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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

/X/

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

/  /

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

For the transition period from __________ to __________

Commission file number 1-12222

BEDFORD PROPERTY INVESTORS, INC.

(Exact name of registrant as specified in our charter)

Securities registered pursuant to Section 12(b) of the Act:

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

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

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

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates of registrant as of June 30, 2004 was approximately $ 427,776,141 .. The number of shares of registrant’s common stock, par value $0.02 per share, outstanding as of February 28, 2005 was 16, 442,554 ..

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement to be mailed to the registrant’s stockholders in connection with the annual meeting of the registrant’s stockholders, scheduled to take place on May 11 , 2005 , are incorporated by reference in Items 10 through 14 of Part III of this report. Except as expressly incorporated by reference, the registrant’s proxy statement shall not be deemed to be part of this report.

Forward-Looking Statements

When used in this Form 10-K, the words “ believe, ” “ expect, ” “ intend, ” “ anticipate ” and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are subject to risks and uncertainties and actual results could differ materially from those expressed, expected, or implied by the forward-looking statements. The risks and uncertainties that could cause our actual results to differ from our estimates and expectations are contained in our filings with the Securities and Exchange Commission and are set forth in the section below entitled “ Potential Factors Affecting Future Operating Results. ” Readers are cautioned not to place undue reliance on these forward-looking statements because they only reflect information available as of the date of this filing. We do not undertake to update forward-looking information contained herein or elsewhere to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking information.

PART I

Item 1. Business

BEDFORD PROPERTY INVESTORS, INC.

We are the successor to ICM Property Investors, Incorporated (ICM), a real estate investment trust (REIT) incorporated in Delaware in 1984. In July 1993, ICM was reorganized in the state of Maryland under the name of Bedford Property Investors, Inc. Equipped with a new board of directors and a new management team, we became a self-administered and self-managed equity REIT, engaged in the business of owning, managing, acquiring and developing industrial and suburban office properties proximate to metropolitan areas in the western United States. As of December 31, 2004, we owned 91 operating properties totaling approximately 7.4 million rentable square feet and 11 parcels of land totaling approximately 46 acres. In addition, we owned three office properties and one research and development property currently under redevelopment.  Of the 91 operating properties, 61 are industrial properties and 30 are suburban office properties. Our propertie s are located in California, Arizona, Washington, Colorado, Nevada, and Oregon.

CORPORATE OBJECTIVE AND STRATEGIES

Our business objective is to increase stockholders’ long-term total return through increases in the dividend and the appreciation in value of our common stock. To achieve this objective, we focus on five strategies:

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Occupancy:  aim to maintain an occupancy rate of 90% or more for the properties in our portfolio;

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Asset Sales:  dispose of selected assets that have reached what we consider to be their full potential or which do not meet our goal of maintaining a multi-tenant property portfolio;

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Development: develop properties with the goal of achieving the high rates of return we have historically generated from internally developed properties;

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Acquisitions:  acquire quality multi-tenant industrial and suburban office properties, land parcels, and/or portfolios of such properties; and

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Share Repurchases:  repurchase our common stock on an opportunistic basis.

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Occupancy

As of December 31, 2004, our operating portfolio was 91% occupied, a 2 percentage point decrease from the 93% occupancy as of December 31, 2003.  We expect our property portfolio will continue to be exposed to higher than usual lease expirations in 2005 similar to our experience in 2004. In response to this higher than projected turnover, we continue to place emphasis on the objective of retaining or, if required, replacing our tenant base. During the past two years, we have engaged in a strategy to negotiate lower rental rates with good credit tenants whose rent is substantially above market in exchange for extended lease terms, which we refer to as “blend and extend” leases. We engaged in these blend and extend leases in order to retain these good credit tenants in the difficult market conditions; however, we believe current market conditions are improving which may result in fewer negotiations of these blend and extend deals in 2005. We are also continuing to focus on the lease renewals of a selected group of our largest tenants, whose leases expire through the year 2007.  Our regional managers have developed strategies for the retention of each of these tenants. Our goal is to provide our best planning and attention to each prospective renewal in the group. In this way, we hope to move successfully through a period of higher lease expirations without a significant reduction in our retention rate. We continue to emphasize the importance of protecting occupancy in strategic planning sessions with our regional and property managers.

Asset Sales

In response to market conditions, we initiated an asset sales program in the fourth quarter of 2004, which resulted in the sale of assets with contract prices totaling approximately $175 million in December 2004 .. We intend to continue to sell selected properties in order to reposition our portfolio and to take advantage of the current low capitalization rates in the market. Properties that will be considered for sale include those that we believe have reached their full potential and can produce a significant gain on sale. We are also shifting our focus away from single - tenant properties to multi-tenant properties in an effort to reduce the vacancy risk associated with large, single-tenant buildings. In an effort to reposition ourselves as a multi-tenant REIT, we may sell properties that do not meet this criteria.

Development

In recent years, we have reduced our development activity due to the lack of demand in our markets.  However, given the current indications of economic recovery, we intend to increase our development activity to take advantage of what we anticipate will be higher rates of returns on properties we develop, which has been our experience in the past.  We currently own 46 acres of land with the potential for approximately 600,000 square feet of rentable space.  We will also seek to buy additional parcels of land as opportunities arise, with a goal of developing 500,000 square feet per year.

Acquisitions

In order to position ourselves as a multi-tenant REIT, we seek to acquire multi-tenant industrial and suburban office properties, parcels of land, and/or portfolios of such properties. We believe that we are able to effectively identify and capitalize on acquisition opportunities through:

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the experience of our management team;

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our existing $150 million credit facility, which contains a $50 million accordion feature that allows the facility to be expanded to $200 million;

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our relationships with private and institutional real estate owners;

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our relationships with the real estate brokerage community; and

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our integrated asset management program.

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Each acquisition opportunity is reviewed to evaluate whether it meets the following criteria:

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potential for higher occupancy levels and/or rents, as well as for lower turnover and/or operating expenses;

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ability to generate returns in excess of our weighted average cost of capital, taking into account the estimated costs associated with tenant turnover (i.e., tenant improvements, leasing commissions and the loss of income due to vacancy); and

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availability for purchase at a price at or below estimated replacement cost.

We have, however, in the past acquired, and in the future we may acquire, properties that do not meet one or more of these criteria. This may be particularly true with the acquisition of a portfolio of properties that may include individual properties that do not meet one or more of the foregoing criteria.

Following completion of an initial review of a property or portfolio of properties, we may make a purchase offer, subject to satisfactory completion of our due diligence process. The due diligence process enables us to refine our original estimate of the potential performance of the property or portfolio and typically includes a complete review and analysis of the physical structure, systems, environmental status and projected financial performance. The due diligence process also includes an evaluation of the local market, including competitive properties and relevant economic and demographic information. Typically, Peter Bedford, our chairman of the board and chief executive officer, and at least one other executive or senior officer visit each proposed acquisition property before the purchase is closed. After their evaluation and endorsement of a potential acquisition property, the proposed acquisition is presented either to the real estate investment committee of the board of directors for acquisitions under $25,000,000, or to the full board of directors for all other acquisitions, for their review and approval prior to our commitment to acquire the property or portfolio.

Share Repurchases

In July 1998, our board of directors approved a share repurchase program of 3 million shares of our common stock, which was increased first to 4.5 million shares in September 1999, then to 8 million shares in September 2000 and later to 10 million shares in January 2002.

In November 1998, we implemented our share repurchase program when we believed our stock price traded at a discount to our estimated net asset value, which was calculated based on current capitalization rates and earnings estimates. From November 1998 through the end of 2000, we repurchased 5,738,837 shares (or 71% of our repurchased shares) at an average cost of $17.49 per share. From 2001 through 2004, as the dividend rates on our average stock price yielded approximately 2% higher than our average borrowing costs, we continued to repurchase our common stock on an opportunistic basis. From November 1998 through the end of 2004, we have repurchased and retired approximately 8.5 million shares at an average cost of $19.24 per share. This represents 37% of the shares outstanding at November 30, 1998 when we implemented our share repurchase program. During the year ended December 31, 2004, we repurchased 453,655 shares of our common stock under o ur share repurchase program at an average cost of $27.98 per share. We intend to continue to opportunistically repurchase our shares in 2005.

