -                     (2,193)
                                                                                 ------------------------   ------------------------
   Balance at end of year                                                             $1,057,800                 $1,072,503
                                                                                 ------------------------   ------------------------

Accumulated depreciation and amortization:
   Balance at beginning of year                                                         $111,640                   $ 89,243
   Additions                                                                              23,487                     23,764
   Dispositions                                                                           (3,834)                         -
   Reclassification                                                                         (874)                    (1,367)
                                                                                 ------------------------   ------------------------
   Balance at end of year                                                               $130,419                   $111,640
                                                                                 ------------------------   ------------------------


Net investments in properties                                                           $927,381                   $960,863
                                                                                 ========================   ========================

Net investments in properties                                                           $927,381                   $952,642
Asset held for sale                                                                            -                      8,221
                                                                                 ------------------------   ------------------------
Net investments in properties                                                           $927,381                   $960,863
                                                                                 ========================   ========================
</TABLE>

                                     - 78 -
<PAGE>


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

     The Company previously disclosed the change in its independent  accountants
     on Form 8-K, filed February 2, 2004,  Form 8-K/A,  filed February 18, 2004,
     and Form 8-K, filed May 12, 2004.


ITEM 9A. CONTROLS AND PROCEDURES

     (a)  Disclosure Controls and Procedures

     As required by SEC Rule  13a-15(b) we conducted  an  evaluation,  under the
     supervision and with the  participation  of our  management,  including our
     Chief Executive  Officer,  President and Vice President of Finance,  of the
     effectiveness  of the design and operation of our  disclosure  controls and
     procedures  (as  defined  in  Rule  13a-15(f)  or  Rule  15d-15(f)  of  the
     Securities  Exchange Act of 1934).  Based upon that  evaluation,  the Chief
     Executive  Officer,  President and Vice President of Finance concluded that
     as of  December  31,  2005 our  disclosure  controls  and  procedures  were
     effective such that the information required to be disclosed in our reports
     filed with the Securities and Exchange  Commission is recorded,  processed,
     summarized  and  reported  within the time  periods  specified in the SEC's
     rules and forms such  information is accumulated  and  communicated  to our
     management,  including  our Chief  Executive  Officer,  President  and Vice
     President  of  Finance,  as  appropriate,  to allow  for  timely  decisions
     regarding required disclosure.

     (b)  Management's   Annual  Report  on  Internal   Control  over  Financial
          Reporting

     Management of Mission West Properties, Inc. is responsible for establishing
     and  maintaining  adequate  internal  control over  financial  reporting as
     defined in Rules 13a-15(f) and 15d-15(f) under the Securities  Exchange Act
     of 1934.  Mission West  Properties,  Inc.'s internal control over financial
     reporting is a process designed to provide reasonable  assurance  regarding
     the  reliability  of financial  reporting and the  preparation of financial
     statements for external  purposes in accordance with accounting  principles
     generally  accepted in the United States of America.  Internal control over
     financial reporting includes those written policies and procedures that:

     -    pertain to the  maintenance  of records that,  in  reasonable  detail,
          accurately and fairly reflect the transactions and dispositions of the
          assets of Mission West Properties, Inc.;
     -    provide  reasonable   assurance  that  transactions  are  recorded  as
          necessary to permit preparation of financial  statements in accordance
          with accounting  principles generally accepted in the United States of
          America;
     -    provide reasonable assurance that receipts and expenditures of Mission
          West  Properties,   Inc.  are  being  made  only  in  accordance  with
          authorization  of management and directors of Mission West Properties,
          Inc.; and
     -    provide reasonable  assurance regarding prevention or timely detection
          of unauthorized  acquisition,  use or disposition of assets that could
          have a material effect on the consolidated financial statements.

     Internal control over financial reporting includes the controls themselves,
     monitoring  and internal  auditing  practices  and actions taken to correct
     deficiencies as identified.

     Because  of its  inherent  limitations,  internal  control  over  financial
     reporting  may not  prevent  or  detect  the  possibility  of human  error,
     misstatements  and the  circumvention  or  overriding  of  controls.  Also,
     projections  of any  evaluation  of  effectiveness  to future  periods  are
     subject to the risk that controls may become inadequate  because of changes
     in  conditions,  or that the  degree of  compliance  with the  policies  or
     procedures may deteriorate.

