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, 2006

                                       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                     American Stock Exchange
   value per share

        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. [X]

     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, 2006, the aggregate market value of the Registrant's  common
stock held by  non-affiliates  of the registrant was  $214,311,432  based on the
closing price as reported on the American Stock Exchange.

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

                Class                           Outstanding at February 28, 2007
---------------------------------------         --------------------------------
Common Stock, $.001 par value per share                  19,625,587 shares

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's  proxy statement to be delivered to stockholders in
connection with the Registrant's  2007 Annual Meeting of Stockholders to be held
on May 17, 2007 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 Item 1A, "Risk Factors").

                                     - i -
<PAGE>


                          MISSION WEST PROPERTIES, INC.
                          2006 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                                                                          24
Item 7.           Management's Discussion and Analysis of Financial Condition and Results of Operations            26
Item 7A.          Quantitative and Qualitative Disclosures about Market Risk                                       41
Item 8.           Financial Statements and Supplementary Data                                                      42
Item 9.           Changes in and Disagreements with Accountants on Accounting and Financial Disclosure             81
Item 9A.          Controls and Procedures                                                                          81
Item 9B.          Other Information                                                                                81

                                                          PART III

Item 10.          Directors, Executive Officers and Corporate Governance                                           82
Item 11.          Executive Compensation                                                                           82
Item 12.          Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
                  Matters                                                                                          82
Item 13.          Certain Relationships and Related Transactions, and Director Independence                        82
Item 14.          Principal Accountant Fees and Services                                                           82

                                                           PART IV

Item 15.          Exhibits and Financial Statement Schedules                                                       83
                  Signatures                                                                                       84
                  Rule 13a-14(a) Certifications                                                                    90
                  Section 1350 Certifications                                                                      93
</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, 2006,
we owned and managed 107 properties totaling  approximately 7.7 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 four  tenants  who  individually  lease in excess of  300,000
rentable square feet from us: Microsoft Corporation,  Apple Computer,  Inc., 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  3,177,000 additional rentable square feet
of R&D properties from the Berg Group under these agreements.

Our executive offices are located at 10050 Bandley Drive, Cupertino,  California
95014,  and our telephone  number is (408)  725-0700.  Our website is located at
http://www.missionwest.com.  On our website, you can access, free of charge, our
annual reports on Form 10-K,  quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished  pursuant to Section
13(a) or 15(d) of the Exchange Act of 1934,  as amended,  as soon as  reasonably
practicable after such material is  electronically  filed with, or furnished to,
the Securities and Exchange  Commission (the "SEC").  A copy of these filings is
available to all interested parties upon written request to "Investor Relations"
at our corporate offices.

We file  annual,  quarterly  and special  reports,  proxy  statements  and other
information  with the SEC.  You may read and copy any  document we file with the
SEC at the SEC's Public Reference Room at 100 F Street, N.W.,  Washington,  D.C.
20549.  You may  obtain  information  about the  operation  of the SEC's  Public
Reference  Room by calling the SEC at  1-800-SEC-0330.  The SEC also maintains a
website that  contains  reports,  proxy and  information  statements,  and other
information   regarding  registrants  that  file  electronically  with  the  SEC
(http://www.sec.gov).

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.

                                     - 1 -

<PAGE>


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;
-    vote on major  transactions,  subject to maintenance  of certain  ownership
     thresholds; 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 84 additional acres
of  land   currently   controlled  by  the  Berg  Group,   which  could  support
approximately 1.4 million square feet of new development.  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  agreement  and  would  remain  eligible  for  potential   future
acquisition by the Company 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  disclosed its
intention to develop "for sale"  industrial  type buildings and 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.  The  Independent  Directors
Committee's  approval also included a requirement  that 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 agreement  and would remain  eligible
for  potential  future  acquisition  by the Company under the Berg Land Holdings
Option Agreement.  In the third quarter of 2006, the Berg Group informed us that
the prospective  purchaser withdrew its offer, and therefore,  this land remains
subject to 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. The
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,  2006,  we had  acquired 21 leased R&D  properties  totaling
approximately  2,034,000  rentable square feet under this agreement at a cost of
approximately  $207.8  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.

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.

                                     - 3 -

<PAGE>


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                               30                      490,000
Morgan Hill (1)                                18                      288,000
King Ranch                                     12                      207,000
Fremont & Cushing                              24                      387,000
                                    ----------------------- -----------------------------
              Total                            84                    1,372,000
                                    ======================= =============================
</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,  subject to approval
by the  Independent  Directors  Committee,  there  can be no  assurance  that we
actually will consummate any additional 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 and current excess capacity in the Silicon Valley real estate
market for R&D/office properties, we do not expect to maintain historical levels
of growth from acquisitions of new developments in the near 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.  For example,  in April 2003,  we acquired a 36-acre  seven  building R&D
property campus consisting of approximately  625,000 rentable square feet in the
San Tomas Technology Park for $110 million.

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 on this basis 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 (79 total) 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.

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 2006 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  (the "BT  Report"),  vacancy  rates  for  Silicon  Valley  R&D  property
decreased  from  approximately  19.6% in late  2005 to 18.3% at the end of 2006.
Total  vacant  R&D square  footage  in  Silicon  Valley at the end of the fourth
quarter of 2006 amounted to 21.9 million  rentable  square feet, of which 28.3%,
or 6.2 million  rentable  square feet, was sublease  space.

                                     - 4 -
<PAGE>

According  to the  BT  Report,  total  positive  net  absorption  (which  is the
computation of gross square footage leased less gross new square footage vacated
for the period presented) in 2005 amounted to approximately 3.6 million rentable
square  feet,  and  in  2006,   there  was  total  positive  net  absorption  of
approximately  1.9 million  rentable  square feet as local  economic  conditions
improved. According to the BT Report, average asking market rent per square foot
was $0.99  and  $0.88 at  year-end  for 2006 and  2005,  respectively,  although
individual  properties within any particular  submarket  presently may be leased
above or below the  current  average  asking  market  rental  rates  within that
submarket. Moreover, the impact of vacancies has not been uniform throughout the
area. 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,  leasing activity for new  build-to-suit and vacated R&D properties
has slowed  considerably during the past several years. 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, 2006 and 2005,  occupancy for leased properties
in our portfolio was 69.5% and 68.9%, respectively.

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 tends to 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 2007 renewal rental rates for our properties will be
approximately  equal  to,  or  perhaps,   below  current  market  rents.  Leases
representing  approximately 742,000 rentable square feet, or 9% of our 2007 cash
rent,  are  scheduled  to  expire  during  2007.  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, but all contracts with
the Berg Group are subject to review and approval by the  Independent  Directors
Committee.

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 -

-    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.

                                     - 5 -
<PAGE>

-    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:

-    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.

                                     - 6 -
<PAGE>

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 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 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  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,  subject to limitations  and  restrictions  contained in the Exchange
Rights Agreement. In April 2006, we registered up to 86,088,095 shares of common
stock issuable on exchange of O.P.  Units for resale  pursuant to the prospectus
included in a registration statement on Form S-3 that the SEC declared effective
on April 28, 2006. We intend to maintain the  effectiveness of this registration
statement in order to facilitate  re-sales of shares of common stock acquired by
O.P. Unit holders from time to time without  volume  limitations or other resale
restrictions under SEC Rule 144.

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.

                                     - 7 -
<PAGE>

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,  2007,  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% of the
equity interests in the operating  partnerships and  approximately  73.8% 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:

-    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

                                     - 9 -
<PAGE>

-    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.

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 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
Many of our  properties  have  unrealized  taxable  gain,  and 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 one of the operating partnerships as
of December 31, 2006,  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

                                     - 10 -
<PAGE>

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
We are  liable  under a  mortgage  loan of $9.7  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. On October 26, 2005, the Independent Directors Committee 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,  but we might obtain a line of
credit from the Berg Group in the future. 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."

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
WONERSHIP 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

                                     - 11 -
<PAGE>

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 also are 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  after a number of  successive
years of rapid growth that resulted in excess capacity for R&D properties in the
Silicon  Valley.  At  present,  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.  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

                                     - 12 -
<PAGE>

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 Item 8, "Financial  Statements and  Supplementary
Data - Note 17."  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, 2006 and 2005,  management believed it had 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 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 net 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.

                                     - 13 -

<PAGE>

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

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

OUR PROPERTIES COULD BE SUBJECT TO PROPERTY TAX REASSESSMENTS.

We do not believe that 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, 2006, 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

                                     - 14 -
<PAGE>

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.  In addition,  pursuant to a  registration
statement on Form S-3 declared effective by the SEC in April 2006, all shares of
common stock acquired upon exchange of currently  outstanding  O.P. Units may be
resold without any such restrictions. 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 month-to-month 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, 2006:


<TABLE>
<CAPTION>
                                                                                                          Major
                                                                                                         Tenants'
                                          Total     Percentage                                           Rentable
                              No. of    Rentable  Occupied as of  Average 2006                          Sq. Ft. at      2006 Annual
Location                    Properties   Sq. Ft.   Dec. 31, 2006   Occupancy   Major Tenants             12/31/06      Base Rents(1)
------------------------------------------------------------------------------------------------------------------------------------
<C>                             <C>     <C>           <C>          <C>        <C>                        <C>           <C>
5300-5350 Hellyer Avenue (2)     2       160,000       100%         100%       Tyco Electronics Corp.     160,000       $3,623,609

10401-10411 Bubb Road (2)        1        20,330       100%         100%       Aeroflex, Inc.              15,830          213,705

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

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

45738 Northport Loop West        1        44,256       100%         100%       Quicksil, Inc.              44,256          398,304

4050 Starboard Drive             1        52,232       100%         100%       Flash Electronics, Inc.     52,232          790,796

3501 W. Warren Avenue &          1        67,864        52%          52%       ASM Nutool, Inc.            35,340          716,043
46600 Fremont Blvd.

48800 Milmont Drive              1        53,000         0%           0%       Vacant                           -                -

4750 Patrick Henry Drive         1        63,105       100%          50%       Infoblox, Inc.              63,105          205,091
</TABLE>

                                     - 16 -
<PAGE>
<TABLE>
<CAPTION>

                                                                                                          Major
                                                                                                         Tenants'
                                          Total     Percentage                                           Rentable
                              No. of    Rentable  Occupied as of  Average 2006                          Sq. Ft. at      2006 Annual
Location                    Properties   Sq. Ft.   Dec. 31, 2006   Occupancy   Major Tenants             12/31/06      Base Rents(1)
------------------------------------------------------------------------------------------------------------------------------------
<C>                             <C>     <C>           <C>          <C>        <C>                        <C>           <C>
Triangle Technology Park (2)     7       416,927        74%          63%       Intevac Corporation        129,583        5,283,616
                                                                               Xicom Technology, Inc.      72,336
                                                                               LSA Cleanpart, LLC          28,300
                                                                               SASCO                       25,350
                                                                               IXYS Technologies, Inc.     19,600

5850-5870 Hellyer Avenue         1       109,715        24%          22%       MeiVac, Inc.                26,557          250,654

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

5500-5550 Hellyer Avenue         2       196,534        23%          23%       ACT Electronics, Inc.       46,120          454,282

5400 Hellyer Avenue              1        77,184        43%          43%       Nortel Networks, Inc.       32,902          316,388

5325-5345 Hellyer Ave.           2       256,500       100%         100%       Celestica Asia, Inc.       256,500        5,294,832

5905-5965 Silver Creek           4       346,000       100%         100%       Ciena Corporation          346,000        9,771,911

855 Embedded Way                 1        67,912        42%          76%       Lynuxworks, Inc.            28,612        1,094,101

1065-1105 La Avenida Street      5       515,700       100%         100%       Microsoft Corporation      515,700       11,727,818

1875 Charleston Road             1        42,126       100%         100%       Netlogic Microsystems, Inc. 42,126          626,271

1750 Automation Parkway          1        80,641       100%         100%       JDS Uniphase Corporation    80,641        1,369,764

1756 Automation Parkway          1        80,640         0%          25%       Vacant                           -          520,041

1762 Automation Parkway          1        61,100         0%          25%       Vacant                           -          599,676

1768 Automation Parkway          1       110,592        40%          31%       Becton, Dickinson and Co.   43,699          973,541

255 Caspian Drive                1       119,756       100%         100%       Equinix Operating Co., Inc.119,756        2,389,132

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

5970 Optical Court               1       128,520       100%         100%       Photon Dynamics, Inc.      128,520        1,864,236

5900 Optical Court               1       165,000       100%         100%       Stryker Endoscopy          165,000        3,389,370

2630 Orchard Parkway             1        60,633         0%           0%       Vacant                           -                -

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 Amer., Inc. 80,000          784,434

2880 Scott Boulevard             1       200,000       100%         100%       NEC Electronics Amer., Inc.200,000        3,265,512

2890 Scott Boulevard (5)         1        75,000       100%         100%       NEC Electronics Amer., Inc. 75,000        2,284,260

2770-2800 Scott Boulevard        1        99,800       100%         100%       Nvidia Corporation          99,800        1,173,154

2300 Central Expressway (5)      1        46,338       100%         100%       JDS Uniphase Corp.          46,338        3,431,983

2220 Central Expressway          1        62,522       100%          42%       Tellabs, Inc.               62,522          271,971

2330 Central Expressway          1        62,522       100%          42%       Tellabs, Inc.               62,522          271,971

233 South Hillview Drive         2        95,690       100%         100%       Sipex Corporation           95,690        1,025,425

2251 Lawson Lane                 1       125,000         0%          16%       Vacant                           -          210,795

1230 East Arques                 1        60,000       100%         100%       Fujitsu                     60,000          327,069

1250 East Arques                 4       200,000       100%         100%       Fujitsu                    200,000          869,311
</TABLE>

                                     - 17 -
<PAGE>
<TABLE>
<CAPTION>

                                                                                                          Major
                                                                                                         Tenants'
                                          Total     Percentage                                           Rentable
                              No. of    Rentable  Occupied as of  Average 2006                          Sq. Ft. at      2006 Annual
Location                    Properties   Sq. Ft.   Dec. 31, 2006   Occupancy   Major Tenants             12/31/06      Base Rents(1)
------------------------------------------------------------------------------------------------------------------------------------
<C>                             <C>     <C>           <C>          <C>        <C>                        <C>           <C>
20400 Mariani Avenue (5)         1       105,000       100%         100%       Dade Behring, Inc.          62,323        1,923,347
                                                                               Apple, Inc.                 42,677

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

20605-705 Valley Green Drive     2       142,000       100%         100%       Apple, Inc.                142,000        3,352,371

10300 Bubb Road                  1        23,400       100%         100%       Apple, Inc.                 23,400          253,422

10440 Bubb Road                  1        19,500        56%          74%       Novare Surgical Sys., Inc.  10,833          180,270

10450-10460 Bubb Road            1        45,460        27%          49%       Blue Lane Tech., Inc.       12,197          253,109

1135 Kern Avenue                 1        18,300         0%           0%       Vacant                           -                -

450 National Avenue              1        36,100         0%           0%       Vacant                           -                -

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          189,738

6810 Santa Teresa Blvd.          1        54,996        13%          13%       Silicon Valley Real Estate   7,281           74,266

140-160 Great Oaks Blvd. &       2       105,300        59%          52%       Santa Clara Water District  25,429          656,640
6781 Via Del Oro                                                               Semiconductor Tooling Serv. 36,800

6540-6541 Via Del Oro &          2        66,600        73%          71%       Modutek Corporation         21,376          372,856
6385-6387 San Ignacio Ave.

6311-6351 San Ignacio Ave.       5       362,767        37%          39%       Saint Gobain                95,953        2,512,274
                                                                               Teledex, LLC                30,000

6320-6360 San Ignacio Ave.       1       157,292        12%          26%       Quantum 3D, Inc.            19,600        1,176,292

75 East Trimble Road &           2       170,810        59%          59%       Comerica Bank               93,984        1,037,052
2610 North First Street

2033-2243 Samaritan Drive (4)    -             -         -            -        -                                -        1,827,766

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          660,858

1212 Bordeaux Lane               1        71,800       100%          50%       Loral Space & Comm.         71,800          345,468

McCandless Technology Park      14       705,958        55%          51%       Arrow Electronics, Inc.     92,862        6,003,926
                                                                               Chartered Semiconductor Mfg.45,312
                                                                               ST Assembly Test Serv., Inc.33,984
                                                                               Hermes Microvision, Inc.    25,285
                                                                               A&D Engineering, Inc.       20,332

1600 Memorex Drive               1       107,500        40%          44%       Int'l Network Services      22,800          385,560
                                                                               Aire Sheet Metal, Inc.      20,000

1688 Richard Avenue              1        52,800       100%         100%       NWE Technology, Inc.        52,800          302,840

1700 Richard Avenue              1        58,783       100%         100%       Broadwing Comm Serv., Inc.  58,783          790,627
                              -------------------                                                                     -------------
      TOTAL                    107     7,701,359        69%                                                            $93,835,748
                              ===================                                                                     =============
</TABLE>

                                     - 18 -
<PAGE>

(1)  Annual cash rents do not include the  recognition  of rental  income on the
     straight-line  method  of  accounting  required  by  accounting  principles
     generally  accepted in the United  States of America  ("GAAP")  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 2006.  It is included in this table for the sole
     purpose of presenting the annual cash rent received in 2006.
(5)  JDS  Uniphase,  NEC  Electronics  America and Dade Behring are currently in
     negotiation to terminate their lease  obligations with us for the indicated
     properties.  An additional  184,000  rentable square feet will be vacant in
     2007 if we accept these lease terminations.

We own  100%  of all of the  properties,  except:  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.

SCHEDULE OF LEASE EXPIRATIONS

The  following  table  sets forth a schedule  of the lease  expirations  for the
properties  beginning  with 2007,  assuming  that none of the  tenants  exercise
existing  renewal options or termination  rights.  The table excludes  2,395,883
rentable square feet that was vacant as of December 31, 2006.