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TRANSACTIONS AND SIGNIFICANT EVENTS DURING 2004

Acquisitions

During 2004, we acquired 809,958 square feet of commercial real estate assets and 4.69 acres of land for total contract price s totaling approximately $103,641,000, which consisted of the following:

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A 111,200 square-foot office building in Scottsdale, Arizona for $17,310,000 or approximately $156 per square foot. The property was fully leased at the time of the acquisition ..

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A 63,785 square-foot office building and a 63,024 square-foot research and development building in Hillsboro, Oregon for a total price of $19,390,000 or approximately $153 per square foot. The properties were fully leased at the time of the acquisition ..

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A 130,639 square-foot industrial building in Phoenix, Arizona for $9,145,000 or approximately $70 per square foot. At the time of acquisition, the property was 50% leased to a single tenant through July of 2004.  At the expiration of the lease, we redeveloped the property to accommodate the expansion requirements of one of our existing tenants.   O ccupancy by the new tenant is expected in the second quarter of 2005.

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A 77,965 square-foot research and development building in Hillsboro, Oregon for $9,800,000 or approximately $126 per square foot. The property was fully leased to a single tenant at the time of acquisition ..

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A 196,501 square-foot office complex in Phoenix, Arizona for $31,200,000 or approximately $159 per square foot. The two-building property was 78% leased at the time of the acquisition.

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An 83,244 square-foot research and development building in Hillsboro, Oregon for $3,800,000 or approximately $46 per square foot.  The newly constructed property was shell complete at the time of acquisition and is currently in the lease-up phase.  

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An 83,600 square-foot research and development building in Gilbert, Arizona for $11,200,000, or approximately $134 per square foot.  The property was 100% leased to a single tenant at the time of the acquisition ..

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A 2.27 acre parcel of land in Las Vegas, Nevada for $700,000.

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Two parcels of land totaling 2.42 acres in North Las Vegas, Nevada for $1,096,149.

Sales of Selected Assets

During 2004, we completed the sales of 11 operating properties in seven sales transactions comprising 995,727 square feet and a 4.3 acre parcel of land for contract prices totaling $175,110,000, net proceeds of approximately $169,307,000, and realized gain on sales of approximately $70,235,000 as follows:

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Four industrial properties totaling 280,302 square feet in South San Francisco, California were sold for a contract price of $41,000,000, producing a gain of approximately $21,498,000.

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A 67,869 square-foot service center/flex property in Santa Rosa, California was sold for a contract price of $10,344,000, producing a gain of approximately $3,588,000.

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A 120,157 square-foot industrial property in Napa, California was sold for a contract price of $9,815,000, producing a gain of approximately $3,407,000.

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Two office properties totaling 297,228 square feet in Seattle, Washington were sold for a contract price of $65,751,000, producing a gain of approximately $20,033,000.

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A 54,584 square-foot office property in Phoenix, Arizona was sold for a contract price of $9,350,000, producing a gain of approximately $3,519,000.

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A 123,853 square-foot office property in San Diego, California was sold for a contract price of $23,850,000, producing a gain of approximately $10,788,000.

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A 51,734 square-foot office property in Laguna Hills, California was sold for a contract price of $14,100,000, producing a gain of approximately $7,246,000.

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A 4.3 acre parcel of land in San Diego, CA was sold for a contract price of $900,000, producing a gain of approximately $156,000.

Development and Redevelopment

In response to decreased demand for office and industrial space, our development activities over the past three years have been limited to our Jurupa Business Center project in Ontario, California. As of February 2005, the 41,726 square-foot Phase I was 100% leased, and the 41,390 square-foot Phase I I, which was shell complete in December 2002, was 91% leased. In October 2004, we completed construction on the final two phases.  Phases III and IV total 40,295 square feet and are currently 77% leased.  In total, the four phases of the Jurupa Business Center comprise 123,411 square feet and as of February 2005 are 89% leased.

As anticipated, one of our larger tenants vacated 334,000 square feet, or 100%, of our five-building property in Renton, Washington upon expiration of its lease on February 28, 2004. We have undertaken a multi-phase remodel of the project to reposition the project as a contemporary multi-tenant office campus. The first two new tenant leases have been secured and together comprise 19,685 square feet, or 13% of the Phase I square footage of 150,725. The Phase I remodel budget is approximately $11.4 million including tenant improvements and the addition of an amenity area comprised of a fitness and conference center and a mini-café. At year-end, a decision was made to position one of the five buildings as a medical office building. We expect to complete the remodel of the medical office building in 2005. The budget for Phase I I construction, expected to be completed in 2005, is approximately $4.0 million. This includes the medical building, the last Phase I building lobby, and the tenant improvements projected under the 2005 leasing goals in the Phase I I buildings.

In April 2004, we purchased a 130,639 square-foot industrial building in Phoenix, Arizona with the intent to redevelop the property to accommodate the expansion requirements of one of our existing tenants in another property.  The redevelopment began in August 2004 and has an expected completion date in the second quarter of 2005 and an estimated redevelopment cost of approximately $6.1 million, of which approximately $3.3 million will be funded by us and approximately $2.8 million will be funded by the tenant.  

In September 2004, we purchased an 83,244 square-foot office/research and development property in Hillsboro, Oregon.  The property was acquired in shell complete condition with the intent to complete the final build-out and lease-up of the building.  The expected cost of development in bringing this property to operating status is approximately $2.7 million over an 18-month period.

Marketing Programs

In response to soft market conditions and increasing lease expirations in several of our markets, we initiated a marketing program in 2003.  We designed the program to accomplish three broad objectives:

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improving our vacant spaces to “ move-in ” condition;

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ensuring high quality external communications and emphasizing the power of the Bedford brand; and

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creating internal personnel recognition programs to recognize contributions at all levels of the organization.

These marketing initiatives have been implemented and incorporated into our regular operational activities.  An on-going Internal Recognition & Award Program recognizes commendable achievement by our employees in the creation of tenant appreciation and retention programs and marketing activities directed toward attracting tenants to fill property vacancies.  This program has enabled us to share best practices across all regions and to sustain a high

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level of priority on this aspect of our operational activities.  We believe this effort has and will continue to keep us competitive and able to secure new leases in the marketplace. We also believe it supports our goal of renew ing as many expiring tenant leases as possible.

Operating Performance

For the year ended December 31, 2004, we reported income from continuing operations of $12,158,000 on rental revenues of $95,971,000, compared with net income from continuing operations of $20,264,000 on rental revenues of $88,267,000 for the year ended December 31, 2003. Income from discontinued operations was $6,452,000 for 2004 and $7,401,000 for 2003.  Gain on sales of real estate investments for the year ended December 31, 2004 totaled $70,235,000. There were no sales in 2003. Our funds from operations (FFO) for the year ended December 31, 2004 was $40,250,000 as compared to $49,723,000 for the year ended December 31, 2003. We provide a definition of FFO in Item 6 of this report and present a reconciliation of our FFO to our net income in Item 7 of this report.

Long-Term Debt

On March 31, 2004, we renewed our revolving credit facility with a six-bank lending group led by Bank of America. The facility, which matures on March 31, 2007, consists of a $150 million secured line of credit with an accordion feature that gives us the option to expand the facility to $200 million, if needed. Interest on the facility is at a floating rate equal to either the lender’s prime rate or LIBOR plus a margin ranging from 1.30% to 1.75%, depending on our leverage level as defined in the credit agreement.

In April 2004, we assumed a mortgage with an outstanding balance of approximately $3,070,000 in connection with the acquisition of a property. The mortgage with Thrivent Financial for Lutherans carried a fixed interest rate of 7.90% and had a maturity date of April 10, 2017. Subsequently, in July 2004, we renegotiated the mortgage with an outstanding balance of $3,036,000, resulting in an increased loan amount, an extended term, and a lower interest rate. The new mortgage contains provisions for two additional fundings, the first of which took place on July 29, 2004 for $2,464,000. The second funding of $2,500,000 will take place in 2005, bringing the total mortgage amount to $8,000,000. The new interest rate on this mortgage is currently 5.94% and will be reduced to 5.60% after the second funding in 2005. The mortgage matures on August 15, 2029.

In August 2004, we assumed a mortgage with an outstanding balance of approximately $7,066,000 in connection with the acquisition of a property. The mortgage with Woodmen of the World carries a fixed interest rate of 7.23% and has a maturity date of July 1, 2012.

As a result of property sales in December 2004, we paid down the outstanding balance on our line of credit, resulting in a zero balance as of December 31, 2004. We also partially paid down three mortgages and paid off one mortgage for a total aggregate repayment amount of approximately $22,686,000.