     Management  assessed the  effectiveness of Mission West Properties,  Inc.'s
     internal  control  over  financial  reporting  as  of  December  31,  2005.
     Management  based this  assessment on the criteria for  effective  internal
     control  over  financial  reporting   established  in  Internal  Control  -
     Integrated Framework issued by the Committee of Sponsoring Organizations of
     the  Treadway  Commission  (COSO).   Management's  assessment  included  an
     evaluation  of the  design of  Mission  West  Properties,  Inc.'s  internal
     control  over   financial   reporting   and  testing  of  the   operational
     effectiveness of its internal control over financial reporting.  Management
     reviewed  the results of its  assessment  with the Audit  Committee  of the
     Board of Directors.

     Based on this  assessment,  management  determined  that as of December 31,
     2005, Mission West Properties,  Inc. maintained  effective internal control
     over financial reporting.

     BDO Seidman,  LLP,  independent  registered  public  accounting  firm,  who
     audited and reported on the  consolidated  financial  statements of Mission
     West  Properties,  Inc.  included in this Annual  Report on Form 10-K,  has
     issued an attestation report on management's assessment of internal control
     over financial reporting.

                                     - 79 -
<PAGE>

     (c)  Changes in Internal Control over Financial Reporting

     There was no change in our internal control over financial reporting during
     the fourth  fiscal  quarter  of 2005 that has  materially  affected,  or is
     reasonably  likely to material affect,  our internal control over financial
     reporting.

ITEM 9B. OTHER INFORMATION

     None.

                                     - 80 -

<PAGE>


PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The  information  required by Item 10 is incorporated by reference from the
     sections titled  "Management - Directors and Executive  Officers," "Code of
     Ethics" and "Section 16(a) Beneficial  Ownership  Reporting  Compliance" in
     the Company's  definitive proxy statement for its 2006 annual stockholders'
     meeting.

ITEM 11. EXECUTIVE COMPENSATION

     The  information  required by Item 11 is incorporated by reference from the
     section titled "Executive  Compensation" in the Company's  definitive proxy
     statement for its 2006 annual stockholders'  meeting,  excluding,  however,
     the  sections  titled  "Executive  Compensation  -  Performance  Graph" and
     "Executive   Compensation  -  Report  on  Executive   Compensation  by  the
     Compensation  Committee  of the  Board of  Directors,"  none of  which  are
     incorporated by reference in response to this item.

ITEM 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

     The  information  required by Item 12 is incorporated by reference from the
     sections titled "Share  Ownership" and "Securities  Authorized for Issuance
     Under  Equity  Compensation  Plans"  in  the  Company's   definitive  proxy
     statement for its 2006 annual stockholders' meeting.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The  information  required by Item 13 is incorporated by reference from the
     sections titled "Certain  Relationships  and Related  Transactions"  in the
     Company's  definitive  proxy  statement  for its 2006 annual  stockholders'
     meeting.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The  information  required by Item 14 is incorporated by reference from the
     sections titled  "Principal  Accountant Fees and Services" in the Company's
     definitive proxy statement for its 2006 annual stockholders' meeting.

                                     - 81 -

<PAGE>


PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)  The following documents are filed as part of this report:

     1.   The consolidated  financial statements are set forth in Item 8 of this
          Annual Report on Form 10-K.

          The  following   financial  statement  schedules  should  be  read  in
          conjunction with the financial  statements  included in Item 8 of this
          Annual Report on Form 10-K.

     2.   Schedule  III  -  Real  Estate  and   Accumulated   Depreciation   and
          Amortization  as of December 31, 2005 and 2004,  which can be found on
          page 74.

     3.   The  following  exhibits  listed on the Exhibit Index either are filed
          with this  Annual  Report on Form 10-K or have been  filed  previously
          with the SEC and are incorporated by reference to those prior filings.

(b)  The  exhibits  required  by Item  601 of  Regulation  S-K,  including  each
     management  contract or  compensatory  plan or  arrangement  required to be
     files as an exhibit to this form are listed under Item 15(a)(3).

                                     - 82 -
<PAGE>


                                   SIGNATURES


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

                                               MISSION WEST PROPERTIES, INC.