<TABLE>
<CAPTION>
                            Number of                                                           Percentage of Total Annual
           Year of Lease    Expiring     Rentable Square Footage      2007 Annual Base Rent      Base Rent Represented By
            Expiration       Leases    Subject to Expiring Leases  Under Expiring Leases (1)(3)     Expiring Leases (2)
         --------------------------------------------------------------------------------------------------------------------
<S>           <C>             <C>               <C>                      <C>                               <C>
               2007            24                742,078                  $8,268,614                         9.4%

               2008            10                230,449                   2,457,481                         2.8%

               2009            20                688,115                   9,317,772                        10.6%

               2010            11                571,460                   9,808,771                        11.2%

               2011             7                931,450                  18,891,914                        21.6%

               2012            11                881,817                  13,975,589                        15.9%

               2013             1                125,044                   1,336,720                         1.5%

               2014             3                709,000                  16,065,850                        18.3%

               2015             3                277,568                   4,902,225                         5.6%

               2017             1                 28,739                     232,785                         0.3%

            Thereafter          1                119,756                   2,460,986                         2.8%
                           --------------------------------------------------------------------------------------------------

                               92              5,305,476                 $87,718,707                        100%
                           ==================================================================================================
</TABLE>

(1)  The base rent for  expiring  leases is based on 2007  scheduled  cash rent,
     which is different than annual rent determined in accordance with GAAP.
(2)  Based upon 2007 cash rent as discussed in Note (1).
(3)  JDS  Uniphase,  NEC  Electronics  America and Dade Behring are currently in
     negotiation to terminate  certain lease  obligations with us. An additional
     184,000  rentable  square  feet will be  vacant in 2007 if we accept  these
     lease terminations.

If we are unable to lease a significant  portion of the available space or space
scheduled to expire in 2007 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.

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

                                     - 19 -
<PAGE>

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. On November 20, 2000, RPC commenced a lawsuit against MWP in the
Circuit Court of Maryland for Baltimore City.  After lengthy  litigation,  which
included a trial on the merits and subsequent  appears, in April 2006 Maryland's
highest Court upheld an earlier  Maryland  Appeals Court ruling in favor of MWP,
finding  that  the  Circuit  Court  of  Maryland   could  not  assert   personal
jurisdiction  over MWP in the RPC  suit.  The Court  vacated  the  judgment  and
decision in the trial court and dismissed the entire  Maryland suit (see Item 8,
"Financial  Statements and  Supplementary  Data - Note 13" for information about
the  Hellyer  Avenue  Limited   Partnership  and  the  historical   transactions
underlying this litigation).

MISSION WEST PROPERTIES,  L.P. V. REPUBLIC PROPERTIES CORPORATION,  ET AL. SANTA
CLARA COUNTY SUPERIOR  COURT,  CASE NO. CV 796249.  In February 2001,  while the
Maryland case was pending,  we filed a suit against RPC in the Superior Court of
the State of California for the County of Santa Clara,  Case No. CV 796249.  The
case was stayed  pending  resolution of the Maryland  case, and we dismissed our
suit on March 4, 2005. In April 2005, RPC submitted a motion asking the Superior
Court to reinstate the case, which the Court granted on May 25, 2005. On July 5,
2006, RPC filed a cross-complaint in the case seeking partnership  distributions
to which we demurred.  The Court  sustained  our  demurrer  with leave to amend.
Subsequently,  RPC filed an amended complaint, and we submitted another demurrer
seeking dismissal of the claims on statute of limitations  grounds.  On February
20, 2007, the Court  overruled our demurrer.  We are in the process of seeking a
writ from the California State Court of Appeal for the Sixth District  directing
the Superior Court to sustain the demurrer.

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,
as more fully explained under Item 8,  "Financial  Statements and  Supplementary
Data - Note 13."

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  avoidable  preference  payments.  During the course of
settlement discussions with Global Crossing's representative, we learned that we
would receive only 2-3% of our unsecured  claim of  $16,710,605  for unpaid rent
from the final  distribution of the assets and proceeds of bankruptcy estate. On
February  21, 2007,  we and the  Liquidating  Trustee  entered into a settlement
agreement  under which the $815,052 claim against us was dismissed and we agreed
to accept a payment of approximately $150,000 as a final settlement of our claim
for unpaid rent.

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, 2006.

                                     - 21 -



<PAGE>

PART II

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

HISTORICAL PERFORMANCE COMPARISON

The following graph compares the change in the Company's cumulative  stockholder
return on its  shares  of common  stock to the  cumulative  total  return of the
NAREIT Equity REIT Total Return Index ("NAREIT Equity Index") and the Standard &
Poor's 500 Stock Index ("S&P 500 Index") from  December 31, 2001 to December 31,
2006. The line graph starts  December 31, 2001. The graph assumes that the value
of the  investment in the  Company's  common stock was $100 at December 31, 2001
and that all dividends were reinvested. The common stock's price on December 31,
2001 was $12.72.  The Company  obtained the information  about the NAREIT Equity
Index and S&P 500 Index from each entity respectively,  and has assumed that the
information is reliable, but cannot assume its accuracy.


                                [OBJECT OMITTED]]

        The stock price performance shown in the graph is not necessarily
         indicative of future performance of the Company's common stock.


Our common stock is listed on the American  Stock  Exchange  ("AMEX") and trades
under the symbol "MSW." The high and low closing price per share of common stock
as reported on AMEX during each quarter of 2006 and 2005 were as follows:

<TABLE>
<CAPTION>
                                                     2006                              2005
                                         -----------------------------     -----------------------------
                                             High            Low               High            Low
                                         -------------   -------------     -------------   -------------
<S>            <C>                         <C>             <C>               <C>             <C>
                1st Quarter                 $11.90          $9.68             $11.19          $10.04
                2nd Quarter                 $11.90          $10.70            $10.53          $9.50
                3rd Quarter                 $11.62          $10.18            $11.00          $10.02
                4th Quarter                 $13.10          $11.31            $10.26          $9.71
</TABLE>

                                     - 22 -

<PAGE>


On February 28, 2007, there were 184 registered  holders of the Company's common
stock.  We declared  and paid  dividends  in each  quarter of 2006 and 2005.  We
expect to pay  quarterly  dividends  during  2007.  The  following  tables  show
information for quarterly dividends for 2006 and 2005.

<TABLE>
<CAPTION>
                                                              2006
                                         -----------------------------------------------
                                                           Payment            Dividend
                                          Record Date        Date            Per Share
                                         -------------   -------------     -------------
<S>            <C>                        <C>             <C>               <C>
                1st Quarter                03/31/06        04/06/06          $0.16
                2nd Quarter                06/30/06        07/06/06           0.16
                3rd Quarter                09/29/06        10/05/06           0.16
                4th Quarter                12/29/06        01/04/07           0.16
                                                                           -------------
                   Total                                                     $0.64
                                                                           =============
</TABLE>


<TABLE>
<CAPTION>
                                                              2005
                                         -----------------------------------------------
                                                            Payment           Dividend
                                          Record Date        Date            Per Share
                                         -------------   -------------     -------------
<S>            <C>                        <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>

The declaration and payment of dividends and  distributions  will continue to be
determined  by the Board of  Directors  in light of  conditions  then  existing,
including the Company's earnings,  financial  condition,  capital  requirements,
debt service requirements and other factors.

For federal  income tax purposes,  we have  characterized  100% of the dividends
declared  in 2006 as taxable  ordinary  income  (unaudited).  For 2005,  we have
characterized  89% of the dividends  declared as taxable ordinary income and 11%
as return of capital (unaudited).

The closing price of our common stock on December 29, 2006, the last trading day
of the year, was $13.10 per share.

                                     - 23 -

<PAGE>


ITEM 6.   SELECTED FINANCIAL DATA

The following  table sets forth selected  historical  financial  information for
Mission West Properties, Inc. (see 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  Item  8,   "Financial   Statements   and
Supplementary Data") and is as follows:

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                        --------------------------------------------------------------------------
                                                            2006           2005           2004            2003           2002
                                                        -------------  -------------  --------------  -------------  -------------
                                                                    (dollars in thousands, except per share data)
    OPERATING INFORMATION: (1)
    Revenue:
<S>                                                       <C>            <C>           <C>             <C>            <C>
        Rental revenue from real estate                    $90,110        $97,735       $115,815        $125,757       $124,189
        Tenant reimbursements                               13,116         14,115         14,192          17,783         19,104
        Other income                                        20,602          4,591          6,862           4,506          4,232
                                                         -------------  -------------  --------------  -------------  -------------
    Total revenues                                         123,828        116,441        136,869         148,046        147,525

    Expenses:
       Property operating, maintenance and real
          estate taxes                                      18,654         18,759         19,111          19,832         22,378
       Interest                                             20,709         21,295         17,581          16,446          9,588
       Interest (related parties)                              755            972          1,077           1,064          3,422
       General and administrative                            2,248          1,910          2,011           1,324          1,488
       Depreciation and amortization of real estate         21,803         20,553         20,827          19,521         17,058
                                                         -------------  -------------  --------------  -------------  -------------
    Total expenses                                          64,169         63,489         60,607          58,187         53,934
                                                         -------------  -------------  --------------  -------------  -------------

    Income before equity in earnings of unconsolidated joint
       venture and minority interests                       59,659         52,952         76,262          89,859         93,591
       Equity in earnings of unconsolidated joint venture    1,985            724          2,947           3,885              -
       Minority interests                                  (50,150)       (44,353)       (65,810)        (78,117)       (78,196)
                                                         -------------  -------------  --------------  -------------  -------------
       Income from continuing operations                    11,494          9,323         13,399          15,627         15,395

    Discontinued operations, net of minority interests:
       Gain from disposal of discontinued operations         2,935            445              -               -          1,018
       Income/(loss) attributable to discontinued
          operations (2)                                       201            259            (87)            585            702
                                                         -------------  -------------  --------------  -------------  -------------
            Income/(loss) from discontinued operations       3,136            704            (87)            585          1,720
                                                         -------------  -------------  --------------  -------------  -------------
    Net income to common stockholders                      $14,630        $10,027        $13,312         $16,212        $17,115
                                                         =============  =============  ==============  =============  =============
    Net income to minority interests                       $66,358        $47,524        $66,100         $80,836        $86,641
                                                         =============  =============  ==============  =============  =============

    Basic net income from continuing operations per share    $0.60          $0.51          $0.74           $0.88          $0.88
    Diluted net income from continuing operations per share  $0.60          $0.51          $0.74           $0.88          $0.86

    Basic net income from discontinued operations per share  $0.17          $0.04             -            $0.03          $0.10
    Diluted net income from discontinued operations per share$0.16          $0.04             -            $0.03          $0.10

    Basic net income per share                               $0.77          $0.55          $0.74           $0.91          $0.98
    Diluted net income per share                             $0.76          $0.55          $0.74           $0.91          $0.96
    Dividends per share                                      $0.64          $0.64          $0.88           $0.96          $0.96

    PROPERTY AND OTHER INFORMATION:
    Total properties, end of period (3)                       107            107            109             109            101
    Total rentable square feet, end of period  (000's)      7,701          7,780          7,917           7,917          7,164
    Average monthly rental revenue per square foot (4)      $1.57          $1.58          $1.80           $1.77          $1.71
    Occupancy for leased properties, end of period            69%            69%            71%             77%            84%

    Funds from operations (5):                            $86,585        $79,152       $103,320        $117,918       $118,444

    CASH FLOW INFORMATION:
    Cash flows provided by operating activities           $27,012        $21,898        $38,970         $36,104        $34,452
    Cash flows used in investing activities               ($5,369)       ($2,875)       ($1,519)      ($109,983)      ($20,744)
    Cash flows (used in)/provided by financing activities($19,299)       $10,899       ($40,061)        $73,529       ($14,539)
</TABLE>

                                     - 24 -
<PAGE>

<TABLE>
<CAPTION>
                                                                                    December 31,
                                                      --------------------------------------------------------------------------
                                                          2006            2005           2004            2003          2002
                                                      -------------  -------------  --------------  -------------  -------------
                                                                               (dollars in thousands)
       BALANCE SHEET INFORMATION:
<S>                                                  <C>            <C>            <C>             <C>            <C>
       Real estate assets, net of accumulated depr.
          & amort.                                      $898,889       $927,381       $960,863        $985,751       $886,122
       Total assets                                   $1,027,487     $1,023,377     $1,005,656      $1,032,632       $926,783
       Line of credit - related parties                        -              -         $9,560          $6,320        $58,792
       Revolving line of credit                                -              -        $24,208         $23,965        $23,839
       Loan payable                                            -              -              -               -        $20,000
       Mortgage notes payable                           $348,101       $357,481       $292,822        $299,858       $125,062
       Mortgage notes payable - related parties           $9,654        $10,051        $10,420         $10,762        $11,078
       Total liabilities                                $397,327       $407,680       $380,355        $394,324       $289,817
       Minority interests                               $501,282       $500,682       $512,089        $524,918       $526,580
       Stockholders' equity                             $128,878       $115,015       $113,212        $113,390       $110,386
       Common stock outstanding                       19,443,587     18,448,791     18,097,191      17,894,691     17,487,329
       O.P. Units issued and outstanding              85,206,199     86,088,095     86,384,695      86,398,064     86,474,032
</TABLE>

(1)  Certain  reclassifications  have been made to prior period amounts in order
     to conform to current period presentation.
(2)  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.
(3)  As of December  31,  2006,  2005,  2004,  2003 and 2002,  total  properties
     include a property at 245 Caspian in  Sunnyvale  with no  building.  During
     2001,  we  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.
(4)  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.
(5)  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 for the inclusion of the
     amortization  of leasing  commissions in depreciation  and  amortization of
     real estate in order to be comparable to our 2006,  2005, 2004 and 2003 FFO
     presentation  and to more closely  conform to the NAREIT's FFO  definition.
     Additionally,  our 2006,  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.

Our definition of FFO also assumes  conversion at the beginning of the period of
all  convertible  securities,  including  O.P.  Units that may be exchanged  for
shares of 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.

A reconciliation of net income to common stockholders to FFO for the years ended
December 31, 2006, 2005, 2004, 2003 and 2002 follows:

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                         ------------------------------------------------------------------------
                                                             2006          2005           2004          2003           2002
                                                         ------------- -------------- ------------- -------------- --------------
                                                                       (dollars in thousands, except per share data)
<S>                                                        <C>            <C>           <C>            <C>           <C>
     Net income to common stockholders                          $14,630        $10,027       $13,312        $16,212        $17,115
     Add:
         Minority interests (1)                                  65,859         47,045        65,614         80,256         86,053
         Depreciation and amortization of real estate(2)         24,636         24,286        24,394         22,850         21,379
     Less:
         Gain on sales of assets or joint venture assets        (18,540)        (2,206)            -         (1,400)        (6,103)
                                                           ------------- -------------- ------------- -------------- --------------
     FFO                                                        $86,585        $79,152      $103,320       $117,918       $118,444
                                                           ============= ============== ============= ============== ==============

     Weighted average common shares & O.P. Units - diluted  104,809,155    104,545,776   104,521,271    104,279,165    104,189,440
     FFO per common share & O.P. Unit - diluted                   $0.83          $0.76         $0.99          $1.13          $1.14
</TABLE>

(1)  The minority interest for third parties totaling $499, $479, $486, $581 and
     $587 in 2006,  2005, 2004, 2003 and 2002,  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 $849, $984, $874 and $874 in
     2006,  2005,  2004 and 2003,  respectively,  and  amortization  of  leasing
     commissions  totaling $1,513,  $1,703,  $1,644,  $1,203 and $3,020 in 2006,
     2005,   2004,  2003  and  2002,   respectively.   Amortization  of  leasing
     commissions  is included in the property  operating,  maintenance  and real
     estate  taxes  line  item in our  consolidated  statements  of  operations.
     (dollars in thousands)

                                     - 25 -
<PAGE>

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

THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS,  INCLUDING BUT NOT
LIMITED  TO  STATEMENTS  WITH  RESPECT  TO  THE  FUTURE  FINANCIAL  PERFORMANCE,
OPERATING RESULTS, PLANS AND OBJECTIVES OF MISSION WEST PROPERTIES,  INC. ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY  ANTICIPATED DEPENDING UPON A
VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED IN PART I - ITEM 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,  2006,  we owned an  18.23%  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  4.3  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 $649 million. We issued a total of 27,962,025
O.P. Units and assumed debt totaling approximately $308 million to acquire them.

Since 1998, we have sold a total of  approximately  0.9 million  rentable square
feet  of  R&D  buildings.   The  total  sales  price  of  these  properties  was
approximately $128 million.

Almost all of our earnings and cash flow is derived from rental revenue received
pursuant  to leased R&D space at our  properties.  Key  factors  that affect our
business and financial results include the following:

-    the general economic climate;
-    the occupancy rates of the properties;
-    rental rates on new and renewed leases;
-    tenant improvement and leasing costs incurred to obtain and retain tenants;
-    the extent of early lease terminations;
-    operating expenses;
-    cost of capital; and
-    the extent of acquisitions and sales of real estate.

Any  negative  effects  of the  above  key  factors  could  potentially  cause a
deterioration in our revenue and/or earnings.

                                     - 26 -

<PAGE>

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  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  17 - Real  Estate  Asset  Held  for  Sale  and  Discontinued
Operations  under Item 8,  "Financial  Statements  and  Supplementary  Data," 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.

                                     - 27 -

<PAGE>


CONSOLIDATION OF 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 we do not exercise significant control over major operating
and  financial  decisions.  We account  for the joint  venture  using the equity
method of accounting.

CONSOLIDATION OF VARIABLE INTEREST ENTITIES
We consolidate all variable  interest  entities ("VIE") in which we deemed to be
the primary  beneficiary in accordance with FASB Interpretation 46R ("FIN 46R"),
a revision to FIN 46,  "Consolidation  of  Variable  Interest  Entities".  As of
December 31, 2006,  we  consolidated  one VIE in the  accompanying  consolidated
financial  statements in connection with an assignment of a lease agreement with
an unrelated party,  M&M Real Estate Control &  Restructuring,  LLC (see Item 8,
"Financial Statements and Supplementary Data - Note 7" for further discussion of
this transaction).

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 regard 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.