Sale of Preferred Stock

On April 6, 2004, we issued and sold 2,400,000 shares of our 7.625% Series B Cumulative Redeemable Preferred Stock in a public offering at a price of $25.00 per share for total gross proceeds of $60,000,000. The Series B preferred shares have no stated maturity, are not subject to any sinking fund or mandatory redemption, and are not convertible into any other securities.  The shares are redeemable at our option beginning in April 2009, or earlier if necessary in limited circumstances to preserve our status as a REIT.

The net proceeds of approximately $58 million from the sale of the Series B preferred stock were used to finance a portion of the approximately $103.6 million in property acquisitions made in 2004.

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DIVIDENDS

Common Stock Dividends

We have made regular quarterly distributions to the holders of our common stock every quarter since the second quarter of 1993 and have increased the dividend seventeen times since then. Dividends have ranged from $0.10 per share in the second quarter of 1993 to $0.51 per share in the fourth quarter of 2004. In December 2004, we declared a special dividend of $3.28 per common share resulting from our gain on sales.

Preferred Stock Dividends

We pay cumulative dividends on the shares of our Series A preferred stock at the rate of 8.75% of the $50.00 liquidation preference per share per year, which is equivalent to $4.375 per share per year. We pay cumulative dividends on the shares of our Series B preferred stock at the rate of 7.625% of the $25.00 liquidation preference per share per year, which is equivalent to $1.90625 per share per year.  Dividends on both classes of preferred shares are paid quarterly in arrears and are recorded when declared.

TENANTS

Based on rentable square feet, as of December 31, 2004, our suburban office properties and industrial properties were approximately 91% occupied by a total of 480 tenants, of which 136 were suburban office property tenants and 344 were industrial property tenants. Our tenants include local, regional, national, and international companies engaged in a wide variety of businesses.

FINANCING

We expect cash flow from operations to be sufficient to pay operating expenses, real estate taxes, general and administrative expenses, and interest on indebtedness and to make distributions to stockholders required to maintain our REIT qualification.

We expect to fund the cost of acquisitions, capital expenditures, costs associated with lease renewals and re-leasing of space, repayment of indebtedness, share repurchases, development of properties, and dividends from:

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cash flow from operations;

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borrowings under our credit facility and, if available, other indebtedness, which may include indebtedness assumed in acquisitions or the refinancing of existing indebtedness;

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the sale of certain real estate investments; and

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the issuance of long-term debt and equity securities.

INSURANCE

We carry commercial general liability coverage with primary limits of $1 million per occurrence and $2 million in the aggregate, as well as $40 million of umbrella/excess liability coverage. This coverage protects us against liability claims as well as the cost of legal defense. We carry property “All Risks” insurance of $200 million on a replacement value basis covering both the cost of direct physical damage and the loss of rental income. This coverage is subject to certain exclusions, including contamination from hazardous materials and mold. We carry insurance for terrorism losses as defined under the Terrorism Risk Insurance Act of 2002 under our all risk policies, as well as for “non-certified” events in excess of $10 million up to the $200 million limit. Separate flood and earthquake insurance is provided with an annual aggregate limit of $10 million, subject to a deductible of the greater of $100,000 or 5% of total insurable value per building and respective rent loss with respect to the earthquake coverage. Additional excess earthquake coverage with an aggregate limit of $20 million is provided for properties located in California. We also carry director and officer liability insurance with an aggregate limit of $10 million and a fidelity bond in the amount of $1 million. This coverage protects our directors and officers against liability claims as well as the cost of legal defense.

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COMPETITION AND OTHER FACTORS

Our success depends upon, among other factors, general economic conditions and trends, including real estate trends, interest rates, government regulations and legislation, income tax laws, and zoning laws. We typically compete in our markets with other REITs, institutional owners, and private operators of commercial property.

Our real estate investments are located in markets in which we face significant competition for rental revenues. Many of our investments, particularly office buildings, are located in markets in which there is a significant supply of available space, resulting in intense competition for tenants and low rents. For example, we own properties in the east side market in Seattle, Washington. This market has been negatively affected by job loss in that region and there is considerable inventory available. In addition, we own properties in Phoenix, Arizona and Denver, Colorado. In both of these cities, weak demand has resulted in excess direct and sublease inventory. Finally, we own and operate properties in the Silicon Valley, in the San Francisco Bay Area. This sub-market was particularly hard hit in the collapse of the tech-telecom boom earlier in the decade. In response to rapid, unsustainable job growth during the boom years, considerable invento ry was brought to market in this region, much of which is still vacant today, acting as a market depressant. Although the sub-lease inventory has declined significantly as a proportion of the total in most of these markets, there is still a substantial amount of space available, which provides tenants with more choices and weakens our negotiating strength.

We believe that our competitive strengths have lessened, and may continue to lessen, the adverse impact of these negative factors. These competitive strengths include brand acceptance, an experienced management team, a long history of operations in all of our current markets and a diversified tenant base.

GOVERNMENTAL REGULATIONS

Our properties are subject to various federal, state, and local regulatory requirements such as local building codes and other similar regulations. We believe our properties are currently in substantial compliance with all applicable regulatory requirements, although expenditures at our properties may be required to comply with changes in these laws and regulations. No material expenditures are contemplated at this time in order to comply with any such laws or regulations. Under various federal, state, and local laws, ordinances, and regulations, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances released on, above, under, or in such property. These laws and regulations often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The costs of such removal or remediation could be subs tantial. Additionally, the presence of such substances or the failure to properly remediate such substances may adversely affect the owner’s ability to borrow using such real estate as collateral.

We believe that we are in compliance in all material respects with all federal, state, and local laws regarding hazardous or toxic substances, and we have not been notified by any governmental authority of any non-compliance or other claim in connection with any of our present or former properties. Accordingly, we do not currently anticipate that compliance with federal, state, and local environmental protection regulations will have any material adverse impact on our financial position, results of operations, or liquidity. There can be no assurance, however, that future discoveries or events at our properties, or changes to current environmental regulations, will not result in such a material adverse impact.

EMPLOYEES

As of December 31, 2004, we had 42 full-time employees and 3 part-time employees.

OTHER INFORMATION

We make our filings with the Securities and Exchange Commission (SEC), including this annual report, available on our website free of charge as soon as reasonably practicable after such filings are made. The address of our website is www.bedfordproperty.com . Other than the information expressly set forth in this annual report, the information contained, or referred to, on our website is not incorporated into this annual report.

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Item 2. Properties

REAL ESTATE SUMMARY

As of December 31, 2004, our real estate investments were diversified by geographic region and by product type as follows (dollars in thousands):

* Less than 1%

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The total occupancy percentage excludes two office and three industrial buildings, which were shell complete and under lease-up as of December 31, 2004.

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LEASE EXPIRATIONS – REAL ESTATE PORTFOLIO

The following table presents lease expirations for each of the 10 years beginning on December 31, 2004 and thereafter. The table presents:  (i) the number of leases that expire each year, (ii) the square feet covered by such expiring leases, (iii) the 2004 annualized base rent of the expiring leases, and (iv) the percentage of total 2004 annualized base rent for expiring leases.

* Includes 31 leases expiring on December 31, 2004, representing 1.8% of 2004 annualized base rent.

Item 3. Legal Proceedings

We are not presently subject to any material litigation. Moreover, we are not aware of any threatened litigation against us, other than routine actions for negligence or other claims and proceedings arising in the ordinary course of our business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse impact on our liquidity, results of operations, business, or financial position.

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

Not applicable.

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PART II

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

As of February 15, 2005, we had 761 holders of record of our common stock. A significant number of these stockholders are also nominees holding stock in street name for individuals. Our common stock trades on the New York Stock Exchange and the Pacific Exchange under the symbol “ BED. ”  The following table shows the high and low sale prices per share reported on the New York Stock Exchange and the dividends declared per share on the common stock for each quarterly period during 2003 and 2004.

⁽¹⁾ Includes a special dividend of $3.28 per share of common stock.

Limitations on our ability to pay dividends are described in the “ Potential Factors Affecting Future Operating Results ” section under Item 7 of this report.

The information relating to our equity compensation plans required by Item 5 of this report is incorporated by reference from the proxy statement that we will mail to our stockholders in connection with the solicitation of proxies for the annual meeting of our stockholders scheduled to take place on May 11, 2005.