Date: March 14, 2006                           By: /s/ Carl E. Berg
                                               ----------------------------
                                               Carl E. Berg
                                               Chief Executive Officer
                                               (Principal Executive Officer)


Date: March 14, 2006                           By: /s/ Wayne N. Pham
                                               ----------------------------
                                               Wayne N. Pham
                                               Vice President of Finance and
                                               Controller
                                               (Principal Accounting Officer)


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

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


<TABLE>
<CAPTION>

Signature                            Title                                  Date
---------                            -----                                  ----

<S>                                 <C>                                    <C>
/s/  Carl E. Berg
-------------------------------      Chairman of the Board, Chief
Carl E. Berg                         Executive Officer and Director         March 14, 2006


/s/  John C. Bolger
-------------------------------
John C. Bolger                       Director                               March 14, 2006


/s/  William A. Hasler
-------------------------------
William A. Hasler                    Director                               March 14, 2006


/s/  Lawrence B. Helzel
-------------------------------
Lawrence B. Helzel                   Director                               March 14, 2006


/s/  Raymond V. Marino
-------------------------------      President, Chief Operating Officer
Raymond V. Marino                    and Director                           March 14, 2006
</TABLE>

                                     - 83 -

<PAGE>


Exhibits required by Item 601 of Regulation S-K.

<TABLE>
<CAPTION>
                                  EXHIBIT INDEX

<C>               <C>
3.2.1              Articles of Amendment and Restatement of Mission West Properties, Inc.(1)
3.2.2              Restated Bylaws of Mission West Properties, Inc.(1)
10.1.1             Amended and Restated Agreement of Limited Partnership of Mission West Properties, L.P.(2a)
10.1.2             Amended and Restated Agreement of Limited Partnership of Mission West Properties, L.P. I(2a)
10.1.3             Amended and Restated Agreement of Limited Partnership of Mission West Properties, L.P. II(2a)
10.1.4             Amended and Restated Agreement of Limited Partnership of Mission West Properties, L.P. III(2a)
10.2               Exchange Rights Agreement between Mission West Properties and the Limited Partners(2a)
10.3.1             1997 Stock Option Plan(3)
10.3.2             Form of Incentive Stock Option Agreement(1)
10.3.3             Form of Non-statutory Stock Option Agreement(1)
10.3.4             Form of Directors Stock Option Agreement(1)
10.4.1             Acquisition Agreement, dated as of May 14, 1998, among Mission West Properties, certain partnerships
                   and the Berg Group (as defined therein)(1)
10.4.2             Amendment of Acquisition Agreement, dated as of July 1, 1998(1)
10.4.3             Form of Partnership Interest Purchase Demand Note (1)
10.5.1             Stock Purchase Agreement dated as of May 4, 1998, between Mission West Properties and the purchasers
                   of Common Stock in a private placement of 5,800,000 shares and Subscription Agreement relating to same(1)
10.5.2             Stock Purchase Agreement dated as of May 4, 1998 between Mission West Properties and the purchasers
                   of Common Stock in a private placement of 695,058 shares and Subscription Agreement relating to same(1)
10.5.3             Form of Registration Rights Agreement for purchasers, who acquired shares of Common Stock under the
                   May 4, 1998 Stock Purchase Agreements (2b)
10.6               Pending Projects Acquisition Agreement among Mission West Properties, the Operating Partnership and the
                   Berg Group(2a)
10.7               Berg Land Holdings Option Agreement between Mission West Properties and certain members of the Berg Group(2a)
10.8               Berg & Berg Enterprises, Inc. Sublease Agreement(1)
10.9               Not in use
10.10              Not in use
10.11              Not in use
10.12              Lease Agreement with Apple Computer, Inc.(4a)
10.13              Lease Agreement with Cisco Systems, Inc,(4b)
10.14              Lease Agreement with Amdahl Corporation(4c)
10.15              Prudential Promissory Note(5)
10.16              Prudential Deed of Trust(5)
10.17              Prudential Certificate Regarding Distribution(5)
10.18              Prudential Guaranty(5)
10.19              Waiver Agreement(6)
10.20              Ownership Limit Exemption Agreement dated December 29, 1998 between Mission West Properties and Dan and
                   Paul McCarthy(7)
10.21              Lease Agreement with Microsoft Corporation, dated July 25, 1998(8)
10.21.1            Lease Agreement with Microsoft Corporation, dated December 23, 2004(8a)
10.22              Contribution Agreement(8)
10.23              Assumption Agreement for Wells Fargo Line of Credit(9)
10.24              Not in use
10.25              Not in use
10.26              Supplemental Agreement among Mission West Properties, Inc., Carl E. Berg and Clyde J. Berg(9)
10.27              Berg Group Revolving Credit - $100,000,000 Secured Promissory Note(10)
10.27.1            Third Amendment to Berg Group $100,000,000 Revolving Line of Credit(11)
10.28              Berg Group Deed of Trust Securing Revolving Promissory Note(12)
10.29              Cupertino National Bank Revolving Credit Loan Agreement(13)
10.29.1            Cupertino National Bank Revolving Credit Loan Agreement Change in Terms Agreement(14)
10.29.2            Cupertino National Bank Revolving Credit Loan Agreement Change in Terms Agreement
10.29.3            Cupertino National Bank Revolving Credit Loan Agreement Change in Terms Agreement
</TABLE>