                                     - 28 -

<PAGE>

RESULTS OF OPERATIONS

COMPARISON  OF THE YEAR ENDED  DECEMBER 31, 2006 TO THE YEAR ENDED  DECEMBER 31,
2005

RENTAL REVENUE FROM CONTINUING PROPERTY OPERATIONS
As of December  31,  2006 and 2005,  through our  controlling  interests  in the
operating  partnerships,  we owned 107 R&D properties totaling approximately 7.7
and 7.8 million  rentable  square feet,  respectively.  We sold three vacant R&D
properties and acquired three leased R&D properties during 2006.

The  following  table  depicts the  amounts of rental  revenue  from  continuing
operations  for the years ended  December 31, 2006 and 2005  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.

<TABLE>
<CAPTION>
                                          Year Ended December 31,
                                     ----------------------------------
                                         2006                2005             $ Change            % Change
                                     --------------     ---------------     --------------     ---------------
                                                    (dollars in thousands)
<S>                                    <C>                 <C>               <C>                  <C>
    Same Property (1)                   $88,338             $97,735           ($9,397)              (9.6%)
    2006 Acquisitions (2)                 1,772                   -             1,772              100.0%
                                     --------------     ---------------     --------------
         Total                          $90,110             $97,735           ($7,625)              (7.8%)
                                     ==============     ===============     ==============
</TABLE>

(1)  "Same Property" is defined as properties  owned by us prior to 2005 that we
     still owned as of December 31, 2006.
(2)  Operating  rental  revenue for 2006  Acquisitions  do not reflect a full 12
     months of  operations  in 2006 because  these  properties  were acquired at
     various times during the year.

For the year ended  December  31,  2006,  our rental  revenue  from real  estate
decreased by ($7.6)  million,  or (7.8%).  Pursuant to SFAS 141, $1.9 million of
amortization  expense with  respect to  above-market  leases was offset  against
rental  revenue from real estate for the years ended December 31, 2006 and 2005.
The ($7.6)  million  decrease in rental  revenue  resulted from current  adverse
market conditions as "Same Property" rents decreased, due to lease terminations,
cessation of operations and tenant relocation since December 31, 2005.

Our overall  occupancy rate for leased  properties at December 31, 2006 and 2005
was approximately 69.5% and 68.9%, respectively.  According to NAI BT Commercial
Real Estate, the leased occupancy rate for R&D property in the Silicon Valley at
December  31,  2006  was  approximately  81.7%.  Due to an  over  supply  of R&D
properties and  competition  from other  landlords in the Silicon Valley bidding
for tenants, our occupancy rate may drop further in 2007 if the 742,000 rentable
square  feet  scheduled  to expire is not  renewed 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 weaker relative  performance of certain  properties due to
their  location  and the weak  demand  in  those  submarkets.  We are  currently
negotiating with three tenants,  JDS Uniphase,  NEC Electronics America and Dade
Behring,  for early  termination  of leases on  approximately  184,000  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, 2006, we had  investments  in three R&D  buildings,  totaling
466,600   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. In July 2006, TBI-MWP sold one R&D property with
approximately  126,400 rentable square feet for approximately $8.5 million.  The
total gain on the sale was  approximately  $0.88  million of which $0.44 million
was our share. 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,  2006 and  2005,  equity  in  earnings  from the
unconsolidated  joint venture was  approximately  $2.0 million  (including  $0.4
million  relating  to a gain  from the sale of real  estate)  and $0.7  million,
respectively.  Our equity in earnings  from this  unconsolidated  joint  venture
increased primarily due to a gain on sale of one R&D property and the write-offs
of  leasing  commission  and  tenant  improvements  in 2005  for a  tenant  that
terminated its lease  agreement  which did not recur in 2006. The occupancy rate
for the properties owned by this joint venture at December 31, 2006 and 2005 was
approximately 100% and 78.7%, respectively.

OTHER INCOME FROM CONTINUING PROPERTY OPERATIONS
The  following  table  depicts  the  amounts  of other  income  from  continuing
operations for the years ended December 31, 2006 and 2005.

<TABLE>
<CAPTION>
                                               Year Ended December 31,
                                          ----------------------------------
                                              2006                2005             $ Change            % Change
                                          --------------      --------------     --------------      --------------
                                                          (dollars in thousands)
<S>                                         <C>                  <C>               <C>                  <C>
         Other income                        $20,602              $4,591            $16,011              348.7%
</TABLE>

Other income of approximately $20.6 million for the year ended December 31, 2006
included  approximately  $16.1 million from termination  fees, $2.3 million from
interest  income,  $1.1 million from management fee income,  $0.5 million from a
property tax accrual,  $0.2 million  from tenant  bankruptcy  settlements,  $0.1
million from security deposit forfeitures and $0.3 million from

                                     - 29 -
<PAGE>

miscellaneous  income.  Other income of approximately  $4.6 million for the year
ended  December 31, 2005 included  approximately  $2.4 million from  termination
fees,  $0.9  million from  management  fee income,  $0.6  million from  interest
income, $0.5 million from security deposit forfeitures, $0.1 million from tenant
bankruptcy  settlements and $0.1 million from miscellaneous income. A 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 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 ("operating expenses") from continuing operations
for the years  ended  December  31,  2006 and 2005 and the  percentage  of total
decrease  in  expenses  over the  period  that is  represented  by each group of
properties.

<TABLE>
<CAPTION>
                                          Year Ended December 31,
                                     ----------------------------------
                                         2006                2005             $ Change            % Change
                                     --------------     ---------------     --------------     ---------------
                                                    (dollars in thousands)
<S>                                    <C>                 <C>                  <C>                <C>
    Same Property (1)                   $17,802             $18,427              ($625)              (3.4%)
    2005 Acquisition (2)                    348                 332                 16                4.8%
    2006 Acquisitions (3)                   504                   -                504              100.0%
                                     --------------     ---------------     --------------
         Total                          $18,654             $18,759              ($105)              (0.6%)
                                     ==============     ===============     ==============
</TABLE>

(1)  "Same Property" is defined as properties  owned by us prior to 2005 that we
     still owned as of December 31, 2006.
(2)  Operating  expenses for 2005 Acquisition do not reflect a full 12 months of
     operations in 2005 because this property was acquired during the year.
(3)  Operating expenses for 2006 Acquisitions do not reflect a full 12 months of
     operations in 2006 because these  properties were acquired at various times
     during the year.

Operating expenses from continuing  operations  decreased by ($0.1) million,  or
(0.6%), from $18.8 million for the year ended December 31, 2005 to $18.7 million
for the year ended  December 31, 2006.  Tenant  reimbursements  from  continuing
operations  decreased by ($1.0) million,  or (7.1%),  from $14.1 million for the
year ended  December 31, 2005 to $13.1  million for the year ended  December 31,
2006.  The decrease in tenant  reimbursements  resulted  primarily  from the JDS
Uniphase lease terminations in early 2006 at three R&D properties  consisting of
approximately  252,000 rentable square feet. Total operating  expenses  exceeded
tenant  reimbursements  because of vacancies,  which reached  approximately  2.4
million rentable square feet by year-end 2006.  Certain operating  expenses such
as property  insurance,  real estate  taxes,  and other fixed  expenses  are not
recoverable  from vacant  properties.  At December 31, 2006 our vacancy rate was
31%.

General and administrative  expenses increased by approximately $0.3 million, or
17.7%,  from $1.9  million for the year ended  December 31, 2005 to $2.2 million
for the year ended December 31, 2006. The increase in general and administrative
expenses was primarily a result of stock option expensing,  as well as fees paid
in connection  with filing a registration  statement for the resale of shares of
common stock to be acquired  from time to time upon the  exchange of O.P.  Units
for stock.

The following table depicts the amounts of depreciation and amortization expense
of real estate from continuing  operations for the years ended December 31, 2006
and 2005.

<TABLE>
<CAPTION>
                                               Year Ended December 31,
                                          ----------------------------------
                                              2006                2005             $ Change            % Change
                                          --------------      --------------     --------------      --------------
                                                          (dollars in thousands)
<S>                                         <C>                 <C>                 <C>                   <C>
         Depreciation and amortization       $21,803             $20,553             $1,250                6.1%
</TABLE>


Depreciation and amortization expense of real estate from continuing  operations
increased  by $1.3  million,  or  6.1%,  primarily  due to  tenant  improvements
write-offs and higher amortization  expense for in-place leases arising from the
acquisition of three R&D properties in early 2006.

The following table depicts the amounts of interest  expense from operations for
the years ended December 31, 2006 and 2005.

<TABLE>
<CAPTION>
                                               Year Ended December 31,
                                          ----------------------------------
                                              2006                2005             $ Change            % Change
                                          --------------      --------------     --------------      --------------
                                                          (dollars in thousands)
<S>                                         <C>                 <C>                 <C>                 <C>
         Interest                            $20,709             $21,295             ($586)              (2.8%)
         Interest (related parties)              755                 972              (217)             (22.3%)
                                          --------------      --------------     --------------
              Total                          $21,464             $22,267             ($803)              (3.6%)
                                          ==============      ==============     ==============
</TABLE>

Interest expense decreased by ($0.6) million,  or (2.8%),  primarily from a cash
flow interest rate derivative loss of approximately ($0.8) million recognized in
2005 that did not recur in 2006. Interest expense (related parties) decreased by
($0.2)  million,  or (22.3%),  because we paid off the Berg Group line of credit
during 2005 and terminated it effective October 31, 2005.

                                     - 30 -

<PAGE>


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, 2006 and
2005.

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                               --------------------------------
                                                   2006              2005             $ Change          % Change
                                               -------------     --------------     -------------     -------------
                                                            (dollars in thousands)
<S>                                             <C>                <C>                <C>                <C>
         Net income to common stockholders       $14,630            $10,027            $4,603             45.9%
         Net income to minority interests         66,358             47,524            18,834             39.6%
                                               -------------     --------------     -------------
              Total                              $80,988            $57,551           $23,437             40.7%
                                               =============     ==============     =============
</TABLE>

As of December 31, 2006 and 2005,  we owned a  controlling  general  partnership
interest of 19.71%,  21.78%,  16.26% and 12.48% and 17.81%,  21.68%,  16.18% and
12.41%  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 an 18.23% and 17.50% general
partnership  interest  in the  operating  partnerships,  taken as a whole,  on a
consolidated   weighted  average  basis  as  of  December  31,  2006  and  2005,
respectively.  Net  income  to common  stockholders  in 2006  increased  by $4.6
million,  or 45.9%,  from the year  ended  December  31,  2005.  Our net  income
attributable to minority interests in 2006 increased by $18.8 million, or 39.6%,
from the year ended December 31, 2005.  The increase in net income  attributable
to common  stockholders and minority  interests is primarily due to higher lease
termination  fee income and gain from sale of real  estate.  Minority  interests
represent the limited partners'  ownership  interest of 81.77% and 82.50% in the
operating partnerships, on a weighted average basis, as of December 31, 2006 and
2005,  respectively.  The decrease in the minority interest ownership percentage
resulted  from the  exchange of O.P.  Units for common stock and the exercise of
stock  options,  the proceeds of which we applied to the purchase of  additional
general partnership interests.

INCOME FROM DISCONTINUED OPERATIONS
The following table depicts the amounts of income from  discontinued  operations
for the years ended December 31, 2006 and 2005.

<TABLE>
<CAPTION>
                                                                                      Year Ended December 31,
                                                                   --------------------------------------------------------------
                                                                               2006                              2005
                                                                   ----------------------------     -----------------------------
                                                                                     (dollars in thousands)
<S>                                                                        <C>                                <C>
     Income attributable to discontinued operations                         $19,345                            $3,874
     Minority interests in earnings attributable to discontinued
        operations                                                          (16,209)                           (3,170)
                                                                   ----------------------------     -----------------------------
          Income from discontinued operations                                $3,136                              $704
                                                                   ============================     =============================
</TABLE>

In  accordance  with  our  adoption  of SFAS  144,  in 2006  we sold  three  R&D
properties   consisting  of  approximately  235,000  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.

We recognized  total income of $19.3 million from  discontinued  operations,  of
which $3.1 million and $16.2 million were  attributable  to common  stockholders
and minority interests,  respectively, for the year ended December 31, 2006. For
the year ended December 31, 2005, we recognized  total income from  discontinued
operations  of $3.9  million.  The income to common  stockholders  and  minority
interests attributable to discontinued  operations from these properties in 2005
was approximately $0.7 million and $3.2 million, respectively.

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>
                                               Year Ended December 31,
                                          ----------------------------------
                                              2005                2004             $ Change            % Change
                                          --------------      --------------     --------------      --------------
                                                          (dollars in thousands)
<S>                                         <C>                <C>               <C>                   <C>
         Same Property                       $97,735            $115,815          ($18,080)             (15.6%)
</TABLE>


For the year ended  December  31,  2005,  our rental  revenue  from real  estate
decreased by ($18.1) 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

                                     - 31 -
<PAGE>

and 2004. The ($18.1) million  decrease in rental revenue  resulted from current
adverse market  conditions as "Same Property" rents decreased,  as our portfolio
occupancy  rate  decreased and market rental rates  decreased.  The lower rental
rate from a blend and extend lease with Microsoft, 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 for leased  properties at December 31, 2005 and 2004
was approximately 68.9% and 71.2%, 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%.  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
relative weaker  performance of certain properties due to their location and the
weak demand in those submarkets.

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>
                                               Year Ended December 31,
                                          ----------------------------------
                                              2005                2004             $ Change            % Change
                                          --------------      --------------     --------------      --------------
                                                          (dollars in thousands)
<S>                                          <C>                 <C>              <C>                  <C>
         Other income                         $4,591              $6,862           ($2,271)             (33.1%)
</TABLE>

Other income of approximately  $4.6 million for the year ended December 31, 2005
included  approximately  $2.4 million from  termination  fees, $0.9 million from
management  fee income,  $0.6 million from  interest  income,  $0.5 million from
security deposit  forfeitures,  $0.1 million from tenant bankruptcy  settlements
and $0.1 million from miscellaneous  income.  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,  $1.2
million from management fee income and $0.2 million from miscellaneous income. A
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 tenant
bankruptcy settlements to be recurring items.

EXPENSES FROM CONTINUING PROPERTY OPERATIONS
The following  table reflects the amounts of operating  expenses 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 each group of
properties.

<TABLE>
<CAPTION>
                                          Year Ended December 31,
                                     ----------------------------------
                                         2005                2004             $ Change            % Change
                                     --------------     ---------------     --------------     ---------------
                                                    (dollars in thousands)
<S>                                    <C>                 <C>                  <C>                <C>
    Same Property (1)                   $18,427             $19,111              ($684)              (3.6%)
    2005 Acquisition (2)                    332                   -                332              100.0%
                                     --------------     ---------------     --------------
         Total                          $18,759             $19,111              ($352)              (1.8%)
                                     ==============     ===============     ==============
</TABLE>

(1)  "Same Property" is defined as properties  owned by us prior to 2004 that we
     still owned as of December 31, 2005.
(2)  Operating  expenses for 2005 Acquisition do not reflect a full 12 months of
     operations in 2005 because this property was acquired during the year.

Operating  expenses for continuing  operations  decreased by ($0.4) million,  or
(1.8%), and tenant reimbursements from continuing operations decreased by ($0.1)
million, or (0.5%), 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 exceeded tenant  reimbursements  because of
vacancies,  which  reached  approximately  2.6 million  rentable  square feet by
year-end  2005.  Certain  operating  expenses such as property  insurance,  real
estate  taxes,  and  other  fixed  expenses  are  not  recoverable  from  vacant
properties. At December 31, 2005 our vacancy rate was 31.1%.

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.

                                     - 32 -
<PAGE>

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>
                                               Year Ended December 31,
                                          ----------------------------------
                                              2005                2004             $ Change            % Change
                                          --------------      --------------     --------------      --------------
                                                          (dollars in thousands)
<S>                                         <C>                 <C>                 <C>                 <C>
         Depreciation and amortization       $20,553             $20,827             ($274)              (1.3%)
</TABLE>

Depreciation and amortization expense of real estate from continuing  operations
decreased by ($0.3)  million,  or (1.3%),  primarily due to the  disposition  of
three R&D properties,  a fully amortized  in-place lease intangible asset in the
second quarter of 2005, offset by one R&D property acquisition.

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

<TABLE>
<CAPTION>
                                               Year Ended 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
terminated 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>
                                                   Year Ended December 31,
                                               --------------------------------
                                                   2005              2004             $ Change          % Change
                                               -------------     --------------     -------------     -------------
                                                            (dollars in thousands)
<S>                                             <C>                <C>              <C>                <C>
         Net income to common 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  interests  represent
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  exchange of O.P.  Units for common stock and the exercise of
stock  options,  the proceeds of which we applied to the purchase of  additional
general partner interests.

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>
                                                                                      Year Ended December 31,
                                                                   --------------------------------------------------------------
                                                                               2005                              2004
                                                                   ----------------------------     -----------------------------
                                                                                     (dollars in thousands)
<S>                                                                         <C>                                 <C>
     Income attributable to discontinued operations                          $3,874                              $203
     Minority interests in earnings attributable to discontinued
        operations                                                           (3,170)                             (290)
                                                                   ----------------------------     -----------------------------
          Total income/(loss) from discontinued operations                     $704                             ($87)
                                                                   ============================     =============================
</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. We also sold three R&D properties in 2006
consisting of approximately  235,000 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

                                     - 33 -
<PAGE>

properties  to be restated and  presented in  discontinued  operations  in prior
consolidated statements of operations. For the years ended December 31, 2005 and
2004,  income from discontinued  operations  included results of operations from
the three R&D properties sold in 2005 and the three R&D properties sold in 2006.

We  recognized  total income of $3.9 million from  discontinued  operations,  of
which $0.7 million and $3.2 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 income from  discontinued
operations  of $0.2 million.  The loss to common  stockholders  attributable  to
discontinued   operation  from  these  properties  in  2004  was   approximately
($87,000).  The  income  to  minority  interests  attributable  to  discontinued
operation from these  properties in 2004 was  approximately  ($0.3) million.  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.

CHANGES IN FINANCIAL CONDITION

YEAR ENDED DECEMBER 31, 2006
The most  significant  changes in our financial  condition in 2006 resulted from
the  acquisition  of  three  R&D  properties,   the  disposition  of  three  R&D
properties,  and the exercise of stock  options and  exchange of O.P.  Units for
shares of the Company's common stock.