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Item 6. Selected Financial Data

Following is a table of our selected financial data for the last five years (which should be read in conjunction with the discussion under the “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” section in Item 7 of this report and the financial statements and notes thereto contained herein):

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Rental income excludes amounts reported as discontinued operations.

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Reported as a component of continuing operations for 2001 and 2000.

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

GENERAL

We are the successor to ICM Property Investors, Incorporated (ICM), a real estate investment trust (REIT) incorporated in Delaware in 1984. In July 1993, ICM was reorganized in the state of Maryland under the name of Bedford Property Investors, Inc. Equipped with a new board of directors and a new management team, we became a self-administered and self-managed equity REIT, engaged in the business of owning, managing, acquiring and developing industrial and suburban office properties proximate to metropolitan areas in the western United States. As of December 31, 2004, we owned 91 operating properties totaling approximately 7.4 million rentable square feet and 11 parcels of land totaling approximately 46 acres. In addition, we owned three office properties and one research and development property currently under redevelopment.  Of the 91 operating properties, 61 are industrial properties and 30 are suburban office properties. Our propertie s are located in California, Arizona, Washington, Colorado, Nevada, and Oregon.

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and notes to financial statements included in this report.

Market Conditions

The Northwest Region

We believe that the Puget Sound area is still experiencing the effects of significant job loss resulting from the technology and telecommunication industry slowdowns. We also believe that these economic conditions have affected most commercial real estate markets causing excess space, both in the direct leasing and sub-leasing markets, and weaker deal terms. At December 31, 2004, our Northwest operating portfolio, which includes three Oregon properties, was 93% occupied with 43,000 square feet vacant in three properties. We believe that this comparatively strong occupancy has insulated us from the worst effects of local market conditions. In February 2004, one of our largest tenants in this region vacated our 334,000 square-foot five-building complex upon expiration of its lease. We have transferred this property to our development portfolio and have commenced a program to re-position the complex as a campus-style office park. In 2004, we completed the first phase of this repositioning, and had signed two leases by year-end.

The Northern California Region

Our properties in Northern California are located throughout the San Francisco Bay Area and include one property in Reno, Nevada. The Bay Area market has also been impacted by the technology industry slowdown, particularly in the Silicon Valley area, where we own 14 properties totaling 1,217,207 square feet as of December 31, 2004. In this sub-market, we believe that the job loss associated with the earlier recession has been significant, resulting in increased vacancy and reduced rental rates. While the California employment situation has shown some improvement in recent months, the oversupply of space and reduced rental rates continue to be a challenge.  In addition, we expect higher than usual lease expirations in the Silicon Valley to continue during 2005, which creates the potential for increasing vacancy in our portfolio. In order to retain good credit tenants in the current market, we have engaged in a strategy to negotiate lower re ntal rates in exchange for extended lease terms, which we refer to as “ blend and extend ” leases.

Another Bay Area sub-market that has demonstrated weakness during the last few years is the South San Francisco industrial market. In December 2004, we sold four of our five properties in South San Francisco, leaving one 78% leased property remaining in this sub-market. Other Bay Area sub-markets have not been as dramatically affected as the South San Francisco industrial market and the Fremont, Milpitas, and San Jose markets in Silicon Valley. In Sonoma County, Napa County, and Contra Costa County sub-markets, while demand has slowed during the past three years, vacancy rates have not climbed to the extent they have in Silicon Valley.

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The Southern California Region

In Southern California, we have properties in three relatively healthy sub-markets. These sub-markets are Orange County, San Diego, and the Inland Empire. We have two properties in Orange County and maintained them at, or close to, 100% occupancy during 2003 and 2004. In the Inland Empire, we have a bulk industrial property in Ontario, California, which was 100% leased as of December 31, 2004. We have two recently developed properties in the Inland Empire, the Jurupa Business Center Phase I , which was 95% leased as of December 31, 2004, and Jurupa Business Center Phase I I, which was 84% leased as of December 31, 2004. In addition, the Jurupa Business Center Phases III and IV became shell complete during the fourth quarter of 2004 and are currently 77% leased. Finally, in San Diego, our properties were 100% leased during the years 2003 and 2004.

The Arizona Region

Most of our properties in Arizona are in Phoenix, a market that has been characterized by the same weakness in demand for office, research and development, and industrial space that we have experienced in other regions. We have responded to these challenges by improving our marketing processes and the marketability of our vacant spaces. We are making capital improvements to our vacant spaces to render them near move-in condition for prospective tenants. Notwithstanding these efforts, however, re-leasing space in Phoenix remains challenging, and we expect our vacant suites to remain vacant for longer periods than we have previously experienced.  As of December 31, 2004, our properties in this region were 93% leased, with approximately 141,000 square feet of vacant space in eight properties.

The Colorado Region

All of our properties in Colorado are in the southeast Denver suburban office market. We believe that market conditions in Denver reflect the effects of the significant job losses experienced in this region during the last several years, similar to other markets. In July 2003, we were successful in executing a significant lease with a large insurance company for the top two floors of our 4601 DTC Boulevard property, representing 20% of the total square footage of the building. This ten-story office property was 80% leased to a single tenant under a lease that expired on January 31, 2005, which the tenant opted not to renew. During the last several years, we have made significant capital improvements to this property in preparation for this vacancy and are actively marketing the space to prospective tenants.

Future Trends and Events

Acquisitions and Dispositions

In September 2004, we announced that our board of directors would undertake a review of a broad range of strategic alternatives for our company. These alternatives included the potential sale or merger of our company, selling certain of our properties and either reinvesting these proceeds in other properties or dividending out the proceeds to our stockholders. On February 2, 2005, the board of directors announced the conclusion of its review of strategic alternatives. The board of directors determined that the interests of our stockholders would be best served by the company’s continuation as an independent, publicly traded REIT. As a result, we intend to continue to operate in the office, service and industrial space, with a shift in focus to properties with multi-tenant configurations.  

Capitalization rates continue to remain low as the result of the large amount of capital available in the marketplace and the low cost of debt. While we have, in the past, been successful at acquiring properties that we believe will enhance our portfolio, it has become increasingly challenging to find properties that meet our target capitalization rate of 9%.  However, we will continue to evaluate, and may capitalize on, opportunities to acquire attractive properties or portfolios of properties as and when they arise.  To accomplish our goal of continuing to reposition ourselves as a multi-tenant REIT, we may also enter into complementary acquisitions of other businesses.

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In addition, we intend to continue to sell selected properties in order to reposition our portfolio and to take advantage of the current low capitalization rates in the market.  Properties that will be considered for sale include those that we believe have reached their full potential and can produce a significant gain on sale.  As part of continuing to reposition ourselves as a multi-tenant REIT, we are also shifting our focus away from single-tenant properties to multi-tenant properties in an effort to reduce the vacancy risk associated with large, single-tenant buildings. As a result, we may also sell properties that do not meet our multi-tenant configuration criteria, as and when appropriate opportunities arise.

Development and Redevelopment

In response to decreasing demand for office and industrial space, our development activities over the past two years have been limited to our Jurupa Business Center project in Ontario, California. As of February 2005, the 41,726 square-foot Phase I was 100% leased, and the 41,390 square-foot Phase I I, which was shell complete in December 2002, was 91% leased. In October 2004, we completed construction on the final two phases. Phases III and IV total 40,295 square feet and are currently 77% leased.  In total, the four phases of the Jurupa Business Center comprise 123,411 square feet and are 89% leased as of February 2005.

In March 2004, we also began our redevelopment of the recently vacated 334,000 square-foot five-building facility in Renton, Washington. The construction process for site work, shell enhancement, construction of lobbies, and the upgrade of common areas is expected to take place over a 48-month period. The construction will be completed in phases, with the completion and leasing of some of the buildings occurring prior to the end of the 48-month period. Phase I of exterior and common area construction of this redevelopment project was completed in September 2004. We hosted a well-attended open house celebration introducing the community to the re-positioned property. Shortly thereafter, the first two leases , which will commence in the first quarter of 2005, were secured for 19,649 square feet, or 13% of the Phase I square footage.

In April 2004, we purchased a 130,639 square-foot industrial building in Phoenix, Arizona with the intent to redevelop the property to accommodate the expansion requirements of one of our existing tenants in another property.  The redevelopment began in August 2004 and has an expected completion date in the second quarter of 2005 and an estimated redevelopment cost of approximately $6.1 million, of which approximately $3.3 million will be funded by us and approximately $2.8 million will be funded by the tenant.  