                                     - 84 -
<PAGE>


<TABLE>
<CAPTION>
<C>               <C>
10.30              Mission West Properties, LP Continuing Guaranty(13)
10.31              Mission West Properties, LP II Continuing Guaranty(13)
10.32              Mission West Properties, L.P. Promissory Note to Northwestern Mutual Life Insurance Company(13)
10.33              Mission West Properties, L.P. I Promissory Note to Northwestern Mutual Life Insurance Company(13)
10.34              Mission West Properties, L.P. II Promissory Note to Northwestern Mutual Life Insurance Company(13)
10.35              Mission West Properties, L.P. Deed of Trust and Security Agreement (First Priority) (13)
10.36              Mission West Properties, L.P. Deed of Trust and Security Agreement (Second Priority) (13)
10.37              Mission West Properties, L.P. I Deed of Trust and Security Agreement (First Priority) (13)
10.38              Mission West Properties, L.P. I Deed of Trust and Security Agreement (Second Priority) (13)
10.39              Mission West Properties, L.P. II Deed of Trust and Security Agreement (First Priority) (13)
10.40              Mission West Properties, L.P. II Deed of Trust and Security Agreement (Second Priority) (13)
10.41              Mission West Properties, L.P. Absolute Assignment of Leases and Rents (First Priority) (13)
10.42              Mission West Properties, L.P. I Absolute Assignment of Leases and Rents (First Priority) (13)
10.43              Mission West Properties, L.P. II Absolute Assignment of Leases and Rents (First Priority) (13)
10.44              Not in use
10.45              Citicorp USA, Inc.$80,000,000 Secured Promissory Note (15)
10.45.1            Citicorp USA, Inc.$80,000,000 First Amendment to Promissory Note (11)
10.45.2            Citicorp USA, Inc.$80,000,000 Second Amendment to Promissory Note (16a)
10.45.3            Citicorp USA, Inc.$80,000,000 Third Amendment to Promissory Note (16b)
10.45.4            Citicorp USA, Inc.$80,000,000 Fourth Amendment to Promissory Note (14)
10.46              2004 Equity Incentive Plan(17)
10.47              Allianz Loan Secured Installment Note(18)
10.48              Allianz Loan Deed of Trust, Security Agreement, Fixture Filing with Absolute Assignment of Rents(18)
10.49              Allianz Loan Limited Guaranty(18)
10.50              Form of Non-statutory Stock Option Agreement with Dividend Rights under 2004 Equity Incentive Plan(18)
10.51              Allianz Loan II Secured Installment Note(19)
10.52              Allianz Loan II Deed of Trust, Security Agreement, Fixture Filing with Absolute Assignment of Rents(19)
10.53              Allianz Loan II Limited Guaranty(19)
10.54              Allianz Loan II Loan Modification Agreement(19)
21.1               Subsidiaries of the Registrant (20)
23.1               Consent of Independent Registered Public Accounting Firm
24.1               Powers of Attorney (included on the signature page hereto)
31.1               Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
31.2               Certification of Chief Operating Officer pursuant to Rule 13a-14(a)
31.3               Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
32.1               Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
</TABLE>