During 2006, we sold three vacant R&D properties to an unrelated third party for
a total  gross  sales  price of  approximately  $43.3  million.  Those  property
dispositions  reduced  approximately  235,000 rentable square feet of space from
our property portfolio.  The proceeds were classified as restricted cash for use
in  tax-deferred  property  exchanges  and were  reflected  on our  consolidated
balance  sheet as restricted  cash at December 31, 2006 (see Item 8,  "Financial
Statements  and  Supplementary  Data - Note 6" for  further  discussion  of this
transaction). In addition to those three property dispositions, we also acquired
three R&D properties representing approximately 138,000 rentable square feet for
a total gross combined  purchase price of approximately  $16.0 million.  Two R&D
properties  were acquired in a tax-deferred  exchange  transaction and the other
one in cash.

Debt  outstanding,  including  amounts due related parties,  decreased by ($9.7)
million,  or (2.7%),  from  $367.5  million as of  December  31,  2005 to $357.8
million as of December 31, 2006 due to normal scheduled debt payments.

During the year ended December 31, 2006, stock options to purchase 80,000 shares
of the  Company's  common  stock  were  exercised  at $8.25  per share and stock
options to purchase  32,900 shares of the Company's  common stock were exercised
at $10.00 per share.  The total  proceeds to the Company of  approximately  $1.0
million increased paid-in-capital.

In 2006,  three  limited  partners  exchanged a total of 871,596 O.P.  Units for
871,596 shares of common stock resulting in a reclassification  of approximately
$10.2 million from minority interests to paid-in-capital.  In 2006, Carl E. Berg
gave 92,300 O.P.  Units to  charitable  institutions.  Only 10,300 of those O.P.
Units had been exchanged for 10,300 shares of common stock by December 31, 2006.
The remaining 82,000 O.P. Units were exchanged for 82,000 shares of common stock
in early 2007.

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, 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  consisting  of  approximately
342,000  rentable square feet to unrelated third parties for a total gross sales
price of  approximately  $27.9  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 sheet as restricted  cash at December 31, 2005. In
addition to those three property  dispositions,  we also acquired one vacant R&D
property  consisting  of  approximately  204,000  rentable  square  feet from an
unrelated third party for the purchase price of approximately $14.0 million in a
tax-deferred exchange transaction.

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 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.

                                     - 34 -
<PAGE>

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.  The total  proceeds to the Company of  approximately  $0.5
million increased paid-in-capital.

In 2005, three limited partners  exchanged 213,600 O.P. Units for 213,600 shares
of common stock resulting in a  reclassification  of approximately  $2.2 million
from minority  interests 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
common stock 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.

LIQUIDITY AND CAPITAL RESOURCES

In 2007, we anticipate  operating  cash flows from our property  portfolio to be
the same or slightly higher than in 2006. We are still  experiencing weak demand
for R&D  properties in certain areas of the Silicon Valley (mainly the south San
Jose area). If we are unable to lease a significant portion of the approximately
742,000  rentable square feet scheduled to expire in 2007 and current  available
space, our operating cash flows will be affected adversely.  In addition,  if we
conclude  agreements  for  early  lease  terminations  with  JDS  Uniphase,  NEC
Electronics  America  and Dade  Behring,  there could be an  additional  184,000
rentable  square feet of vacant space. 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.

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 Santa Clara Valley  National Bank (formerly  known
as 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 2007.  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. We have the ability to meet short-term  obligations or
other liquidity needs based on a line of credit with Santa Clara Valley National
Bank and our  existing  cash  reserves.  In 2007,  we will be  obligated to make
payments totaling  approximately  $11.0 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.

As of December 31, 2006, we were in compliance  with loan covenants  relating to
the Allianz  mortgage  loans and the Santa Clara  Valley  National  Bank line of
credit.

Cash and cash  equivalents  increased by  approximately  $2.4 million from $31.4
million as of December 31, 2005 to $33.8 million as of December 31, 2006.

Restricted  cash totaled  $48.2 million as of December 31, 2006. Of this amount,
$43.4 million represents  proceeds received from the Samaritan property sale and
earned  interest  income held in a separate  cash account at a trust company for
future use in  tax-deferred  exchanges  (see Item 8,  "Financial  Statements and
Supplementary Data - Note 6" for further  discussion of this  transaction).  The
remaining $4.8 million  represents a balance we consolidated due to our adoption
of  FIN  46R,  "Consolidation  of  Variable  Interest  Entities"  (see  Item  8,
"Financial Statements and Supplementary Data - Note 7" for further discussion of
this  transaction).  We do not possess or control these funds or have any rights
to receive  them  except as provided in the  applicable  agreements.  Therefore,
restricted cash is not available for distribution to stockholders.

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 2007. 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 2007, 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

                                     - 35 -
<PAGE>

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 4, 2007,  we paid  dividends  of $0.16 per share of common  stock to all
common  stockholders  of record as of December 29, 2006.  On the same date,  the
operating partnerships paid a distribution of $0.16 per O.P. Unit to all holders
of O.P. Units.  Aggregate dividends and distributions  amounted to approximately
$16.7 million.

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.

CONTRACTUAL OBLIGATIONS
The following table  identifies our  contractual  obligations as of December 31,
2006 that will impact our liquidity and cash flow in future periods:

<TABLE>
<CAPTION>
                                    ------------ ------------ ------------- ------------ ------------ ------------- ------------
                                        2007         2008         2009          2010         2011      Thereafter       Total
                                    --------------------------------------------------------------------------------------------
                                                                       (dollars in thousands)
<S>                                  <C>        <C>              <C>        <C>           <C>          <C>          <C>
     Long-Term Debt Obligations (1)   $11,011    $121,589         $9,561     $10,105       $10,681      $194,808     $357,755
     Operating Lease Obligations(2)        95          24              -           -             -             -          119
                                    ------------ ------------ ------------- ------------ ------------ ------------- ------------
     Total                            $11,106    $121,613         $9,561     $10,105       $10,681      $194,808     $357,874
                                    ============ ============ ============= ============ ============ ============= ============
</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, 2006, we had total indebtedness of approximately $357.8 million,
all of which is fixed rate mortgage debt. A table listing our indebtedness as of
December  31,  2006  is  set  forth  in  Item  8,   "Financial   Statements  and
Supplementary Data - Note 8."

At December 31, 2006, 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 $13.10 per share on December 29, 2006) on a fully  diluted  basis,  including
the conversion of all O.P. Units into common stock, was approximately  20.7%. On
December   29,  2006,   the  last  trading  day  for  the  year,   total  market
capitalization was approximately $1.73 billion.  By comparison,  on December 31,
2005 total debt as a  percentage  of market  capitalization  was 26.5% and total
market capitalization was approximately $1.39 billion.

At December 31, 2006, the  outstanding  balance  remaining  under certain demand
notes that we owed to the operating  partnerships was $1.8 million. The due date
of the demand notes has been  extended to September  30, 2008.  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  statements 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 or by raising additional equity capital.

HISTORICAL CASH FLOWS

The Company's cash flow activities are summarized as follows:

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                     -----------------------------------------------------------
                                                            2006                 2005                 2004
                                                     -----------------    -----------------    -----------------
                                                                       (dollars in thousands)
<S>                                                     <C>                  <C>                  <C>
   Cash flow provided by operating activities            $27,012              $21,898              $38,970
   Cash flow used in investing activities                ($5,369)             ($2,875)             ($1,519)
   Cash flow (used in)/provided by financing activities ($19,299)             $10,899             ($40,061)
</TABLE>

                                     - 36 -

<PAGE>


COMPARISON  OF THE YEAR ENDED  DECEMBER 31, 2006 TO THE YEAR ENDED  DECEMBER 31,
2005
Cash and cash equivalents were approximately $33.8 million at December 31, 2006,
an increase of $2.4 million from $31.4 million at December 31, 2005.

Net cash provided by operating  activities  for the year ended December 31, 2006
was approximately $27.0 million, compared to approximately $21.9 million for the
prior year.  The  increase in cash  provided by  operating  activities  resulted
primarily from higher lease  termination  fee income,  higher  interest  income,
higher  distributions  from our  unconsolidated  joint venture,  higher deferred
rental income and lower leasing  commission  payments (included in Other assets)
in 2006.

Our cash used in  investing is primarily  for  property  acquisitions,  property
sales and improvements to our properties.  Net cash used in investing activities
was  approximately  ($5.4) million for the year ended December 31, 2006 compared
to  approximately  ($2.9) million for the prior year. In 2006, we acquired three
R&D properties for approximately  $16.0 million,  incurred capital  expenditures
relating to real estate  improvements of  approximately  $4.3 million and excess
restricted  cash of  approximately  $1.8 million was  transferred to our general
cash account.  Restricted cash in the amount of approximately  $13.5 million was
used to  complete  the  acquisition  of two  R&D  properties  in a  tax-deferred
exchange transaction  involving our former R&D property at 800 Embedded Way, San
Jose,  California.  We sold three vacant R&D properties for approximately  $43.3
million  as  described  above,  the  proceeds  of  which  are  reflected  on our
consolidated  balance sheet as restricted cash at December 31, 2006. In 2005, we
sold three vacant R&D properties for  approximately  $27.5 million.  We acquired
one vacant R&D property for  approximately  $14.2  million and incurred  capital
expenditures relating to real estate improvements of approximately $1.1 million.
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  sheet as
restricted cash at December 31, 2005.

Net cash (used  in)/provided by financing  activities was approximately  ($19.3)
million for the year ended December 31, 2006,  compared to  approximately  $10.9
million for the year ended December 31, 2005. During 2006 and 2005, 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   2006,   financing   activities   included  the  net  effect  of  paying
approximately  $9.8 million for outstanding debt,  receipt of approximately $1.6
million from the refund of an appeal bond, receipt of approximately $1.0 million
from stock option  exercises  and paying  approximately  $12.1 million to common
stockholders for dividends.  During 2005,  financing activities included the net
effect of borrowing  approximately  $150.8 million under two new  collateralized
mortgage loans and repaying approximately $120.3 million of outstanding debt. We
also  received  approximately  $0.5 million from stock  option  exercises,  paid
approximately  $11.7  million  to common  stockholders  for  dividends  and paid
approximately  $8.4  million to O.P.  Unit  holders in excess of their  share of
earnings for distributions.

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 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 for un-leased  properties  from 29% to 31%
that offset cash savings.

Our cash used in  investing is primarily  for  property  acquisitions,  property
sales and improvements to our properties.  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 was  primarily  for the  acquisition  of one vacant R&D
property  for $14.2  million  and capital  expenditures  relating to real estate
improvements  of $1.1 million.  We received $27.5 million from the sale of three
vacant R&D properties.  Cash used in investing activities during 2004 related to
capital expenditures relating to real estate improvements of $1.5 million.

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, financing activities included the
net  effect  of   borrowing   approximately   $150.8   million   under  two  new
collateralized  mortgage  loans and  paying  approximately  $120.3  million  for
outstanding  debt.  We received  approximately  $0.5  million  from stock option
exercises.  In  2005 we also used  funds  for  approximately  $11.7  million  in
dividends to stockholders  and  approximately  $8.4 million in  distributions to
O.P. Unit holders.  During 2004, financing activities included the net effect of
payment  of  approximately   $7.4  million  for  outstanding  debt,  receipt  of
approximately  $3.6 million from our lines of credit,  payment of  approximately
$1.6  million for an appeal  bond,  receipt of  approximately  $0.2 million from
stock  option  exercises,  payment  of  approximately  $17.3  million  to common
stockholders  for dividends and payment of  approximately  $17.6 million to O.P.
Unit holders in excess of their share of earnings for distributions.

                                     - 37 -
<PAGE>

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, 2002  through  December 31,  2006,  the  recurring  tenant/building
improvement  costs and leasing  commissions  incurred with respect to new leases
and  lease  renewals  of the  properties  averaged  approximately  $3.7  million
annually. We will have approximately 742,000 rentable square feet under expiring
leases  in  2007.   We  expect  that  the  average   annual  cost  of  recurring
tenant/building improvements and leasing commissions related to these properties
will be  approximately  $4.0  million  during  2007.  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  "Policies  with Respect to Certain Activities - Financing  Policies"
below).

DISTRIBUTION POLICY

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 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  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.

                                     - 38 -
<PAGE>

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  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.  During the past two years we have sold
vacant R&D  properties  that we did not believe  were likely to earn the type of
return on assets that we seek. We will  continue to dispose of  under-performing
properties when we consider it appropriate.

A significant factor influencing our disposition policy is that 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.
For example,  in 2006 we completed  the sale of three vacant R&D  properties  at
Samaritan  Drive in San Jose,  California  consisting of  approximately  235,000
rentable  square  feet.  A

                                     - 39 -
<PAGE>

total net gain of approximately  $18.1 million was recognized on the total sales
price of $43.3 million (see Item 8, "Financial Statements and Supplementary Data
- Note 6" for  further  discussion  of this  transaction).  In  March  2007,  we
acquired 50 acres of vacant land in Morgan Hill, California, which could support
approximately  725,000 rentable square feet of spaces. The acquisition price for
this property was  approximately  $25.6 million and was funded from a portion of
the proceeds received from the Samaritan  property sale, which was classified as
restricted cash as of December 31, 2006.

In addition, 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 results of operations, cash flows or financial position.

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.

In June 2006, the FASB issued  Interpretation 48, "Accounting for Uncertainty in
Income Taxes" ("FIN 48").  FIN 48 clarifies the  accounting  for  uncertainty in
income taxes recognized in our financial statements in accordance with SFAS 109,
"Accounting  for Income  Taxes." The  provisions of FIN 48 are effective for our
fiscal year beginning January 1, 2007. The adoption of FIN 48 on January 1, 2007
is not  expected to have a  significant  impact on our  consolidated  results of
operations or financial position.

In September  2006, the FASB issued SFAS 157, "Fair Value  Measurements"  ("SFAS
157").  SFAS 157 defines fair value, establishes a framework for measuring  fair
value in generally accepted accounting principles, and expands disclosures about
fair value measurements. The provisions of SFAS 157 are effective for our fiscal
year  beginning  January 1, 2008. We are currently  evaluating the impact of the
provisions  of  SFAS  157  and  currently  cannot  estimate  the  impact  to our
consolidated results of operations or financial position.

                                     - 40 -

<PAGE>


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.  As of
December 31, 2006,  we had no interest  rate risk since none of our  outstanding
debt is subject to variable interest rates.

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, 2006.  The current terms of our  outstanding  debt are described in
Item 8, "Financial Statements and Supplementary Data - Note 8." 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, 2006 was  approximately  $467.7
million.

For fixed rate debt,  the table  presents the  assumption  that the  outstanding
principal  balance at December  31,  2006 will be paid  according  to  scheduled
principal payments and that we will not prepay any of the outstanding  principal
balance.

<TABLE>
<CAPTION>
                                           2007       2008     2009      2010      2011   Thereafter       Total    Fair Value
                                           ----       ----     ----      ----      ----   ----------       -----    ----------
                                                                            (dollars in thousands)
        FIXED RATE DEBT:
<S>                                    <C>       <C>        <C>      <C>       <C>         <C>         <C>           <C>
        Secured notes payable           $11,011   $121,589   $9,561   $10,105   $10,681     $194,808    $357,755      $467,692
        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% for the years ended
December 31, 2006 and 2005. The decrease in interest expense attributable to the
average interest rate difference between 2005 and 2006 was approximately  ($0.8)
million,  which was a result of normal  scheduled  debt payments in 2006 and the
termination of the Berg Group line of credit in late 2005.

The primary market risk we face is the risk of interest rate  fluctuations.  The
Santa Clara Valley National Bank line of credit,  which had a balance of zero at
December  31,  2006,  is tied to a LIBOR based  interest  rate.  With a floating
interest  rate we could 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, 2006, we had no interest rate caps or interest rate swap
contracts.

                                     - 41 -

<PAGE>

ITEM 8.  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                       43
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, 2006 and 2005                                                        46
Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004                          47
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2006, 2005 and 2004                48
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004                          49
Notes to Consolidated Financial Statements                                                                          50
Supplemental Financial Information                                                                                  72
Report of Independent Registered Public Accounting Firm  on Financial Statement Schedule                            73
Report of Independent Registered Public Accounting Firm  on Financial Statement Schedule                            74
Schedule III: Real Estate and Accumulated Depreciation as of December 31, 2006                                      76
Schedule III: Real Estate and Accumulated Depreciation as of December 31, 2005                                      78
</TABLE>

                                     - 42 -

<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,  2006 and the  related
consolidated  statements of operations,  stockholders' equity and cash flows for
the  year  then  ended.   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 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  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 audit  provides 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. as of December 31, 2006,  and the results of their  operations
and their  cash  flows for the year then  ended in  conformity  with  accounting
principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated  financial statements,  on January 1,
2007, the Company changed its method of accounting for stock-based  compensation
as a result of adopting  Statement of Financial  Accounting  Standards No. 123R,
Share-Based Payment.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the effectiveness of the Company's
internal control over financial  reporting as of December 31, 2006, based on the
criteria  established in Internal  Control - Integrated  Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated March 12, 2007 expressed an unqualified opinion on management's assessment
of, and the effective operation of, internal control over financial reporting.

We also have audited the  adjustments  to the  consolidated  balance sheet as of
December 31, 2005 and the related consolidated  statements of operations for the
two years then ended for the retrospective reporting of discontinued operations,
as described in Note 17. In our opinion,  such  adjustments  are appropriate and
have been properly applied.  We were not engaged to audit,  review, or apply any
procedures to the 2004 and 2005 financial  statements of the Company referred to
above other than with respect to the  adjustments  and,  accordingly,  we do not
express an opinion or any other form of assurance of the 2004 and 2005 financial
statements taken as a whole.