In September 2004, we purchased an 83,244 square-foot office/research and development property in Hillsboro, Oregon.  The property was acquired in shell complete condition with the intent to complete the final build-out and lease-up of the building.  The expected cost of development to bring this property to operating status is approximately $2.7 million over an 18-month period.

Capital Expenditures

We expect the higher than usual lease expirations in our portfolio that occurred during 2004 to continue throughout 2005. Prior to 2004, annual lease expirations in our portfolio ranged from approximately 12% to 15% of our annualized base rents. As of December 31, 2004, our expected lease expirations for 2005 were 21% of annualized base rents. As a result, we expect to incur significant capital expenditures in 2005, including the costs of leasing commissions and tenant improvements related to renewing or replacing the expiring leases. In several instances, these lease expirations may occur in markets that have experienced considerable weakness due to job loss and excess inventory. This market weakness, combined with a higher level of lease expirations, may require us to incur more capital expenditures than we have experienced historically to renew or re-lease these spaces.

In addition, we are renovating two properties that were leased by single tenants who did not renew their leases , which will also result in additional capital expenditures in 2005. We believe that these renovations are necessary to render the properties competitive in their respective markets.  

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The combination of these two factors will require that we manage our capital resources carefully. We intend to closely monitor these situations and continually assess our actual expenditures against our planned expenditures. We believe that we will have sufficient funds to meet the needs of these situations. We plan to spend approximately $15 million in capital expenditures during the year 2005.

Share Repurchases

Since the inception of our share repurchase program in November of 1998, we have repurchased a total of 8,485,907 shares of our common stock at an average cost of $19.24 per share, which represents 37% of the shares of common stock outstanding at November 1998. We intend to continue to repurchase shares of our common stock on the open market when the opportunities exist. Our share repurchase strategy takes into consideration several factors, including the dividend yield on our stock price, the cost of capital and its alternative uses, existing yields on potential acquisitions, market trading volume, trading regulations, and debt covenants. We currently have board approval to repurchase up to a total of 10 million shares of our common stock. During the year ended December 31, 2004, we repurchased or acquired 453,655 shares of our common stock at an average price of $27.98. We acquired 341,300 shares in open market repurchases made pursuant to ou r share repurchase program and 112,355 shares from employees to satisfy payroll tax obligations upon the vesting of restricted stock or in connection with stock option exercises, which were not repurchased pursuant to our share repurchase program. We did not purchase any shares of our common stock pursuant to our share repurchase program during the second half of 2004.

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Occupancy and Rental Rates

As of December 31, 2004, our operating portfolio occupancy was at 91%, a 2 percentage point decrease from the 93% occupancy as of December 31, 2003 .. Maintaining our occupancy rate has been our highest priority during this economic downturn. In order to retain tenants in the current market, we have sometimes found it necessary to negotiate lower rental rates in exchange for extended terms, which we refer to as “ blend and extend ” leases. While this has a negative impact on our income from operations, we believe the negative impact of losing good credit tenants would surpass the incremental loss due to reduced rental rates. During the year ended December 31, 2004, we renewed or re-leased 96 of 126 expiring leases or 74% of our expiring square footage and experienced a 16% decline in weighted average rental rates on these leases. We intend to continue this strategy in order to maximize our occupancy rate.

Leasing

Over the next three years, we will be facing significant lease rollovers. During the years 2005, 2006, and 2007, leases representing 21%, 15%, and 15% of annualized base rent, respectively, will expire. As of December 31, 2004, the expirations as a percentage of annualized base rent by region are as follows:

In order to manage the risk associated with higher lease expirations in weaker markets, we developed a plan to focus our attention on a group of our largest tenants. At its inception in June of 2003, this group consisted of 90 tenants, with lease expirations scheduled to occur through the year 2006. Although the 90 tenants represented 20% of our total tenant group, the revenue associated with these tenants represented over 50% of our portfolio annualized base rent. For each of these tenants, we have been pursuing a proactive approach by creating specific strategies for renewal. These approaches may involve blend and extend leases, early renewals, and other appropriate measures. We have recently begun focusing on additional tenants with leases expiring through the year 2007 and plan to continue our focus on this expanded group of tenants.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our financial statements in accordance with U.S. generally accepted accounting principles (GAAP) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We believe that our critical accounting policies are those that require significant judgments and estimates such as those related to valuation of real estate investments, classification of discontinued operations, accounting for development costs, revenue recognition and allowance for doubtful accounts, stock compensation expense, and qualification as a REIT, each of which is discussed in more detail below. These estimates are made and evaluated on an on-going basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances. Actual results could vary from those estimates, and those estimates could be different under different assumptions or conditions.

Valuation of Real Estate Investments

Real estate investments are recorded at cost less accumulated depreciation. The cost of real estate includes the purchase price and other related acquisition costs. In accordance with Statement of Financial Accounting Standards (SFAS) 141, “ Business Combinations, ” a portion of the purchase price is allocated to tenant improvements and identifiable intangible assets or liabilities. For acquired properties with rental guarantees from the seller, amounts received under the rental guarantee are recorded as a reduction to the basis of the asset upon receipt. Expenditures for maintenance and repairs that do not add to the value or prolong the useful life of the property are expensed. Expenditures for asset replacements or significant improvements that extend the life or increase the property’s value are capitalized. Real estate properties are depreciated using the straight-line method over estimated useful lives. When circumstances such as adverse market conditions indicate an impairment of a property, we will recognize a loss to the extent that the carrying value exceeds the fair value of the property. The fair value of a property is determined by using an internally developed discounted cash flow analysis. The evaluation of the fair value of individual properties re quires significant management judgments and assumptions that affect the amount of any impairment loss that we may recognize.  Significant changes in the facts and circumstances underlying these judgments and assumptions in future periods could cause significant impairment adjustments to be recorded.

The acquisition of real estate investments results in the allocation of a portion of the purchase price to tenant improvements and identifiable intangible assets or liabilities. Tenant improvements represent the tangible assets associated with the existing leases valued on a historical basis prorated over the remaining lease terms. They are classified as an asset under real estate investments and are depreciated over the remaining lease terms. Identifiable intangible assets and liabilities relate to the value of in-place operating leases as follows : (i) origination value, which represents the value associated with “ cost avoidance ” of acquiring in-place leases, such as lease commissions paid under terms generally experienced in our markets; (ii) value of in-place leases, which represents the estimated loss of revenue and of costs incurred for the period required to lease the “ assumed vacant ” property to the occupancy level when purchased; (iii) fair market value of acquired leases, which represents the difference between the contractual rents and market rents at the time of the acquisition, discounted for tenant credit risks; and (iv) value of tenant relationships, which reflects estimated future benefits from enhanced renewal probabilities and cost savings in lease commissions and tenant improvements. Origination value is recorded as an other asset and is amortized over the remaining lease terms. Value of in-place leases is recorded as an other asset and amortized over the average term of the acquired leases. Fair m arket value of acquired leases is classified as an other asset or liability, depending on whether the contractual terms are above or below market, and the asset or liability is amortized to rental revenue over the remaining terms of the leases. Value of tenant relationships is classified as an other asset and is amortized over the anticipated term of the customer relationship, not to exceed the remaining depreciable life of the building.

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Classification of Discontinued Operations

We record real estate investments that are considered held for sale at the lower of carrying amount or fair value less estimated costs to sell, and such properties are no longer depreciated. We classify real estate assets as held for sale in the period in which both of the following criteria are met:

-

management has obtained board approval to sell the asset, and

-

a letter of intent has been signed by an officer of the c ompany and the buyer.

We present the net operating results of properties held for sale and sold during the year, less allocated interest expense, as income from discontinued operations for all periods presented. The gain on sale of operating properties sold, net of sale costs, is presented as income from discontinued operations. We allocate interest expense based on the percentage of the cost basis of each property held for sale and sold to the total cost basis of real estate assets as of the respective year-end, pro-rated for the number of days prior to sale.