(1)  Incorporated  herein  by  reference  to the  same-numbered  exhibit  to the
     Company's  Registration  Statement on Form S-4/A filed on July 20, 1998 and
     declared effective on November 23, 1998.
(2a) 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).
(2b) Incorporated   herein  by  reference  to  Exhibit  10.8  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).
(3)  Incorporated herein by reference to Exhibit E to the Company's Schedule 14A
     Proxy  Statement  filed with the  Securities  and  Exchange  Commission  on
     October 21, 1997.
(4a) Incorporated  herein  by  reference  to  Exhibit  10.15  to  the  Company's
     Registration  Statement  on Form S-4/A filed on June 17, 1998 and  declared
     effective on November 23, 1998.
(4b) Incorporated  herein  by  reference  to  Exhibit  10.16  to  the  Company's
     Registration  Statement  on Form S-4/A filed on June 17, 1998 and  declared
     effective on November 23, 1998.
(4c) Incorporated  herein  by  reference  to  Exhibit  10.17  to  the  Company's
     Registration  Statement  on Form S-4/A filed on June 17, 1998 and  declared
     effective on November 23, 1998.
(5)  Incorporated  herein  by  reference  to the  same-numbered  exhibit  to the
     Company's  Registration  Statement  on Form S-4/A filed on October 27, 1998
     and declared effective on November 23, 1998.
(6)  Incorporated  herein  by  reference  to the  same-numbered  exhibit  to the
     Registration  Statement  on Form  S-4/A  filed  on  November  16,  1998 and
     declared effective on November 23, 1998.

                                     - 85 -
<PAGE>

(7)  Incorporated herein by reference to the same numbered exhibit to the annual
     report on Form 10-K for 1998 filed on March 31, 1999.
(8)  Incorporated  herein by reference to the  same-numbered  exhibit to current
     report on Form 8-K filed on May 14, 1999 (Commission File No. 000-25235).
(8a) Incorporated  herein  by  reference  to the  same-numbered  exhibit  to the
     quarterly report on Form 10-Q filed on May 10, 2005.
(9)  Incorporated  herein  by  reference  to the  same-numbered  exhibit  to the
     Registration  Statement on Form S-11/A  filed on June 15, 1999  (Commission
     File No. 333-80203).
(10) Incorporated  herein  by  reference  to the  same-numbered  exhibit  to the
     quarterly report on Form 10-Q filed on November 13, 2001.
(11) Incorporated  herein  by  reference  to the  same-numbered  exhibit  to the
     quarterly report on Form 10-Q filed on August 12, 2003.
(12) Incorporated herein by reference to the same numbered exhibit to the annual
     report on Form 10-K for 1999 filed on March 30, 2000.
(13) Incorporated herein by reference to the same-numbered exhibit to the annual
     report on Form 10-K for 2002 filed on March 27, 2003.
(14) Incorporated  herein  by  reference  to the  same-numbered  exhibit  to the
     quarterly report on Form 10-Q filed on November 2, 2004.
(15) Incorporated  herein  by  reference  to the  same-numbered  exhibit  to the
     quarterly report on Form 10-Q filed on May 15, 2003.
(16a)Incorporated  herein by reference to Exhibit  10.45.1  to the annual report
     on Form 10-K for 2003 filed on July 30, 2004.
(16b)Incorporated  herein by reference to Exhibit  10.45.2  to the annual report
     on Form 10-K for 2003 filed on July 30, 2004.
(17) Incorporated  herein by reference to Appendix II to the Company's  Schedule
     14A Proxy  Statement  filed with the Securities and Exchange  Commission on
     October 22, 2004.
(18) Incorporated  herein  by  reference  to the  same-numbered  exhibit  to the
     quarterly report on Form 10-Q filed on May 10, 2005.
(19) Incorporated  herein  by  reference  to the  same-numbered  exhibit  to the
     quarterly report on Form 10-Q filed on August 9, 2005.
(20) Incorporated herein by reference to the same-numbered exhibit to the annual
     report on Form 10-K for 1998 filed on March 31, 1999.

                                     - 86 -