\S\ Burr, Pilger & Mayer, LLP
San Francisco, California
March 12, 2007

                                     - 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,  before the effects of the  reclassifications  to  discontinued
operations  described in Note 17, the consolidated balance sheet of Mission West
Properties,  Inc.  (the  "Company")  as of  December  31,  2005 and the  related
consolidated statements of operations,  stockholders' equity, and cash flows for
each of the two years in the period  ended  December 31, 2005 (the 2005 and 2004
financial statements before the effects of the reclassifications to discontinued
operations  discussed in Note 17 are not presented  herein).  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, before
the effects of the  reclassifications  to discontinued  operations  described in
Note 17, present fairly,  in all material  respects,  the financial  position of
Mission  West  Properties,  Inc. at December  31,  2005,  and the results of its
operations  and its cash  flows  for each of the two years in the  period  ended
December 31, 2005, in conformity with accounting  principles  generally accepted
in the United States of America.

We  were  not  engaged  to  audit,  review,  or  apply  any  procedures  to  the
reclassifications   to  discontinued   operations  described  in  Note  17  and,
accordingly,  we do not express an opinion or any other form of assurance  about
whether such  reclassifications  are appropriate and have been properly applied.
Those reclassifications were audited by Burr, Pilger & Mayer, LLP.



\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's 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, 2006,  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,  2006,  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, 2006, 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 sheet of
Mission  West  Properties,  Inc.  as of  December  31,  2006,  and  the  related
consolidated  statements of operations,  stockholders' equity and cash flows for
the year then ended, and the related financial statement schedule, as of and for
the year ended  December 31, 2006, and our report dated March 12, 2007 expressed
an  unqualified  opinion  on those  consolidated  financial  statements  and the
related financial statement schedule.


\S\ Burr, Pilger & Mayer, LLP
San Francisco, California
March 12, 2007

                                     - 45 -

<PAGE>


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

<TABLE>
<CAPTION>
                                     ASSETS
                                                                                             December 31,
                                                                             ---------------------------------------------
                                                                                     2006                    2005
                                                                             ----------------------  ---------------------
Real estate:
<S>                                                                              <C>                    <C>
  Land                                                                              $272,223               $273,933
  Buildings and improvements                                                         756,596                766,457
  Real estate related intangible assets                                               19,529                 17,410
                                                                             ----------------------  ---------------------
                                                                                   1,048,348              1,057,800
  Less accumulated depreciation and amortization                                    (149,459)              (130,419)
                                                                             ----------------------  ---------------------
      Total investments in real estate, net                                          898,889                927,381

Cash and cash equivalents                                                             33,785                 31,441
Restricted cash                                                                       48,245                 16,712
Deferred rent receivable, net                                                         18,489                 19,218
Investment in unconsolidated joint venture                                             3,468                  3,263
Other assets, net                                                                     24,611                 25,362
                                                                             ----------------------  ---------------------
      Total assets                                                                $1,027,487             $1,023,377
                                                                             ======================  =====================
Liabilities:
  Mortgage notes payable                                                            $348,101               $357,481
  Mortgage note payable (related parties)                                              9,654                 10,051
  Interest payable                                                                     1,375                    321
  Security deposits                                                                    6,977                  8,047
  Deferred rental income                                                               6,874                  6,103
  Dividends and distributions payable                                                 16,745                 16,725
  Accounts payable and accrued expenses                                                7,601                  8,952
                                                                             ----------------------  ---------------------
      Total liabilities                                                              397,327                407,680
                                                                             ----------------------  ---------------------

Commitments and contingencies (Note 16)

Minority interests                                                                   501,282                500,682
                                                                             ----------------------  ---------------------

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, 19,443,587
      and 18,448,791 shares issued and outstanding at December 31, 2006 and 2005          19                     18
  Paid-in capital                                                                    149,541                138,038
  Accumulated deficit                                                                (20,682)               (23,041)
                                                                             ----------------------  ---------------------
      Total stockholders' equity                                                     128,878                115,015
                                                                             ----------------------  ---------------------
      Total liabilities and stockholders' equity                                  $1,027,487             $1,023,377
                                                                             ======================  =====================

                 See notes to consolidated financial statements.
</TABLE>

                                     - 46 -
<PAGE>


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


<TABLE>
<CAPTION>
                                                                                            Year Ended December 31,
                                                                    ---------------------------------------------------------------
                                                                            2006                 2005                  2004
                                                                    -------------------  --------------------  --------------------

Revenues:
<S>                                                                    <C>                  <C>                   <C>
  Rental revenue from real estate                                          $90,110              $97,735               $115,815
  Tenant reimbursements                                                     13,116               14,115                 14,192
  Other income, including lease terminations, settlements and interest      20,602                4,591                  6,862
                                                                    -------------------  --------------------  --------------------
                                                                           123,828              116,441                136,869

Expenses:
  Property operating, maintenance and real estate taxes                     18,654               18,759                 19,111
  Interest                                                                  20,709               21,295                 17,581
  Interest (related parties)                                                   755                  972                  1,077
  General and administrative                                                 2,248                1,910                  2,011
  Depreciation and amortization of real estate                              21,803               20,553                 20,827
                                                                    -------------------  --------------------  --------------------
                                                                            64,169               63,489                 60,607
                                                                    -------------------  --------------------  --------------------
Income before equity in earnings of unconsolidated joint venture
     and minority interests                                                 59,659               52,952                 76,262
Equity in earnings of unconsolidated joint venture                           1,985                  724                  2,947
Minority interests                                                         (50,150)             (44,353)               (65,810)
                                                                    -------------------  --------------------  --------------------
     Income from continuing operations                                      11,494                9,323                 13,399

Discontinued operations, net of minority interests:
  Gain from disposal of properties classified as discontinued operations     2,935                  445                      -
  Income/(loss) attributable to discontinued operations                        201                  259                    (87)
                                                                    -------------------  --------------------  --------------------
     Income/(loss) from discontinued operations                              3,136                  704                    (87)
                                                                    -------------------  --------------------  --------------------

Net income to common stockholders                                          $14,630              $10,027                $13,312
                                                                    ===================  ====================  ====================
Net income to minority interests                                           $66,358              $47,524                $66,100
                                                                    ===================  ====================  ====================

Income per share from continuing operations:
  Basic                                                                     $0.60                $0.51                  $0.74
                                                                    ===================  ====================  ====================
  Diluted                                                                   $0.60                $0.51                  $0.74
                                                                    ===================  ====================  ====================
Income/(loss) per share from discontinued operations:
  Basic                                                                     $0.17                $0.04                      -
                                                                    ===================  ====================  ====================
  Diluted                                                                   $0.16                $0.04                      -
                                                                    ===================  ====================  ====================
Net income per share to common stockholders:
  Basic                                                                     $0.77                $0.55                  $0.74
                                                                    ===================  ====================  ====================
  Diluted                                                                   $0.76                $0.55                  $0.74
                                                                    ===================  ====================  ====================

Weighted average shares of common stock (basic)                         19,066,581           18,286,947            18,034,873
                                                                    ===================  ====================  ====================
Weighted average shares of common stock (diluted)                       19,298,664           18,325,659            18,076,498
                                                                    ===================  ====================  ====================
Weighted average O.P. Units                                             85,510,491           86,220,117            86,444,773
                                                                    ===================  ====================  ====================
Outstanding common stock                                                19,443,587           18,448,791            18,097,191
                                                                    ===================  ====================  ====================
Outstanding O.P. Units                                                  85,206,199           86,088,095            86,384,695
                                                                    ===================  ====================  ====================
</TABLE>

                 See notes to consolidated financial statements.

                                     - 47 -

<PAGE>


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


<TABLE>
<CAPTION>
                                               Shares of Common    Common      Paid-in-     Accumulated       Total Stockholders'
                                               Stock Outstanding    Stock      Capital        Deficit              Equity
                                               ------------------  --------  ------------  ---------------   -------------------
<S>                                                <C>               <C>      <C>            <C>                 <C>
Balance, December 31, 2003                          17,894,691        $18      $132,136       ($18,764)           $113,390

   Net income                                                                                   13,312              13,312
   Dividends declared at $0.88 per share                                                       (15,893)            (15,893)
   Issuance of common stock upon O.P. Unit conversion  182,500                    2,238                              2,238
   Issuance of common stock upon option exercise        20,000                      165                                165
                                               ------------------  --------  ------------  ---------------   -------------------
Balance, December 31, 2004                          18,097,191         18       134,539        (21,345)            113,212

   Net income                                                                                   10,027              10,027
   Dividends declared at $0.64 per share                                                       (11,723)            (11,723)
   Issuance of common stock upon O.P. Unit conversion  296,600                    3,019                              3,019
   Issuance of common stock upon option exercise        55,000                      480                                480
                                               ------------------  --------  ------------  ---------------   -------------------
Balance, December 31, 2005                          18,448,791         18       138,038        (23,041)            115,015

   Net income                                                                                   14,630              14,630
   Dividends declared at $0.64 per share                                                       (12,271)            (12,271)
   Issuance of common stock upon O.P. Unit conversion  881,896          1        10,279                             10,280
   Stock option compensation                                                        210                                210
   Issuance of common stock upon option exercise       112,900                    1,014                              1,014
                                               ------------------  --------  ------------  ---------------   -------------------
Balance, December 31, 2006                          19,443,587        $19      $149,541       ($20,682)           $128,878
                                               ==================  ========  ============  ===============   ===================
</TABLE>

                 See notes to consolidated financial statements.

                                     - 48 -
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                       Year Ended December 31,
                                                                       ---------------------------------------------------------
                                                                             2006                2005                2004
                                                                       -----------------   -----------------  ------------------
Cash flows from operating activities:
<S>                                                                        <C>                 <C>                 <C>
Net income from continuing operations                                       $11,494              $9,323             $13,399
Net income/(loss) from discontinued operations                                3,136                 704                 (87)
Adjustments to reconcile income from continuing operations to
   net cash provided by operating activities:
     Minority interests income from continuing operations                    50,150              44,353              65,810
     Minority interests income from discontinued operations                  16,208               3,171                 290
     Minority interests distributions                                       (55,618)            (47,524)            (66,100)
     Depreciation and amortization of real estate and in-place leases        21,803              20,554              20,826
     Depreciation and amortization from discontinued operations                 471               1,045               1,050
     Amortization of above market lease                                       1,888               1,888               1,888
     Gain from disposal of properties classified as discontinued operations (18,102)             (2,206)                  -
     Equity in earnings of unconsolidated joint venture                      (1,985)               (724)             (2,947)
     Distributions from unconsolidated joint venture                          1,780               1,020               1,673
     Interest earned on restricted cash                                        (821)               (100)                  -
     Lease termination fee income related to restricted cash                 (4,549)                  -                   -
     Stock-based compensation expense                                           236                   -                   -
     Asset impairment charge attributable to discontinued operation               -                   -               2,193
     Other                                                                       37                   -                   -
Change in operating assets and liabilities, net of liabilities assumed:
     Deferred rent receivable                                                   729                (707)                459
     Other assets                                                               751              (5,709)              2,195
     Interest payable                                                         1,054                  (6)                 (5)
     Security deposits                                                       (1,070)               (497)             (1,690)
     Deferred rental income                                                     771              (4,935)             (1,685)
     Accounts payable and accrued expenses                                   (1,351)              2,248               1,701
                                                                       -----------------   -----------------  ------------------
     Net cash provided by operating activities                               27,012              21,898              38,970
                                                                       -----------------   -----------------  ------------------

Cash flows from investing activities:
Improvements to real estate                                                  (4,277)             (1,138)             (1,519)
Proceeds from sales of real estate                                           42,628              27,508                   -
Purchase of real estate                                                     (15,959)            (14,184)                  -
Restricted cash held in escrow                                              (43,043)            (15,061)                  -
Restricted cash released for purchase of real estate                         13,447                   -                   -
Excess restricted cash                                                        1,835                   -                   -
                                                                       -----------------   -----------------  ------------------
     Net cash used in investing activities                                   (5,369)             (2,875)             (1,519)
                                                                       -----------------   -----------------  ------------------

Cash flows from financing activities:
Proceeds from mortgage loan payable                                               -             150,800                   -
Principal payments on mortgage notes payable                                 (9,380)             (7,431)             (7,036)
Principal payments on mortgage notes payable (related parties)                 (397)               (369)               (342)
Net (payments)/proceeds under line of credit (related parties)                    -              (9,560)              3,338
Payment on loan payable                                                           -             (78,710)                  -
Net (payments)/proceeds from revolving line of credit                             -             (24,208)                243
Restricted cash for appeal bond                                                   -                   -              (1,551)
Refund of appeal bond                                                         1,599                   -                   -
Net proceeds from exercise of stock options                                     989                 480                 165
Minority interests distributions in excess of earnings                            -              (8,435)            (17,586)
Dividends                                                                   (12,110)            (11,668)            (17,292)
                                                                       -----------------   -----------------  ------------------
     Net cash (used in)/provided by financing activities                    (19,299)             10,899             (40,061)
                                                                       -----------------   -----------------  ------------------

     Net increase/(decrease) in cash and cash equivalents                     2,344              29,922              (2,610)
Cash and cash equivalents, beginning of year                                 31,441               1,519               4,129
                                                                       -----------------   -----------------  ------------------
Cash and cash equivalents, end of year                                      $33,785             $31,441              $1,519
                                                                       =================   =================  ==================
</TABLE>

                 See notes to consolidated financial statements.

                                     - 49 -

<PAGE>


                          MISSION WEST PROPERTIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands, except 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,  2006,  the Company owns a  controlling  general  partnership
interest of 19.71%, 21.78%, 16.26% and 12.48% 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 an 18.23%  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, 2006, 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 Company consolidates all variable interest entities in which it is deemed to
be the primary  beneficiary  in accordance  with FASB  Interpretation  46R ("FIN
46R"), a revision to FIN 46, "Consolidation of Variable Interest Entities."

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 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 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 and base building improvements of newly acquired             - Weighted average composite life of 40 years properties
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, 2006 and 2005.

ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
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 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.

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

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

RESTRICTED CASH
Restricted cash totaled $48,245 as of December 31, 2006. Of this amount, $43,406
represents  proceeds  received  from the  Samaritan  property  sale  and  earned
interest  income held in a separate  cash account at a trust  company for future
use in tax-deferred  exchanges.  The remaining  $4,839  represents a balance the
Company consolidated due to its adoption of FIN 46R,  "Consolidation of Variable
Interest  Entities." The Company does not possess or control these funds or have
any rights to receive  them  except as provided  in the  applicable  agreements.
Therefore, restricted cash is not available for distribution to stockholders.

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 commitments 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 13 below).

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   expenses,
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  realizability  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 the Company's  rental revenue
for any period if it 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.

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.

                                     - 52 -
<PAGE>

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

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, 2006, 2005 and 2004,
no  provision  for federal  income taxes has been  included in the  accompanying
consolidated financial statements.

For the years ended  December 31, 2006 and 2005, the Company's  total  dividends
paid or payable to the stockholders represent 100% of ordinary income and 89% of
ordinary income and 11% return of capital, respectively, for income tax purposes
(unaudited). For the year ended December 31, 2004, 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
In  December  2004,  the FASB  issued SFAS 123R,  "Share-Based  Payment"  ("SFAS
123R"),  which  addresses the accounting  for employee,  director and consultant
stock  options.  SFAS 123R requires that the cost of stock  options,  as well as
other equity-based compensation  arrangements,  be reflected in the consolidated
financial  statements based on the estimated fair value of the awards. SFAS 123R
is an amendment to SFAS 123 and supersedes  Accounting  Principles Board Opinion
25,  "Accounting  for  Stock  Issued  to  Employees"  ("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.  As of December 31, 2006, the Company had one stock-based
compensation  plan.  The  Company  has  adopted  the  requirements  of SFAS 123R
effective January 1, 2006 using the modified  prospective  method of transition.
Accordingly, prior periods have not been restated. The adoption of this standard
did  not  have a  material  effect  on the  Company's  consolidated  results  of
operations, cash flows or financial position.

The Company  measures  compensation  cost for its stock options at fair value on
the date of grant and recognizes  compensation expense relating to the remaining
unvested  portion of outstanding  stock options at the time of adoption  ratably
over the vesting period,  generally four years.  The fair value of the Company's
stock  options is  determined  using the  Black-Scholes  option  pricing  model.
Compensation expense related to the Company's  share-based awards is included in
general and administrative  expenses in the Company's accompanying  consolidated
statements of operations.  Under SFAS 123R, the Company recorded $236 of expense
for  share-based  compensation  relating to grants of stock options for the year
December 31, 2006.

As of December 31, 2006, there was $92 of total  unrecognized  compensation cost
related to unvested  share-based  compensation  arrangements  granted  under the
compensation   plan.   That  cost  is   expected   to  be   recognized   over  a
weighted-average period of one year.

For 2005 and all prior  years,  the  Company  had  elected  to follow APB 25 and
related interpretations in accounting for its employee and non-employee director
stock options. 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 prior to year 2006. Under APB 25, no
compensation  expense related to stock options had been  recognized  because the
exercise price of the granted options equaled the market price of the underlying
stock on the date of grant.  Although  the  Company had elected to follow APB 25
for previously  granted options prior to January 1, 2006, pro forma  information
regarding  net income and net income per share is  required by SFAS 123R for all
periods  presented prior to 2006. This information has been determined as if the
Company had  accounted  for stock options under the fair value method under SFAS
123.

                                     - 53 -

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

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 two years.

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                                 -------------------------------------------
                                                                        2005                    2004
                                                                 --------------------   --------------------
                                                                (dollars in thousands, except per share data)
<S>                                                                  <C>                    <C>
         Historical net income to common stockholders                 $10,027                $13,312
         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)
         Allocation of expense to minority interests                      134                    145
                                                                 --------------------   --------------------
         Pro forma net income to common stockholders                  $10,000                $13,281
                                                                 --------------------   --------------------
         Earnings per share - basic:
            Historical net income to common stockholders                $0.55                  $0.74
            Pro forma net income to common stockholders                 $0.55                  $0.74
         Earnings per share - diluted:
            Historical net income to common stockholders                $0.55                  $0.74
            Pro forma net income to common stockholders                 $0.55                  $0.73
</TABLE>

In 2005,  stock options to purchase  710,000 shares of common stock were granted
to four employees and three non-employee directors. The 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. All options were granted at the
fair market value at the date of grant.  There were no stock options  granted in
years 2006 and 2004.

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 ("DERs"),  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  DERs
     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 DERs 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.