Accounting for Development Costs

In accordance with SFAS 67, “ Accounting for Costs and Initial Rental Operations of Real Estate, ” costs associated with the development of real estate include acquisition and direct construction costs as well as capitalization of real estate taxes, insurance, incidental revenue and expenses, and a portion of salaries and overhead of personnel responsible for development activity.  In addition, we capitalize interest expense to the development projects according to SFAS 34, “ Capitalization of Interest Cost .”   The amount of interest capitalized during a period is determined by applying the weighted average rate of our borrowings to the average accumulated costs, excluding interest, of the project. The capitalization of interest, real estate taxes, insurance, and incidental revenue and expenses begins when construction of a project commences and ends when a project or a portion of the project is placed in service, not to exceed twelve months from the cessation of construction activities.  The capitalization of salaries and overhead of development personnel commences upon development approval from the prevailing governing authorities and ends with completion of the project.

Revenue Recognition and Allowance for Doubtful Accounts

Base rental income is recognized on a straight-line basis over the terms of the respective lease agreements. Differences between rental income recognized and amounts contractually due under the lease agreements are credited or charged, as applicable, to rent receivable. The amount of straight-line rent receivable is charged against income upon early termination of a lease or as a reduction of gain on sale of the property. In the event a tenant downsizes into a smaller space with reduced rent, a pro-rated amount of the straight-line rent receivable is charged against income based on square footage.  Lease termination income is recorded when we have an executed lease termination agreement with no further contractual obligations that must be met before the fee is due to us .. If a tenant remains in the leased space following the execution of a definitive termination agreement, the applicable termination fees are deferred and recognized over the term of such tenant’s occupancy. In accordance with SFAS 141, “ Business Combinations, “ a portion of the purchase price of acquired properties is allocated to the market value of in-place leases. The market value of in-place leases is classified as an other asset or liability and is amortized to rental income over the remaining terms of the leases. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments, which results in a reduction to income. Management determines the adequacy of this allowance by continually evaluating individual tenant receivables, taking into account the tenant’s financial condition, security deposits, any letters of credit, any lease guarantees, and current economic conditions.  Significant judgments and estimates must be made by management and used in connection with establishing this allowance in any accounting period.  In the event that the allowance for doubtful accounts is insufficient to cover the actual amount of accounts that are subsequently written off in an accounting p eriod, additional bad debt expense would be recognized as a current period charge in our income statement.

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Stock Compensation Expense

Beginning January 1, 2003, we voluntarily adopted the recognition provisions of SFAS 123, “Accounting for Stock-Based Compensation,” using the modified prospective method as prescribed in SFAS 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS 123.” The modified prospective method provides for the calculation of the compensation expense as if the fair value based accounting method had been used to account for all stock options granted in fiscal years after December 15, 1994. Management is required to make certain assumptions in calculating the amount of any stock-based compensation expense, including assumptions relating to the fair value of options.  In determining the fair value of options, we make assumptions about the future volatility of our stock, the expected term to exercise the options, the expected dividend yields, and the risk-free interest rate.  The underl ying assumptions affect amounts reported in future periods.

Qualification as a REIT

We have elected to be taxed as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended. A REIT is generally not subject to federal income tax on that portion of real estate investment trust taxable income that is distributed to stockholders, provided that at least 90% of such taxable income is distributed and other requirements are met. If we were to fail to qualify as a REIT, we would be, among other things, required to provide for federal income taxes on our income and reduce the level of distributions made to our stockholders.

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RESULTS OF OPERATIONS

Our operations consist of developing, owning and operating industrial and suburban office properties located primarily in the western United States.

Variances in net income and cash flows for the year ended December 31, 2004 when compared with the same period in 2003 were due primarily to the acquisition, sale, development and redevelopment of operating properties as follows:

⁽¹⁾

Properties are included in development based on the date of shell completion.

⁽²⁾

One property was acquired on September 27, 2004 as a development project and is currently under lease-up.

⁽³⁾

One 334,000 square-foot five-building property was transferred from operating to development on March 1, 2004 as a redevelopment project, and one property was acquired on April 21, 2004 as a redevelopment project. Two of the buildings from the five-building property were transferred to operating as lease-up properties in November 2004 and are included as two properties in redevelopment in the above table.

Comparison of 2004 to 2003

Income from Operations

Income from operations, defined as rental income less rental expenses (which includes operating expenses, real estate taxes, depreciation and amortization, and general and administrative expenses), decreased $5,688,000 or 15% in 2004 compared to 2003. This decrease is attributable to an increase in rental income of $7,704,000, offset by an increase in rental expenses of $13,392,000.

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The following table presents the change in income from operations for the twelve months ended December 31, 2004 compared with the same period in 2003, detailing amounts contributed by properties acquired, properties redeveloped, properties developed, and properties that remained stable during the period from January 1, 2003 to December 31, 2004 (in thousands):

⁺

Includes one five-building property transferred from operating to development on March 1, 2004, and one property acquired for redevelopment on April 21, 2004.

⁺⁺

Includes one property with a shell completion date of January 1, 2003 and two properties with a shell completion date of October 18, 2004.

⁽¹⁾

Stabilized properties includes properties that were fully operating during the years 2003 and 2004.

The increase in rental income of $7,704,000 is primarily attributable to property acquisitions, partially offset by decreases in rental income on redevelopment and stabilized properties. The decrease in rental income of $4,843,000 on the stabilized properties is generally attributable to decreased rental rates on new leases, renewed leases, and blend and extend leases, as well as decreased occupancy rates.

The increases in operating expenses of $2,929,000 or 20%, real estate taxes of $1,324,000 or 14%, and depreciation and amortization of $7,174,000 or 36% are primarily due to additional expenses incurred for properties acquired during 2003 and 2004. The increase in depreciation and amortization on the stabilized properties is primarily due to a greater level of capital improvement spending required to obtain tenants.

General and administrative expenses increased $1,965,000 or 34% in 2004 compared to 2003, primarily as a result of bonus accruals for 2004 of approximately $935,000, increased accounting fees of approximately $319,000, increased professional fees of approximately $435,000, and increased restricted stock vesting expense of $291,000.

Interest Expense

Interest expense, which includes amortization of loan fees, increased $2,399,000 or 13% in 2004 compared with 2003. The increase is attributable to the increase in mortgages used to finance property acquisitions in the fourth quarter of 2003 and mortgages assumed on properties acquired in 2004.  This increase is partially offset by a higher level of capitalized interest on development properties in 2004 due to increased development activity. The amortization of loan fees was $1,531,000 and $1,599,000 in 2004 and 2003, respectively.

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Discontinued Operations

In December 2004, we sold four industrial properties in South San Francisco, California; one industrial property in Santa Rosa, California; one industrial property in Napa, California; two office properties in Seattle, Washington; one office property and a 4.3 acre parcel of land in San Diego, California; and an office building in Laguna Hills, California for net sale prices totaling $175,110,000, which resulted in an aggregate gain of $70,235,000. As of December 31, 2004, we classified one operating property as held for sale. Net operating income relating to these properties is classified as discontinued operations for all periods presented.

Dividends

Common stock dividends to stockholders declared for each quarter of 2004 were $0.51 per share. In addition, a special dividend of $3.28 per common share was declared in December 2004 as a result of gain on sales of properties.  Common stock dividends to stockholders declared for the first and second quarters of 2003 were $0.50 per share and $0.51 per share for the third and fourth quarters of 2003. Quarterly dividends on our Series A preferred stock of $1.09375 per share were declared for each quarter of 2004. In 2003, quarterly dividends on our Series A preferred stock were $0.8507 for the third quarter, and $1.09375 for the fourth quarter. Quarterly dividends on our Series B preferred stock of $0.5242 per share were declared for the second quarter of 2004 and $0.47656 per share for the third and fourth quarters of 2004.

Comparison of 2003 to 2002

Income from Operations

Income from operations, defined as rental income less rental expenses (which include operating expenses, real estate taxes, depreciation and amortization, and general and administrative expenses), decreased $2,838,000 or 7% in 2003 compared to 2002. This decrease is attributable to an increase in rental income of $7,682,000, offset by an increase in rental expenses of $10,520,000.

The following table presents the change in income from operations for the twelve months ended December 31, 2003 compared with the same period in 2002, detailing amounts contributed from properties acquired, properties developed, and properties that remained stable during the period from January 1, 2002 to December 31, 2003 (in thousands):

⁺

Includes one property with a shell completion date of December 1, 2001.

⁽¹⁾

Stabilized properties includes properties that were fully operating during the years 2002 and 2003.

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The increase in rental income of $7,682,000 is primarily attributable to property acquisitions and, to a lesser extent, development activities. The decrease in rental income of $946,000 on the stabilized properties is generally attributable to decreased rental rates on new leases, renewed leases, and blend and extend leases, as well as decreased occupancy rates.