In April 2005, a total of 290,000 DERs were  awarded by the  Company's  Board of
Directors.  The Company recorded DER compensation  expense of approximately $186
and $139 in 2006 and 2005, respectively.

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, 2006 was  approximately  $467,692 as
compared to its carrying value of $357,755.

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 79 tenants at December 31, 2006,  default by any major
tenant could  significantly  impact the results of the  consolidated  total. One
tenant,  Microsoft  Corporation,  accounted for approximately  12.5%,  10.0% and
18.1%

                                     - 54 -
<PAGE>

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

of the Company's cash rental income for the years ended December 31, 2006,  2005
and 2004,  respectively,  of total cash rental  income.  Cash rental income from
Microsoft  Corporation  was  $11,728,  $10,089  and  $21,997 for the years ended
December 31, 2006, 2005 and 2004,  respectively.  Future minimum rents from this
tenant are $101,331.  One other tenant accounted for approximately  10.0%, 12.4%
and 10.8% of the Company's  cash rental income for the years ended  December 31,
2006, 2005 and 2004, respectively, of total cash rental income. During 2006, six
of the Company's tenants relocated or ceased operations.

NEW ACCOUNTING PRONOUNCEMENTS
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 significant
effect  on  the  Company's  consolidated  results  of  operations  or  financial
condition.

In June 2006, the FASB issued  Interpretation 48, "Accounting for Uncertainty in
Income Taxes" ("FIN 48").  FIN 48 clarifies the  accounting  for  uncertainty in
income taxes recognized in the Company's financial statements in accordance with
SFAS 109,  "Accounting for Income Taxes." The provisions of FIN 48 are effective
for the Company's fiscal year beginning  January 1, 2007. The adoption of FIN 48
on January 1, 2007 is not expected to have a significant impact on the Company's
consolidated results of operations or financial position.

In September  2006, the FASB issued SFAS 157, "Fair Value  Measurements"  ("SFAS
157").  SFAS 157 defines fair value,  establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about
fair  value  measurements.  The  provisions  of SFAS 157 are  effective  for the
Company's  fiscal  year  beginning  January 1, 2008.  The  Company is  currently
evaluating  the  impact  of the  provisions  of SFAS  157 and  currently  cannot
estimate  the impact to the  Company's  consolidated  results of  operations  or
financial position.

3.   DEFERRED RENT ALLOWANCE

The following table  represents  activity in the deferred rent allowance for the
years ended December 31, 2006, 2005 and 2004.

<TABLE>
<CAPTION>
                                                               Provision
                                                 Beginning      Against                    Ending
                                                  Balance       Revenues    Charge-off     Balance
                                               -------------- ------------ ------------ -------------
                                                               (dollars in thousands)
<S>                                               <C>           <C>          <C>           <C>
         Year ended December 31, 2004              $2,000        $1,313       $1,313        $2,000
         Year ended December 31, 2005              $2,000          $785         $785        $2,000
         Year ended December 31, 2006              $2,000        $1,216       $1,216        $2,000
</TABLE>

4.   STOCK TRANSACTIONS

As of December 31, 2006 and 2005,  $1,833 and $1,706 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
statements 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, 2008. 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 or by raising additional equity capital.

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 all of the  eligible
limited  partners in one year exceeds $1 million,

                                     - 55 -
<PAGE>

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

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, 2006, stock options to purchase 80,000 shares
of the  Company's  common  stock  were  exercised  at $8.25  per share and stock
options to purchase  32,900 shares of the Company's  common stock were exercised
at $10.00 per share. Total proceeds to the Company were approximately $989.

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.

In 2006, 2005 and 2004,  881,896,  296,600 and 182,500 O.P. Units were exchanged
for  881,896,  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 INTERESTS

Minority  interests  represent the separate  private  ownership of the operating
partnerships,  by the Berg Group and other  non-affiliate  interests.  In total,
these interests  account for 81.77% and 82.50%,  on a weighted average basis, of
the  ownership  interests  in the real  estate  operations  of the Company as of
December 31, 2006 and 2005,  respectively.  Minority  interests in earnings have
been  calculated  by taking the net income of the operating  partnerships  (on a
stand-alone  basis) multiplied by the respective  minority  interests  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 interests in the joint
ventures are  reflected as a component  of minority  interests of the  operating
partnerships.  For the years ended  December  31,  2006,  2005 and 2004,  income
associated  with the minority  interests  held by the third parties of the three
consolidated joint ventures was $499, $479 and $486, respectively.

6.   REAL ESTATE

PROPERTY ACQUISITIONS
In March 2006, the Company acquired two fully leased office/R&D  properties with
approximately 95,700 rentable square feet located at 233 South Hillview Drive in
Milpitas,  California  from Sipex  Corporation in a tax-deferred  exchange under
section 1031 of the Internal Revenue Code of 1986. The total  acquisition  price
for this  property  was  approximately  $13,411 and was funded from the proceeds
received  from the 800 Embedded Way  property  sale,  which were held by a third
party and classified as restricted cash as of December 31, 2005.

The purchase price of the 233 South Hillview Drive  acquisition was allocated to
long-lived  assets and the value of an in-place  lease.  The in-place  lease was
valued  at  fair  market  so  there  was  no  intangible   asset   allocated  to
above-or-below  market lease value.  The Company recorded $1,374 of the purchase
price as real estate related intangible assets in the accompanying  consolidated
balance  sheet for the value of an in-place  lease.  The  intangible  assets are
amortized over the applicable remaining lease terms.

In April 2006,  the Company  acquired a fully leased  office/R&D  property  with
approximately  42,100  rentable  square feet located at 1875  Charleston Road in
Mountain View, California by purchasing Mission West Charleston,  LLC, an entity
controlled  by Carl E. Berg.  The total  acquisition  price for this  entity was
$2,615,  which is subject  to a ground  lease  with an  unrelated  party for the
underlying  property that runs through June 2057.  The  acquisition  was paid in
cash.

The purchase  price of the 1875  Charleston  Road  acquisition  was allocated to
long-lived  assets and the value of an in-place  lease.  The in-place  lease was
valued  at  fair  market  so  there  was  no  intangible   asset   allocated  to
above-or-below  market lease value.  The Company  recorded  $745 of the purchase
price as real estate related intangible assets in the accompanying  consolidated
balance  sheet for the value of an in-place  lease.  The  intangible  assets are
amortized over the applicable remaining lease term.

                                     - 56 -
<PAGE>

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

The purchase price allocation for these property  acquisitions was determined in
accordance with the following principles under SFAS 141:

The fair value of the tangible  assets of an acquired  property,  which includes
land, building and 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.

The capitalized in-place lease value, included in real estate related intangible
assets in the accompanying  consolidated balance sheets, is amortized to expense
as amortization of real estate over the remaining  non-cancelable lease term. 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.

In 2005, the Company acquired a 203,800 rentable square feet 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  improvments 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.

PROPERTY DISPOSITIONS
In the fourth  quarter,  the Company  disposed of three vacant R&D properties at
2033-2243  Samaritan Drive in San Jose,  California  consisting of approximately
235,000  rentable  square  feet. A total net gain of  approximately  $18,102 was
recognized and classified as discontinued operations, net of minority interests,
on the total sales price of $43,271. These properties were subject to a contract
of sale  from an  unrelated  party  for the  purchase  of a total of  three  R&D
properties  located at Samaritan Drive that the Company signed on July 17, 2006.
On March 8, 2007,  the Company  acquired 50 acres of vacant land in Morgan Hill,
California,  which could support  approximately  725,000 rentable square feet of
space.  The land is  currently  zoned for  industrial  use and a portion has the
potential  to be rezoned for  residential  use. The  acquisition  price for this
property was approximately $25,638 and was funded from a portion of the proceeds
received from the Samaritan  property  sale,  which was classified as restricted
cash as of December 31, 2006. The remaining  balance in restricted  cash will be
used for future tax-deferred property exchanges.

In 2005, the Company  completed the sale of three R&D  properties  consisting of
342,350  rentable  square feet,  which included 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 impariment  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 and 800  Embedded  Way  properties.  The gain from the 405 Tasman
Drive  sale was  from  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-deffered  property exchanges as of December
31, 2005.  These proceeds were used in 2006 to fund the acquisition of 233 South
Hillview Drive in Milpitas, California.

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  84 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 21
acquisitions  under  the  Berg  Land  Holdings  Option  Agreement   representing
approximately  2,034,000  rentable  square feet.  The acquired  properties  cost
approximately  $207,803,  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

                                     - 57 -
<PAGE>

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

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 84  additional  acres of land
currently  controlled by the Berg Group,  which could support  approximately 1.4
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.

7.   VARIABLE INTEREST ENTITY

In December 2003,  the FASB issued FIN 46R.  Under FIN 46R, a variable  interest
entity ("VIE") must be consolidated by a company if that company is subject to a
majority of the  entity's  expected  losses or entitled to receive a majority of
the entity's  expected  residual  returns or both. FIN 46R requires  disclosures
about variable  interest entities that a company is not required to consolidate,
but in which it has a significant variable interest.

Under FIN 46R,  for an entitiy to qualify as a VIE one or more of the  following
three characteristics must exist:

1    The equity  investment  at risk is not  sufficient to permit the entity to
     finance its activities without additional subordinated financial support by
     any parties, including the equity holders.
2.   The  equity  investors  lack  one  or  more  of  the  following   essential
     characteristics of a controlling financial interest:

     a.   The direct or indirect  ability to make  decisions  about the entity's
          activities through voting or similar rights.
     b.   The obligation to absorb the expected loss of the entity.
     c.   The right to receive the expected residual returns of the entity.

3.   The equity investors have voting rights that are not proportionate to their
     economic  interests,  and  the  activities  of the  entity  involve  or are
     conducted on behalf of an investor with a  disproportionately  small voting
     interest.

In March 2006, one of the Company's tenants, JDS Uniphase ("JDS"),  entered into
an  assignment  of lease  agreement  with an  unrelated  party,  M&M Real Estate
Control  &   Restructuring,   LLC  ("M&M"),   in  connection   with  leases  for
approximately 252,000 rentable square feet located in San Jose, California.  M&M
assumed all of JDS's remaining obligations under these leases,  acquired certain
personal  property  of JDS  located on the  premises  and  received a payment of
approximately  $11,147. At the same time, the Company entered into a consent for
assignment of lease with both parties and a mutual  release  agreement with JDS,
pursuant  to which all of the JDS's  obligations  under  these  leases have been
effectively  transferred  to  M&M.  M&M  must  continue  to  perform  all of the
obligations  under the assumed  JDS leases and has the right to sublease  any or
all of the 252,000  rentable square feet vacated by JDS for the remainder of the
current  lease  terms,  which  expire in 2006 and  2007.  Under the terms of the
agreement,  the Company will receive monthly rent payments of approximately $733
from April 2006 through  December  2006,  $545 from January 2007 through  August
2007  and $330  from  September  2007  through  November  2007.  Based  upon the
provisions  of FIN 46R,  the Company  determined  that M&M is a VIE. The Company
further  determined  that the  Company is the  primary  beneficiary  of this VIE
because  the  assignment  of  lease  noted  above  is the  only  property  under
management  by M&M, and  therefore  has  consolidated  this entity for financial
reporting  purposes.   Upon  consolidation,   the  Company  recognized  a  lease
termination fee of $11,147 in March 2006.

                                     - 58 -

<PAGE>

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

Factors  considered  by  the  Company  in  determining  whether  M&M  should  be
considered a VIE for financial reporting purposes included the following:

-    No equity was contributed by the partners in the formation of M&M.
-    At present, the assignment of a lease is the only property under management
     by M&M.
-    Because M&M is a newly formed entity it does not have an operating  history
     that demonstrates its ability to finance its activities  without additional
     subordinated financial support.
-    All  revenues,  other than interest  income,  are generated by M&M from the
     Company in the form of fees or commissions.

The  Company  remains at risk  because if M&M's  operating  expenses  exceed its
interest income,  fees and commissions there would be insufficient funds to meet
the assigned lease obligation without  additional  financial support from equity
holders or other parties.  The Company,  which had released the original  tenant
from its obligations  under the lease,  would have to absorb the majority of any
loss, making it the primary beneficiary of M&M's activities.

                                     - 59 -
<PAGE>

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

8.   DEBT

The following table sets forth certain information regarding debt outstanding as
of December 31, 2006 and 2005.

<TABLE>
<CAPTION>
                                                                                        Balance at             Maturity     Interest
        Debt Description                     Collateral Properties                      December 31,             Date         Rate
------------------------------------    ---------------------------------      ---------------------------- -------------- ---------
                                                                                    2006          2005
------------------------------------    ---------------------------------      ---------------------------- --------------  --------
                                                                                  (dollars in thousands)
Line of Credit:
<S>                                    <C>                                     <C>            <C>           <C>             <C>
Santa Clara Valley Nat'l  Bank (1)      Not Applicable                                  -               -    December 2007    (1)

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

Mortgage Notes Payable(related parties):5300-5350 Hellyer Ave., San Jose, CA       $9,654         $10,051      June 2010     7.650%

                                                                               -------------  -------------
Mortgage Notes Payable: (2)
Prudential Insurance Co. of America (3) 10300 Bubb Road, Cupertino, CA            114,994         117,290    October 2008    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 Ins. Co. (4)   1750 Automation Parkway, San Jose, CA      88,411          91,417    January 2013    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 Dr., Cupertino, CA

Allianz Life Insurance Company (I)(5)   5900 Optical Court, San Jose, CA           24,598          25,269     August 2025    5.560%


Allianz Life Insurance Company (II)(5)  5325-5345 Hellyer Avenue, San Jose, CA    120,098         123,505     August 2025    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

                                                                               ------------  ------------
                                                                                 348,101        357,481

                                                                               ------------  ------------
   Total                                                                        $357,755       $367,532
                                                                               ============  ============
</TABLE>

(1)  Santa Clara Valley  National Bank ("SCVNB") was formerly known as Cupertino
     National  Bank.  Interest  rate for the SCVNB  line of credit is LIBOR plus
     1.75%.  The interest rate for the SCVNB line of credit at December 31, 2006
     and 2005 was 7.08% and 6.14%,  respectively.  On July 22, 2005, the Company
     entered into a "Change in Terms  Agreement"  with SCVNB,  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 SCVNB that
     increased  the facility  from $9 million to $10 million.  The SCVNB line of
     credit contains certain  financial loan and reporting  covenants as defined
     in the  loan  agreement.  As of  December  31,  2006,  the  Company  was in
     compliance with these loan covenants.

(2)  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% at December 31, 2006 and 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  $12,000 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, 2006,  the
     Company was in compliance with these loan covenants.

                                     - 60 -
<PAGE>

(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.  The  Northwestern
     loan contains certain customary covenants as defined in the loan agreement.
     As of December  31,  2006,  the Company was in  compliance  with these loan
     covenants.

(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, 2006,  the Company was in  compliance  with
     these loan covenants.


Scheduled principal payments on debt as of December 31, 2006 are as follows:

<TABLE>
<CAPTION>
                                                  Fixed Rate Debt
                                            (Including Related Parties)
                                         ----------------------------------
<S>                                                 <C>
         December 31, 2007                            $11,011
         December 31, 2008                            121,589
         December 31, 2009                              9,561
         December 31, 2010                             10,105
         December 31, 2011                             10,681
         Thereafter                                   194,808
                                         ----------------------------------
              Total                                  $357,755
                                         ==================================
</TABLE>

INTEREST RATE DERIVATIVE
In 2005,  the Company  entered into a 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 $834 charge to interest expense in 2005. There were no interest rate
derivatives in 2006.

9.   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 2006,  the Company,  as general  partner of the  operating  partnerships,
declared  quarterly  dividends/distributions  aggregating $0.64 per common share
and O.P. Unit for total  dividends/distributions  of $66,948,  including $16,745
payable in January 2007. Total distributions attributable to O.P. Units owned by
various members of the Berg Group were $50,151.

During 2005,  the Company,  as general  partner of the  operating  partnerships,
declared  quarterly  dividends/distributions  aggregating $0.64 per common share
and O.P. Unit for total  dividends/distributions  of $66,887,  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  dividends/distributions  aggregating $0.88 per common share
and O.P. Unit for total  dividends/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 dividends/distributions 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.

                                     - 61 -
<PAGE>

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

10.  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:

-    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. 3,281,089 shares
of common stock were  available for future option or award grants under the 2004
Plan as of December  31, 2006 and 2005.  In addition,  272,000  shares of common
stock subject to options  granted under the Company's  1997 Plan,  which options
expired unexercised in 2006, can be added to the reserve of shares available for
future grant under the 2004 Plan.

Stock  options to purchase  710,000  shares of common stock were granted to four
employees and three non-employee  directors in 2005. The estimated fair value of
the  options  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.
All  options  were  granted at the fair  market  value at the date of grant.  No
options were granted in years 2006 and 2004.

The remaining  contractual  lives of unexercised  option grants range from April
2009 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, 2006.

<TABLE>
<CAPTION>
                                                                                 Weighted Average
                                                             Options              Exercise Price
                                                           Outstanding               Per Share
                                                        ------------------     ----------------------
<S>                                                        <C>                       <C>
         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
               Options exercised                             (112,900)                 $8.76
               Options cancelled                             (272,000)                $13.00
                                                        ------------------     ----------------------
         Balance, December 31, 2006                         1,037,100                 $10.48
                                                        ==================     ======================
         Available for grant at December 31, 2006           3,281,089
         Available for grant at December 31, 2005           3,281,089
</TABLE>


                                     - 62 -
<PAGE>

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


The following table summarizes information regarding options outstanding for the
2004 Plan at December 31, 2006:

<TABLE>
<CAPTION>
                                            Options Outstanding                 Options Exercisable        Options Not Exercisable
                                  -------------------------------------------------------------------------------------------------
                                                    Weighted
                                                     Average
                                                    Remaining      Weighted                  Weighted                  Weighted
                                                Contractual Life   Average                   Average                   Average
         Range of Exercise Prices     Options       in Years   Exercise Price   Options   Exercise Price   Options   Exercise Price
         --------------------------------------------------------------------------------------------------------------------------
<S>                                <C>               <C>         <C>            <C>         <C>           <C>          <C>
         $10.00                       662,100         4.33        $10.00         425,429     $10.00        236,671      $10.00
         $11.33                       375,000         2.33        $11.33         354,167     $11.33         20,833      $11.33
                                  ------------                               ------------              ------------
         $10.00 to $11.33           1,037,100         3.61        $10.48         779,596     $10.60        257,504      $10.11
                                  ============                               ============              ============
</TABLE>


None of the options  granted are  contingent  upon the attainment of performance
goals or  subject  to other  restrictions.  As of  December  31,  2006 and 2005,
"in-the-money"  outstanding  options to purchase  779,596  and 80,000  shares of
common stock, respectively, were exercisable.

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 3,991,089  shares of common stock are reserved for issuance under the
2004 Plan, in addition to 767,000 shares subject to outstanding  options if they
expire unexercised,  of which options to purchase 272,000 shares of common stock
have expired to date. 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

                                     - 63 -
<PAGE>


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


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, 2006, 2005 and 2004, the Company  recognized  $103,
$103 and $92 of expense for employer  contributions made in connection with this
Plan, respectively.

11.  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  following  table  provides  a  reconciliation   of  net  income  to  common
stockholders  and the number of shares used in the  computations  of "basic" net
income per share to common  stockholders  and  "diluted" net income per share to
common stockholders.

<TABLE>
<CAPTION>
                                                                Year Ended              Year Ended               Year Ended
                                                             December 31, 2006       December 31, 2005       December 31, 2004
                                                             --------------------------------------------------------------------
                                                                        (dollars in thousands, except per share data)
     Numerator:
<S>                                                            <C>                      <C>                    <C>
        Income from continuing operations                          $11,494                  $9,323                 $13,399
        Income/(loss) from discontinued operations                   3,136                     704                     (87)
                                                             -------------------     -------------------     --------------------
           Net income to common stockholders                       $14,630                 $10,027                 $13,312
                                                             -------------------     -------------------     --------------------

     Denominator:
        Weighted average shares of common stock (basic)         19,066,581              18,286,947              18,034,873
        Effect of dilutive securities:
           Incremental shares from assumed stock options exercise  232,083                  38,712                  41,625
                                                             -------------------     -------------------     --------------------
           Weighted average shares of common stock (diluted)    19,298,664              18,325,659              18,076,498
                                                             -------------------     -------------------     --------------------
     Per share data:
        Basic net income per share:
           Net income to common stockholders before discontinued
              operations                                            $0.60                   $0.51                   $0.74
           Discontinued operations                                   0.17                    0.04                       -
                                                             -------------------     -------------------     --------------------
                 Net income to common stockholders                  $0.77                   $0.55                   $0.74
                                                             -------------------     -------------------     --------------------
        Diluted net income per share:
           Net income to common stockholders before discontinued
              operations                                            $0.60                   $0.51                   $0.74
           Discontinued operations                                   0.16                    0.04                       -
                                                             -------------------     -------------------     --------------------
                 Net income to common stockholders                  $0.76                   $0.55                   $0.74
                                                             ===================     ===================     ====================
</TABLE>

Outstanding  options to purchase  647,000  and 272,000  shares in 2005 and 2004,
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, 2006,
2005 and 2004 were 85,206,199, 86,088,095 and 86,384,695, respectively.

12.  OTHER INCOME

Other income from continuing  operations was approximately  $20,602,  $4,591 and
$6,862 for the years ended December 31, 2006, 2005 and 2004,  respectively.  For
the year ended  December 31, 2006,  termination  fees,  prior tenant  bankruptcy
settlements,  management  fee  income,  interest  income  and  security  deposit
forfeitures accounted for approximately  $16,068, $183, $1,070, $2,344 and $104,
respectively, of other income. 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,  $936, $567 and $455,  respectively,  of other income.  For the year ended
December 31, 2004,  termination  fees, prior tenant  bankruptcy  settlements and

                                     - 64 -
<PAGE>

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


management fee income  accounted for  approximately  $4,250,  $1,199 and $1,201,
respectively,  of other  income.  Management  fee is paid by the  tenant  to the
landlord for the administration and supervision of the property.

13.  RELATED PARTY TRANSACTIONS

As of December 31, 2006 and 2005, the Berg Group owned 77,392,648 and 77,490,528
O.P.  Units,  respectively,  of the total  85,206,199 and 86,088,095  O.P. Units
issued and outstanding,  respectively.  The Berg Group's interest in the Company
represents  74.0% and 74.1% of the  Company as of  December  31,  2006 and 2005,
respectively,  assuming  conversion of the O.P.  Units into common shares of the
Company.

The Company periodically acquires un-leased 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.

PROPERTY ACQUISITION
In April 2006,  the Company  acquired a fully leased  office/R&D  property  with
approximately  42,100  rentable  square feet located at 1875  Charleston Road in
Mountain View, California by purchasing Mission West Charleston,  LLC, an entity
controlled  by Carl E. Berg.  The total  acquisition  price for this  entity was
$2,615,  which is subject  to a ground  lease  with an  unrelated  party for the
underlying  property that runs through June 2057.  The  acquisition  was paid in
cash. The transaction was approved by the Independent Directors Committee of the
Company's Board of Directors.

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

DEBT WITH THE BERG GROUP
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. The Company did
not incur any fees or  charges  for  terminating  the Berg Group line of credit.
Additionally,  in 2006,  2005 and  2004,  the  operating  partnerships  declared
distributions of $0.64,  $0.64 and $0.88 per O.P. Unit,  respectively.  Interest
expense  incurred in connection  with the Berg Group line of credit was $188 and
$266 for the years ended December 31, 2005 and 2004, respectively.

As of  December  31,  2006 and 2005,  debt in the amount of $9,654 and  $10,051,
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 $755,  $784 and $811 for the years ended  December 31,
2006, 2005 and 2004, 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  Corporation ("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 O.P.  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  buildings,  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.

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


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.

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 $0.8 million,  $0.7 million and $0.7
million  in  2006,  2005  and  2004,  respectively.  As of  December  31,  2006,
accumulated cash flow distributions from Hellyer LP totaling  approximately $3.7
million were accrued and  distributed to BBE. If the Company's  litigation  with
RPC (as described under Note 16 below) 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"  on the  Company's
consolidated balance sheets, 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,  TBI, an  unrelated  party,  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-MWP,  a new  limited  partnership,  to own all the leased
buildings.  The Berg Group offered its 50%  non-controlling  limited partnership
interest in TBI-MWP 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-MWP  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

                                     - 66 -
<PAGE>

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

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-MWP  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. In July 2006,  TBI-MWP sold
one  R&D  property  with   approximately   126,400   rentable  square  feet  for
approximately $8,450. The total gain on the sale was approximately $876 of which
$438 was the Company's share. TBI-MWP currently own three fully leased buildings
totaling approximately 466,600 rentable square feet.

BERG CONTROLLED  ENTITIES HAVE FINANCIAL INTERESTS IN CERTAIN TENANTS THAT LEASE
SPACE FROM THE COMPANY
During  the years  ended  December  31,  2006,  2005 and  2004,  Carl E. Berg or
entities  controlled by Mr. Berg held financial  interests in several  companies
that lease space from the operating partnerships,  which include companies where
Mr.  Berg has a greater  than 10%  ownership  interest.  These  related  tenants
contributed  $1,875,  $731 and $866 in rental  revenue  in 2006,  2005 and 2004,
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 $2,529 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  assets"  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.

The  Berg  Group  has  an  approximately   $7,494   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  assets" 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.

BERG GROUP HIRED TO PERFORM RESTORATIONS
In March  2006,  the  Company and  Fujitsu  Limited,  or Fujitsu,  agreed to the
termination  of a lease for one building  consisting  of  approximately  125,000
rentable  square  feet.  Fujitsu is  responsible  for  repairing  damages to the
building and with the Company's  Independent  Directors  Committee  approval has
hired Berg & Berg  Enterprises,  LLC to perform the restoration work for a total
of approximately $4,500.

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, 2006, 2005 and 2004.

14.  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, 2006, excluding tenant
reimbursements of expenses are as follows:

                                     - 67 -
<PAGE>

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


<TABLE>
<CAPTION>
         Year                    Minimum Rent
         --------------------------------------------
                            (dollars in thousands)
<S>                              <C>
         2007                      $87,719
         2008                       78,376
         2009                       74,465
         2010                       67,415
         2011                       54,974
         Thereafter                110,755
                          ---------------------------
              Total               $473,704
                          ===========================
</TABLE>

15.  SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest was  approximately  $20,137,  $21,842 and $18,363 for the
years ended December 31, 2006, 2005 and 2004, respectively.

Amounts of  approximately  $50,166,  $50,223 and  $75,326  were paid to the Berg
Group for  distributions  declared to O.P.  Unit holders  during the years ended
December 31,  2006,  2005 and 2004,  respectively.  The amounts paid in 2005 and
2004 were treated as draws under the Berg Group line of credit.

For the years ended  December  31,  2006,  2005 and 2004,  881,896,  296,600 and
182,500 O.P. Units were exchanged for 881,896, 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.  These non-cash transactions were valued at approximately

$10,279, $3,019 and $2,238 for the years ended December 31, 2006, 2005 and 2004,
respectively, based on the market closing price on the day of the transactions.

16.  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  consolidated  cash flows,  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.

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.  On
November 20, 2000,  RPC  commenced a lawsuit  against the Company in the Circuit
Court of Maryland for Baltimore City. After lengthy litigation, which included a
trial on the merits and subsequent  appears,  in April 2006  Maryland's  highest
Court upheld an earlier  Maryland  Appeals Court ruling in favor of the Company,
finding  that  the  Circuit  Court  of  Maryland   could  not  assert   personal
jurisdiction  over the Company in the RPC suit.  The Court  vacated the judgment
and decision in the trial court and dismissed the entire Maryland suit (see Note
13 above  under,  "Transfer  of  Interest  to Berg Group in  Consolidated  Joint
Venture" for  information  about the Hellyer Avenue Limited  Partnership and the
historical transactions underlying this litigation).

MISSION WEST PROPERTIES,  L.P. V. REPUBLIC PROPERTIES CORPORATION,  ET AL. SANTA
CLARA COUNTY SUPERIOR  COURT,  CASE NO. CV 796249.  In February 2001,  while the
Maryland case was pending,  the Company filed a suit against RPC in the Superior
Court of the State of  California  for the  County of Santa  Clara,  Case No. CV
796249.  The case was stayed  pending  resolution of the Maryland  case, and the
Company  dismissed  its suit on March 4, 2005.  In April 2005,  RPC  submitted a
motion asking the Superior Court to reinstate the case,  which the Court granted
on May 25,  2005.  On July 5,  2006,  RPC  filed a  cross-complaint  in the case
seeking  partnership  distributions  to which the  Company  demurred.  The Court
sustained the Company's demurrer with leave to amend. Subsequently, RPC filed an
amended  complaint and the Company  submitted another demurrer seeking dismissal
of the claims on statute of limitations grounds. On February 20, 2007, the Court
overruled  the  Company's  demurrer.  The Company is in the process of seeking a
writ from the California State Court of Appeal for the Sixth District  directing
the Superior Court to sustain the demurrer.

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
made in the ordinary  course of business  within 90 days of the Global  Crossing
bankruptcy  filing  were  avoidable  preference  payments.  During the course of
settlement discussions with Global Crossing's representative, we learned that we
would receive only 2-3% of our  unsecured  claim of $16,711 for unpaid rent from
the final  distribution  of the assets and  proceeds of  bankruptcy  estate.  On
February  21, 2007,  we and the  Liquidating  Trustee  entered into a

                                     - 68 -
<PAGE>

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

settlement  agreement under which the $815 claim against us was dismissed and we
agreed to accept a payment of  approximately  $150 as a final  settlement of our
claim for unpaid rent.

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, 2006.

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, 2006.

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 the Company is not aware of any such liability.  Nonetheless, it
is  possible  that there are  material  environmental  liabilities  of which the
Company is 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.

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 disclosed
its  intention  to  develop  "for  sale"   industrial  type  buildings  and  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.  The  Independent
Directors  Committee's  approval also  included a requirement  that 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  agreement  and would  remain
eligible for  potential  future  acquisition  by the Company under the Berg Land
Holdings Option Agreement. In the third quarter of 2006, the Berg Group informed
the Company that the prospective purchaser withdrew its offer.

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 by the Company under the
Berg Land Holdings Option Agreement.

                                     - 69 -
<PAGE>

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

ASSET DISPOSITION SUBJECT TO CERTAIN CONDITIONS
The Company had entered into sales  agreements  with  unrelated  parties to sell
Morse  Avenue and  McCandless  Drive  subject to numerous  material  conditions,
including but not limited to re-zoning of the property and  negotiating  certain
agreements with the local  municipality  acceptable to buyer. As of December 31,
2006 the contract to sell a portion of the  McCandless  Drive  project  expired;
however,  the Company is in active discussions with other unrelated  prospective
buyers for various portions of the project. As a result of the conditions agreed
to by the Company with the buyers of Morse Avenue and the status of  discussions
to sell  McCandless  Drive,  these  assets do not meet the criteria set forth in
SFAS 144 to be classified as assets held for sale. The following  summarizes the
properties described above:

<TABLE>
<CAPTION>
         Property                   Number of Buildings   Rentable Square Feet           Acre              Sales Price
         --------                   -------------------   --------------------           ----              -----------
<S>      <C>                               <C>                   <C>                   <C>                   <C>
         McCandless Drive
         Milpitas, California               14                    706,000               46.3                     N/A

         Morse Avenue
         Sunnyvale, California               1                     39,200               2.25                  $8,250
</TABLE>

17.  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, 2006, 2005 and 2004.  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, 2006,  there were no properties  under contract to be sold or
otherwise disposed of which would qualify as assets held for sale.

There was one R&D 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 R&D  properties  for a total  sales  price of
$27,855  (including  the one sold in January  2005)  resulting  in a net gain of
$2,206.  In 2006,  the Company sold three R&D properties for a total sales price
of $43,271  resulting in a net gain of $18,102.  Results of operations for these
properties for the years ended December 31, 2006, 2005 and 2004 are as follows:

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                               -------------------------------------------------------------
                                                                     2006                  2005                  2004
                                                               -----------------     -----------------     -----------------
<S>                                                              <C>                     <C>                   <C>
Revenues:                                                                         (dollars in thousands)
   Rental revenue from real estate                                 $1,730                 $3,044                $4,090
   Tenant reimbursements                                              262                    647                   845
   Other income                                                       255                     16                    55
                                                               -----------------     -----------------     -----------------
      Total revenues                                                2,247                  3,707                 4,990
                                                               -----------------     -----------------     -----------------

Expenses:
   Property operating, maintenance and real estate taxes              534                    993                 1,544
   Depreciation of real estate                                        471                  1,045                 1,050
   Asset impairment charge                                              -                      -                 2,193
                                                               -----------------     -----------------     -----------------
     Total expenses                                                 1,005                  2,038                 4,787
                                                               -----------------     -----------------     -----------------

Income from discontinued operations                                 1,242                  1,669                   203
Gain from disposal of discontinued operations                      18,102                  2,206                     -
Minority interests in earnings from discontinued operations       (16,208)                (3,171)                 (290)
                                                               -----------------     -----------------     -----------------
     Income/(loss) from discontinued operations                    $3,136                   $704                  ($87)
                                                               =================     =================     =================
</TABLE>

For the years ended December 31, 2006, 2005 and 2004,  income from  discontinued
operations included results of operations from three R&D properties sold in 2006
and three R&D properties sold in 2005.

                                     - 70 -
<PAGE>

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

18.  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.

In March 2006,  the Company  acquired two R&D  properties at 233 South  Hillview
Drive  in  Milpitas,  California  for  $13,411  from  an  unrelated  party  in a
tax-deferred  exchange   transaction.   The  purchase  price  was  allocated  to
long-lived assets and the value of an in-place lease as follows:

         Land                                   $ 3,335
         Buildings and improvements               8,702
         In-place lease                           1,374
                                                -------
            Total cash purchase price           $13,411
                                                =======

In April 2006, the Company  acquired one R&D property at 1875 Charleston Road in
Mountain View, California for $2,615 by purchasing Mission West Charleston, LLC,
an entity  controlled by Carl E. Berg.  The  acquisition  is subject to a ground
lease with an unrelated party for the underlying property that runs through June
2057. The purchase price was allocated to long-lived  assets and the value of an
in-place lease as follows:

         Buildings and improvements              $1,870
         In-place lease                             745
                                                 ------
            Total cash purchase price            $2,615
                                                 ======

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.

The results of  operations  for the three R&D  property  acquisitions  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  expense  related to  in-place  leases of
$1,613,  $1,444 and $1,762 was recorded  for the years ended  December 31, 2006,
2005 and 2004, respectively.