The increases in operating expenses of $2,255,000 or 19%, real estate taxes of $1,709,000 or 23%, and depreciation and amortization of $5,430,000 or 37% are primarily due to additional expenses incurred for properties acquired during 2002 and 2003 and increased rental expenses on stabilized properties. The increase of $1,573,000 in operating expenses on the stabilized properties is generally attributable to higher repairs and maintenance spending, which was increased in order to attract potential tenants in competitive markets.  The increase of $825,000 in real estate taxes on the stabilized properties is due to re-assessment of the value of properties developed in recent years, as well as overall increases in tax rates. The increase in depreciation and amortization of $1,778,000 on the stabilized properties is attributable to a greater level of capital improvement spending required to obtain tenants.

General and administrative expenses increased $1,126,000 or 24% in 2003 compared with 2002, primarily as a result of increased compensation expense associated with the hiring of the employees of Bedford Acquisitions, Inc., which increased compensation costs by approximately $500,000. The remaining increase is mainly due to higher legal and accounting fees.

Interest Expense

Interest expense, which includes amortization of loan fees, increased $1,535,000 or 9% in 2003 compared to 2002. The increase is attributable to a higher level of weighted average outstanding debt in 2003 due to share repurchases and the funding of property acquisitions in the third and fourth quarters of 2003, as well as increased amortization of loan fees. The amortization of loan fees was $1,599,000 and $1,361,000 in 2003 and 2002, respectively. The increase in amortization of loan fees is primarily due to loan fees paid in connection with the $137.6 million of mortgage financing obtained in 2003.

Discontinued Operations

In the second quarter 2002, we sold three industrial properties in Vista, California; one industrial property in San Diego, California; and one industrial property in Scottsdale, Arizona for net sale prices totaling $19,081,000, which resulted in an aggregate gain of $1,798,000. Net operating income relating to these properties is classified as discontinued operations for all periods presented.

In the third quarter 2002, we sold two industrial properties and one office property in Monterey, California for net sale prices totaling $12,391,000, which resulted in an aggregate gain of $1,777,000. Net operating income relating to these properties is classified as discontinued operations for all periods presented.

Dividends

Common stock dividends to stockholders declared for the first and second quarters of 2003 were $0.50 per share and $0.51 per share for the third and fourth quarters of 2003. Common stock dividends to stockholders declared for the first and second quarters of 2002 were $0.48 per share and $0.50 per share for the third and fourth quarters of 2002. Quarterly dividends on our Series A preferred stock of $0.8507 per share were declared for the third quarter of 2003 and $1.09375 for the fourth quarter of 2003.

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LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Operating Activities

Net cash provided by operating activities decreased approximately $2,519,000 to $46,651,000 for the twelve months ended December 31, 2004 as compared to $49,170,000 for the same period in 2003. This decrease was primarily due to higher interest payments on our outstanding debt and increased payments for accounting and other professional fees. Interest payments increased in 2004 as a result of new mortgages obtained to finance 2003 acquisitions and mortgages assumed on 2004 acquisitions. Accounting and professional fees increased in 2004 as a result of services performed to document and test the company’s internal control over financial reporting.  

Investing Activities

Net cash provided by investing activities increased approximately $ 153,008 ,000 to $ 58,085 ,000 for the twelve months ended December 31, 2004 as compared to cash used in investing activities of $94,923,000 for the same period in 2003. The increase in cash provided by investing activities was primarily due to net proceeds from the sale of operating properties in 2004 of approximately $169,307,000. These proceeds were offset by an increase in property acquisitions in 2004 as well as increased spending on building improvements and tenant improvements on existing operating properties.

Financing Activities

Net cash used in financing activities increased approximately $ 137,740 ,000 to $ 88,116 ,000 for the twelve months ended December 31, 2004 as compared to net cash provided by financing activities of $49,624,000 for the same period in 2003. The increase in cash used in financing activities was primarily due to reduced proceeds from new mortgages in 2004 as compared to 2003, increased net payments on our credit facility with proceeds from the sale of operating properties , and increased dividend payments for the preferred shares issued in 2003 and 2004.  These increases in cash used were partially offset by additional cash provided by our Series B preferred stock offering in 2004.

Available Borrowings, Capital Resources, and Cash Balances

We expect to meet our long-term liquidity and capital requirements, such as funding capital expenditures, costs associated with lease renewals and re-leasing of space, the cost of acquisitions, repayment of indebtedness, share repurchases, development of properties, and dividends from:

-

cash flow from operations;

-

borrowings under our credit facility and, if available, other indebtedness which may include indebtedness assumed in acquisitions or the refinancing of existing indebtedness;

-

the sale of real estate investments; and

-

issuance of long-term debt and equity securities.

On April 6, 2004, we completed a public offering of 2,400,000 shares of our 7.625% Series B Cumulative Redeemable Preferred Stock at $25 per share. The net proceeds of approximately $58 million were used to finance the purchase of four operating properties, one redevelopment project and three parcels of land totaling 4.69 acres in the second and third quarters of 2004, which totaled approximately $57.4 million.

Our line of credit, which has a total commitment of $150 million plus an accordion feature for expansion of $50 million, had a zero outstanding balance and letters of credit issued and undrawn of $11,943,000 at December 31, 2004, leaving approximately $188,057,000 of available borrowing. We anticipate utilizing this available borrowing capacity and/or sale proceeds from real estate assets to fund our investing activities in 2005, including estimated development and redevelopment costs of approximately $22 million and capital expenditures of approximately $15 million.

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As of December 31, 2004, we had approximately $24,218,000 in cash and cash equivalents, including approximately $22,000 of restricted cash.  Restricted cash represents security deposits held in interest bearing cash deposit accounts in accordance with tenant leases. Unrestricted cash includes approximately $3,776,000 held in a liquidity management investment account investing in money market instruments that are backed by U.S. government short-term securities and approximately $17,988,000 held in short-term U.S. Treasury Bills. The balance of the unrestricted cash is in a demand deposit account which is used to fund our disbursements.

We anticipate that the cash flow generated by our real estate investments and funds available under our credit facility will be sufficient to meet our short-term liquidity requirements.

Debt Financing

Our ability to continue to finance operations is subject to several uncertainties. For example, our ability to obtain mortgage loans on income producing property is dependent upon our ability to attract and retain tenants and the economics of the various markets in which the properties are located, as well as the willingness of mortgage-lending institutions to make loans secured by real property. Approximately 91% of our real estate investments served as collateral for our existing mortgage indebtedness and available borrowing under our credit facility as of December 31, 2004. Our ability to sell real estate investments is partially dependent upon the ability of purchasers to obtain financing at reasonable commercial rates.

We currently have a revolving credit facility with a bank group led by Bank of America. The facility, which matures on March 31, 2007, consists of a $150 million secured line with an accordion feature that allows us at our option to expand the facility to $200 million, if needed. Interest on the facility is at a floating rate equal to either the lender’s prime rate or LIBOR plus a margin ranging from 1.30% to 1.75%, depending on our leverage level. As of December 31, 2004, the facility did not have an outstanding balance.

In April 2004, we assumed a mortgage with an outstanding balance of approximately $3,070,000 in connection with the acquisition of a property. The mortgage with Thrivent Financial for Lutherans carried a fixed interest rate of 7.90% and had a maturity date of April 10, 2017. Subsequently, in July 2004, we renegotiated the mortgage with a then outstanding balance of $3,036,000, resulting in an increased loan amount, an extended term, and a lower interest rate. The new mortgage contains provisions for two additional fundings, the first of which took place on July 29, 2004 for $2,464,000. The second funding of $2,500,000 will take place in 2005, bringing the total mortgage amount to $8,000,000. The new interest rate on this mortgage is currently 5.94% and will be reduced to 5.60% after the second funding in 2005. The mortgage matures on August 15, 2029.

In August 2004, we assumed a mortgage with an outstanding balance of approximately $7,066,000 in connection with the acquisition of a property.  The mortgage with Woodmen of the World carries a fixed interest rate of 7.23% and has a maturity date of July 1, 2012.

As a result of property sales in December 2004, we paid down the outstanding balance on our line of credit, resulting in a zero balance as of December 31, 2004. We also partially paid down three mortgages and paid off one mortgage for a total aggregate repayment amount of approximately $22,686,000.

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Mortgage loans payable at December 31, 2004 consist of the following (in thousands):

⁺

Interest rates are fixed unless otherwise indicated by footnote.