Details of real estate related  intangible  assets at December 31, 2006 and 2005
are as follows:

<TABLE>
<CAPTION>
                                                                     December 31,
                                                      -------------------------------------------
                                                             2006                    2005
                                                      -------------------     -------------------
<S>                                                       <C>                      <C>
                                                                 (dollars in thousands)
       Amortizable intangible assets:
          Above-market lease                               $11,172                  $11,172
          In-place leases                                    8,357                    6,238
                                                      -------------------     -------------------
       Gross real estate related intangible assets          19,529                   17,410
       Less accumulated amortization                       (11,907)                  (8,405)
                                                      -------------------     -------------------
       Net real estate related intangible assets            $7,622                   $9,005
                                                      ===================     ===================
</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 Above Market
                         Estimated In-placen Lease   Lease Amortization          Estimated
         Year              Amortization (expense)     (revenue off-set)      Total Amortization
         -----------------------------------------------------------------------------------------
                                                   (dollars in thousands)
<S>                              <C>                     <C>                     <C>
         2007                     $1,618                  $1,888                  $3,506
         2008                        724                   1,888                   2,612
         2009                        608                     315                     923
         2010                        442                       -                     442
         2011                        139                       -                     139
                           -----------------------------------------------------------------------
            Total                 $3,531                  $4,091                  $7,622
                           =======================================================================
</TABLE>

                                     - 71 -
<PAGE>

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

19.  SUPPLEMENTAL FINANCIAL INFORMATION (Unaudited)

Quarterly  financial  information for the year ended December 31, 2006 (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             $23,576               $21,588               $22,107               $22,839
Income before gain on sales of assets,
  equity in earnings of unconsolidated
  joint venture and minority interests                $27,688               $10,186                $9,966               $11,819
Income from continuing operations (2)                  $5,068                $2,032                $2,109                $2,286
Income/(loss) from discontinued operations (2)            $85                   $89                   ($3)               $2,964
Net income                                             $5,153                $2,121                $2,106                $5,250
Per share data:
  Basic net income per share                            $0.28                 $0.11                 $0.11                 $0.27
  Diluted net income per share                          $0.28                 $0.11                 $0.11                 $0.27
Weighted average shares of common stock (basic)    18,455,897            19,028,240            19,350,672            19,417,823
Weighted average shares of common stock (diluted)  18,520,297            19,123,945            19,418,884            19,630,674
</TABLE>

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             $25,475               $24,343               $23,935               $23,982
Income before gain on sales of assets,
   equity in earnings of unconsolidated
   joint venture and minority interests               $13,833               $14,488               $11,787               $12,844
Income from continuing operations (2)                  $2,365                $2,633                $2,069                $2,255
Income from discontinued operations (2)                   $43                   $62                  $382                  $218
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>

(1)  The  summation  of the  quarterly  financial  data may not equal the annual
     number  reported  on  the  consolidated  statements  of  operations  due to
     rounding differences.
(2)  Amounts may not equal previously  reported results due to  reclassification
     between  income from  continuing  operations  and income from  discontinued
     operations.

20.  SUBSEQUENT EVENTS

On January 4, 2007,  the  Company  paid  dividends  of $0.16 per share of common
stock to all common  stockholders of record as of December 29, 2006. On the same
date, the operating  partnerships  paid a distribution of $0.16 per O.P. Unit to
all holders of O.P. Units.  Aggregate  dividends and  distributions  amounted to
approximately $16,745.

On March 8, 2007,  the Company  acquired 50 acres of vacant land in Morgan Hill,
California,  which could support  approximately  725,000 rentable square feet of
space.  The land is  currently  zoned for  industrial  use and a portion has the
potential  to be rezoned for  residential  use. The  acquisition  price for this
property was approximately $25,638 and was funded from a portion of the proceeds
received from the Samaritan  property  sale,  which was classified as restricted
cash as of December 31, 2006.

                                     - 72 -

<PAGE>

           REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
                          FINANCIAL STATEMENT SCHEDULE



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

The audit  referred  to in our  report  dated  March 12,  2007  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  schedule  listed in the  accompanying  index as of December 31, 2006.
This  financial  statement  schedule  is the  responsibility  of  the  Company's
management.  Our  responsibility  is to express  an  opinion  on this  financial
statement schedule based upon our audit.

In our  opinion  such  financial  statement  schedule  as of  December  31, 2006
presents fairly, in all material respects, the information set forth therein.


\S\ Burr, Pilger & Mayer, LLP
San Francisco, California
March 12, 2007


                                     - 73 -

<PAGE>



           REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
                          FINANCIAL STATEMENT SCHEDULE



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  schedule as of December  31, 2005 listed in the  accompanying  index.
This  financial  statement  schedule  is the  responsibility  of  the  Company's
management.  Our  responsibility  is to express  an  opinion  on this  financial
statement schedule based upon our audits.

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


\S\ BDO Seidman, LLP
San Francisco, California
February 3, 2006

                                     - 74 -
<PAGE>






                               INTENTIONALLY BLANK



                                     - 75 -

<PAGE>


                          MISSION WEST PROPERTIES, INC.
                                  Schedule III
            Real Estate and Accumulated Depreciation and Amortization
                                December 31, 2006
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                               Initial Cost                          Total Cost
                                                          ----------------------     Cost      -----------------------
                                             December 31,            Buildings   Subsequent to             Buildings
                                                2006                    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      $9,654    $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           405      1,604        8,210        9,814
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           109      2,787        6,611        9,398
5750 Hellyer Avenue           San Jose                      3,266        3,354         2,455      3,266        5,809        9,075
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 Street   Mt. View                     46,832      109,275            65     46,832      109,340      156,172
1875 Charleston Road          Mt. View    M                     -        2,615                        -        2,615        2,615
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            23      8,195       19,144       27,339
255 Caspian Drive             Sunnyvale                     3,491        7,160         1,658      3,491        8,818       12,309
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           170      7,138        7,245       14,383
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           816      3,304        4,243        7,547
2330 Central Expressway       Santa Clara E                 3,673        3,932           677      3,673        4,609        8,282
233 South Hillview Drive      Milpitas    N                 3,335       10,076                    3,335       10,076       13,411
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 Dr.  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           102        434        2,214        2,648
10460 Bubb Road               Cupertino   H                   994        4,838         1,252        994        6,090        7,084
1135 Kern Avenue              Sunnyvale   F                   407        1,982                      407        1,982        2,389
450 National Avenue           Mt. View    F                   611        2,973            72        611        3,045        3,656
3301 Olcott Street            Santa Clara                   1,846        8,984            37      1,846        9,021       10,867
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
</TABLE>



<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           $1,895            5/00              L
10401-10411 Bubb Road         Cupertino   A              656            7/98              L
45365 Northport Loop          Fremont                    904           10/00              L
45700 Northport Loop          Fremont     F            1,226            7/98              L
45738 Northport Loop          Fremont     F              926            7/98              L
4050 Starboard Drive          Fremont     F            1,378            7/98              L
3501 W. Warren Ave/Fremont    Fremont                  2,424            7/98              L
48800 Milmont Blvd            Fremont                  1,049            7/98              L
4750 Patrick Henry Drive      Santa Clara              1,836            7/98              L
3520 Bassett Street           Santa Clara D            1,142            7/98              L
3530 Bassett Street           Santa Clara B,D            880            7/98              L
5850-5870 Hellyer Avenue      San Jose                 1,346           11/98              L
5750 Hellyer Avenue           San Jose                   454            8/01              L
800 Embedded Way              San Jose                     -            3/00              L
5500 Hellyer Avenue           San Jose                 1,857            2/01              L
5550 Hellyer Avenue           San Jose                   515            6/01              L
5400 Hellyer Avenue           San Jose                   996            7/00              L
5325 Hellyer Avenue           San Jose    H            1,581            1/01              L
5345 Hellyer Avenue           San Jose    H              848            1/02              L
5905-5965 Silver Crk Valley RdSan Jose                 2,381            7/01              L
5905-5965 Silver Crk Valley RdSan Jose                   358           10/01              L
855 Embedded Way              San Jose    K              977            5/01              L
1065-1105 La Avenida Street   Mt. View                21,182            4/99              L
1875 Charleston Road          Mt. View    M              141            4/06              L
1750 Automation Parkway       San Jose    G            2,154            7/99              L
1756 Automation Parkway       San Jose    G            1,803            1/00              L
1762 Automation Parkway       San Jose    G            2,083            4/00              L
1768 Automation Parkway       San Jose    H            2,923           12/00              L
255 Caspian Drive             Sunnyvale                1,637            4/00              L
245 Caspian Drive             Sunnyvale                    -            4/01              L
5970 Optical Court            San Jose                   630           12/03              L
5900 Optical Court            San Jose    H            1,475            7/02              L
2630 Orchard Parkway          San Jose                   731            3/02              L
2610 Orchard Parkway          San Jose    J              632            3/02              L
55 West Trimble Road          San Jose    J            1,072            3/02              L
2001 Walsh Avenue             Santa Clara E,I          1,488            4/03              L
2880 Scott Boulevard          Santa Clara E,H,I        4,416            4/03              L
2890 Scott Boulevard          Santa Clara E,H,I        1,516            4/03              L
2770-2800 Scott Boulevard     Santa Clara E,H            676            4/03              L
2300 Central Expressway       Santa Clara E,I          7,800            4/03              L
2220 Central Expressway       Santa Clara E,I            433            4/03              L
2330 Central Expressway       Santa Clara E              409            4/03              L
233 South Hillview Drive      Milpitas    N              403            3/06              L
2251 Lawson Lane              Santa Clara G            2,020            7/98              L
1230 East Arques              Sunnyvale   F              595            7/98              L
1250 East Arques              Sunnyvale   F            1,382            7/98              L
20400 Mariani Avenue          Cupertino   H            1,729            7/98              L
10500 De Anza Blvd            Cupertino   F            7,931            7/98              L
20605-20705 Valley Green Dr.  Cupertino   G            3,613            7/98              L
10300 Bubb Road               Cupertino   F              658            7/98              L
10440 Bubb Road               Cupertino                  514            7/98              L
10460 Bubb Road               Cupertino   H            1,412            7/98              L
1135 Kern Avenue              Sunnyvale   F              424            7/98              L
450 National Avenue           Mt. View    F              644            7/98              L
3301 Olcott Street            Santa Clara              1,912            7/98              L
2800 Bayview Avenue           Fremont                  1,168            7/98              L
5521 Hellyer Avenue           San Jose                   556            2/05              L
6850 Santa Teresa Blvd        San Jose                   753            7/98              L
6810 Santa Teresa Blvd        San Jose                 1,234            3/99              L
</TABLE>


                                     - 76 -
<PAGE>


<TABLE>
<CAPTION>
                                                               Initial Cost                          Total Cost
                                                          ----------------------     Cost      -----------------------
                                             December 31,            Buildings   Subsequent to             Buildings
                                                 2006                   and      Construction/                and
Property Name                 City           Encumbrances   Land    Improvements  Acquisition     Land    Improvements     Total
-------------------------------------------- ------------ --------- ------------ ------------- ---------- ------------ ------------
<S>                          <C>                <C>      <C>         <C>              <C>       <C>        <C>          <C>
140-160 Great Oaks Blvd.      San Jose                      1,402        6,822           754      1,402        7,576        8,978
6541 Via del Oro/6385 San Ig. San Jose    G                 1,039        5,057            72      1,039        5,129        6,168
6311-6351 San Ignacio Ave.    San Jose    F                 6,247       30,396           170      6,247       30,566       36,813
6320-6360 San Ignacio Ave.    San Jose    G                 2,616       12,732           439      2,616       13,171       15,787
75 E. Trimble Rd/2610 N. 1st  San Jose                      3,477       16,919            85      3,477       17,004       20,481
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           182        943        4,773        5,716
3540-3544 Bassett Street      Santa Clara F,D               1,565        7,615           195      1,565        7,810        9,375
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         F     114,994
   Northwestern Mutual Life Insurance Co. G      88,411
   Allianz Life Insurance Company         H     144,696
                                             ------------ --------- ------------ ------------- ---------- ------------- -----------
                                               $357,755   $272,223    $761,696       $14,429   $272,223     $776,125   $1,048,348
                                             ============ ========= ============ ============= ========== ============= ===========
</TABLE>


<TABLE>
<CAPTION>
                                                   Accumulated
                                                   Depreciation        Date of       Depreciable
Property Name                 City                & Amortization     Acquisition        Life
--------------------------------------------     ----------------  ---------------  -------------
<S>                          <C>                    <C>               <C>                <C>
140-160 Great Oaks Blvd.      San Jose                 1,744            7/98              L
6541 Via del Oro/6385 San Ig. San Jose    G            1,100            7/98              L
6311-6351 San Ignacio Ave.    San Jose    F            6,592            7/98              L
6320-6360 San Ignacio Ave.    San Jose    G            2,865            7/98              L
75 E. Trimble Rd/2610 N. 1st  San Jose                 3,677            7/98              L
1170 Morse Avenue             Sunnyvale   F              682            7/98              L
3236 Scott Blvd               Santa Clara F            1,278            7/98              L
1212 Bordeaux Lane            Sunnyvale   F            2,330            7/98              L
1325-1810 McCandless Drive    Milpitas    G           14,671            7/98              L
1600 Memorex Drive            Santa Clara F            1,250            7/98              L
1688 Richard Avenue           Santa Clara F              624            9/98              L
1700 Richard Avenue           Santa Clara F              751            8/99              L
3506-3510 Bassett Street      Santa Clara D            1,062            7/98              L
3540-3544 Bassett Street      Santa Clara F,D          1,671            7/98              L
3550 Bassett Street           Santa Clara F,D          1,148            7/98              L
3560 Bassett Street           Santa Clara F,D          1,121            7/98              L
3570-3580 Bassett Street      Santa Clara F,D          1,115            7/98              L
   Prudential Ins. Co. of America         F
   Northwestern Mutual Life Insurance Co. G
   Allianz Life Insurance Company         H
                                                 ----------------
                                                    $149,459
                                                 ================
</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 $114,994  Prudential  Insurance Company of America loan -
     full amount of loan shown at the bottom of the schedule.
(G)  Encumbered by the $88,411 Northwestern Mutual Life Insurance Company loan -
     full amount of loan shown at the bottom of the schedule.
(H)  Encumbered  by the  $144,696  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.
(M)  Purchase price allocated to real estate related  intangible assets pursuant
     to SFAS 141 amounted to $745.
(N)  Purchase price allocated to real estate related  intangible assets pursuant
     to SFAS 141 amounted to $1,374.

                                     - 77 -


<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       Mt. 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           Mt. 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


</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   Mt. 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           Mt. 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

</TABLE>

                                     - 78 -

<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>
6541 Via del Oro/6385 San Ig  San Jose    G                 1,039        5,057            91      1,039        5,148        6,187
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         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>
6541 Via del Oro/6385 San Ig  San Jose    G                 949         7/98              L
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         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.


                                     - 79 -

<PAGE>

                          MISSION WEST PROPERTIES, INC.
                              NOTE TO SCHEDULE III
                           December 31, 2006 and 2005
                             (dollars in thousands)

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

<TABLE>
<CAPTION>
                                                                                          2006                       2005
                                                                                 ------------------------   ------------------------
Real estate investments:
<S>                                                                                  <C>                        <C>
   Balance at beginning of year                                                       $1,057,800                 $1,072,503
   Additions                                                                              20,304                     15,151
   Dispositions                                                                          (29,756)                   (28,980)
   Reclassification                                                                            -                       (874)
                                                                                 ------------------------   ------------------------
   Balance at end of year                                                             $1,048,348                 $1,057,800
                                                                                 ------------------------   ------------------------

Accumulated depreciation and amortization:
   Balance at beginning of year                                                         $130,419                   $111,640
   Additions                                                                              24,163                     23,487
   Dispositions                                                                           (5,123)                    (3,834)
   Reclassification                                                                            -                       (874)
                                                                                 ------------------------   ------------------------
   Balance at end of year                                                               $149,459                   $130,419
                                                                                 ------------------------   ------------------------

Net investments in properties                                                           $898,889                   $927,381
                                                                                 ========================   ========================
</TABLE>

                                     - 80 -
<PAGE>



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

The Company previously disclosed the change in its independent registered public
accountants on Form 8-K, filed April 10, 2006.

ITEM 9A. CONTROLS AND PROCEDURES

(a)  Evaluation of 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, 2006 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 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.
Management  assessed  the  effectiveness  of  Mission  West  Properties,  Inc.'s
internal  control over financial  reporting as of December 31, 2006.  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
Mission  West  Properties,  Inc.  maintained  effective  internal  control  over
financial reporting as of December 31, 2006.

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's assessment of the effectiveness of Mission West Properties,  Inc.'s
internal  control  over  financial  reporting  as of December  31, 2006 has been
audited  by  Burr,  Pilger  &  Mayer,  LLP,  an  independent  registered  public
accounting  firm,  as stated in their  report  which is  included in this Annual
Report on Form 10-K.

(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 2006 that has  materially  affected,  or is reasonably
likely to material affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

                                     - 81 -

<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The  information  required  by Item 10 is  incorporated  by  reference  from the
sections  titled  "Management - Directors and  Executive  Officers,"  "Corporate
Governance"  and  "Code of  Ethics"  and  "Section  16(a)  Beneficial  Ownership
Reporting  Compliance" in the Company's  definitive proxy statement for its 2007
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 2007 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
2007 annual stockholders' meeting.

ITEM 13.  CERTAIN   RELATIONSHIPS   AND  RELATED   TRANSACTIONS,   AND  DIRECTOR
          INDEPENDENCE

The  information  required  by Item 13 is  incorporated  by  reference  from the
sections titled "Certain  Relationships and Related Transactions" and "Corporate
Governance"  in the  Company's  definitive  proxy  statement for its 2007 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 2007 annual stockholders' meeting.

                                     - 82 -

<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  consolidated  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, 2006 and 2005,  which can be found on
          page 76.

     3.   The  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).

                                     - 83 -
<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 15, 2007           By: /s/ Carl E. Berg
                                        ------------------------------------
                                        Carl E. Berg
                                        Chief Executive Officer
                                        (Principal Executive Officer)


      Date: March 15, 2007           By: /s/ Wayne N. Pham
                                        ------------------------------------
                                        Wayne N. Pham
                                        Vice President of Finance and Controller
                                        (Principal Financial and 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 15, 2007


/s/  John C. Bolger
------------------------------
John C. Bolger                 Director                                     March 15, 2007


/s/  William A. Hasler
------------------------------
William A. Hasler              Director                                     March 15, 2007


/s/  Lawrence B. Helzel
------------------------------
Lawrence B. Helzel             Director                                     March 15, 2007


/s/  Raymond V. Marino
------------------------------ President, Chief Operating Officer
Raymond V. Marino              and Director                                 March 15, 2007
</TABLE>


                                     - 84 -

<PAGE>


Exhibits required by Item 601 of Regulation S-K.

<TABLE>
<CAPTION>
                                  EXHIBIT INDEX

<S>                   <C>
    3.2.1              Articles of Amendment and Restatement of Mission West Properties, Inc.(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) (Terminated)
    10.27.1            Third Amendment to Berg Group $100,000,000 Revolving Line of Credit(11) (Terminated)
    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

                                     - 85 -
<PAGE>

    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
    23.2               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>

*Management contract or compensatory plan or arrangement

(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.

                                     - 86 -
<PAGE>

(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.
(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.

                                     - 87 -

<PAGE>