⁽¹⁾

Floating rate based on 30-day LIBOR plus 1.40% (adjusted monthly). Effective July 3, 2003, the floating 30-day LIBOR rate was swapped to a fixed rate of 1.595% for an all-in rate of 2.995% until maturity.

⁽²⁾

Maturity date of November 1, 2005 represents the first of two interest rate reset dates, at which time we may opt to reject the new rate and pay the outstanding balance on the mortgage. The second interest rate reset date is November 1, 2008 with a final maturity date of November 1, 2011.

⁽³⁾

Floating rate based on LIBOR plus 1.60%. The current rate of 4.14% is fixed until May 19, 2005, at which time we have the option of fixing the LIBOR rate for a period of 1 month, 3 months, 6 months, or 12 months.

⁽⁴⁾

Floating rate based on a 12-month average of U.S. Treasury security yields plus 2.60% (adjusted semi-annually).

*

The two Sun Life Assurance Company mortgages are collateralized by a single property.

The 67 operating properties that served as collateral for our mortgages had a net book value of approximately $501,550,000 as of December 31, 2004. We were in compliance with the covenants and requirements of our various mortgage loans payable during the years ended December 31, 2004 and 2003.

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CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following summarizes our contractual obligations and other commitments at December 31, 2004, and the effect such obligations could have on our liquidity and cash flow in future periods (in thousands):

RELATED PARTY TRANSACTIONS

We occasionally use the services of the law firm Bartko, Zankel, Tarrant & Miller of which a member of our board of directors, Martin I. Zankel, is a Senior Principal. During the years ended December 31, 2004, 2003, and 2002, we paid Bartko, Zankel, Tarrant & Miller approximately $200, $81,000, and $17,000, respectively.

OFF-BALANCE SHEET ARRANGEMENTS

At December 31, 2004 and 2003, we did not have any relationships with unconsolidated entities or financial partnerships, including entities often referred to as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Therefore, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we were engaged in such relationships.

As of December 31, 2004, we had outstanding undrawn letters of credit against our credit facility of approximately $11,943,000. The letters of credit were required by our various lenders as substitution for insurance and real estate impound accounts, as temporary substitution of collateral for a sold property, and as security for a vacancy in a property serving as collateral for a mortgage.

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POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS

Many factors affect our actual financial performance and may cause our future results to be different from past performance or trends. These factors include the following:

We could experience a reduction in rental income if we are unable to renew or re-lease space on expiring leases on current lease terms, or at all.

A significant portion of our leases is scheduled to expire in the near future. As of December 31, 2004, leases representing 21%, 15%, 15%, and 22% of our total annualized base rent were scheduled to expire during 2005, 2006, 2007, and 2008, respectively. If the rental rates upon re-leasing or renewal of leases were significantly lower than current rates, or if we were unable to lease a significant amount of space on economically favorable terms, or at all, our results of operations could suffer. We are subject to the risk that, upon expiration, some of these or other leases will not be renewed, the space may not be re-leased, or the terms of renewal or re-leasing, including the costs of required renovations or concessions to tenants, may be less favorable than current lease terms. We could face difficulties re-leasing our space on commercially acceptable terms when it becomes available. In addition, we expect to incur costs in making improvemen ts or repairs to our properties required by new or renewing tenants and expenses associated with brokerage commissions payable in connection with the re-leasing of space. Similarly, our rental income could be reduced by vacancies resulting from lease expirations or by rental rates that are less favorable than our current terms. If we are unable to promptly renew leases or re-lease space or if the expenses relating to tenant turnover are greater than expected, our financial results could be harmed.

Our leases with our 25 largest tenants generate approximately 41% of our base rent, and the loss of one or more of these tenants, as well as the inability to re-lease this space on equivalent terms, could harm our results of operations.

As of December 31, 2004, our 25 largest tenants accounted for approximately 41% of our total annualized base rent. In the event that one or more of our larger tenants were to vacate or not renew their lease with us, the re-leasing of the square footage previously leased by these tenants may require considerable capital expenditures and an indeterminate period of time. Losses of our larger tenants and our inability to re-lease vacated properties on favorable terms could limit our ability to make distributions to our stockholders.

A significant portion of our base rent is generated by properties in California, and our business could be harmed by an economic downturn in the California real estate market or a significant earthquake.

As of December 31, 2004, approximately 45% of our total annualized base rent was generated by our properties located in the State of California. As a result of this geographic concentration, a downturn in the performance of the commercial real estate markets and the local economies in various areas within California could adversely affect the value of these properties and the rental income from these properties and, in turn, our results of operations. In addition, the geographic concentration of our properties in California in close proximity to regions known for their seismic activity exposes us to the risk that our operating results could be harmed by a significant earthquake.

Future declines in the demand for commercial space in the greater San Francisco Bay Area could harm our results of operations and, consequently, our ability to make distributions to our stockholders.

Approximately 28% of our net operating income , including income from discontinued operations, for the year ended December 31, 2004 was generated by our properties located in the greater San Francisco Bay Area. As a result, our business is somewhat dependent on the condition of the San Francisco Bay Area economy. The market for commercial space in the San Francisco Bay Area is recovering from of one of the most severe downturns of the past several decades. This downturn was precipitated by the unprecedented collapse of many technology and so-called “ dot com ” businesses that, during the 1998-2001 period, had been chiefly responsible for generating demand

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for, and increased prices of, local office properties. This downturn has harmed, and may continue to harm, our results of operations. In the event this downturn continues or economic conditions in the San Francisco Bay Area worsen, it could harm the market value of our properties, the results derived from such properties and our ability to make distributions to our stockholders.

Real estate investments are inherently risky, and many of the risks involved are beyond our ability to control.

Real property investments are subject to numerous risks. The yields available from an equity investment in real estate depend on the amount of income generated and costs incurred by the related properties. If the properties in which we invest do not generate sufficient income to meet costs, including debt service, tenant improvements, third-party leasing commissions, and capital expenditures, our results of operations and ability to make distributions to our stockholders could suffer. Revenues and values of our properties may also be harmed by a number of other factors, some of which are beyond our control, including:

-

the national economic climate;

-

the local economic climate;

-

local real estate conditions, including an oversupply of space or a reduction in demand for real estate in an area;

-

the attractiveness of our properties to tenants;

-

competition from other available space;

-

our ability to provide adequate maintenance and insurance to cover other operating costs, government regulations and changes in real estate, zoning or tax laws, and interest rate levels;

-

the availability of financing; and

-

potential liabilities under environmental and other laws.

If our tenants experience financial difficulty or seek the protection of bankruptcy laws, our cash from operating activities could suffer.

Our commercial tenants may, from time to time, experience downturns in their business operations and finances due to adverse economic conditions, which may result in their failure to make rental payments to us on a timely basis or at all. Missed rental payments, in the aggregate, could impair our cash flows and, as a result, our ability to make distributions to our stockholders.

At any time, a tenant could seek the protection of the bankruptcy laws, which might result in the modification or termination of the tenant’s lease and cause a reduction in our cash flow. During the twelve months ended December 31, 2004, none of our tenants had filed for bankruptcy. However, in the event of default by or bankruptcy of a tenant, we may experience delays in enforcing our rights as lessor and may incur substantial costs in protecting our investment. The default, bankruptcy, or insolvency of a few major tenants may harm us and our ability to pay dividends to our stockholders.

Our dependence on smaller businesses to rent office space could negatively affect our cash flow.

Many of the tenants in our properties operate smaller businesses that may not have the financial strength of larger corporate tenants. Smaller companies generally experience a higher rate of failure and are generally more susceptible to financial risks than large, well-capitalized enterprises. Dependence on these companies could create a higher risk of tenant defaults, turnover, and bankruptcies, all of which could harm our ability to pay dividends.

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The acquisition and development of real estate is subject to numerous risks, and the cost of bringing any acquired property to standards for its intended market position could exceed our estimates.

A significant portion of our leases is scheduled to expire in 2005. To supplement the losses in net operating income caused by the leasing turnover, we expanded our acquisitions program in 2003 and during the first ten months of 2004. Acquisitions totaled approximately $85.1 million in 2003 and $103.6 million in 2004. The goal of our acquisitions program was to purchase additional properties the net operating income from which would supplement the declines in net operating income we have been experiencing, and will experience, from rental declines and from our high tenant turnover rate in 2004 and 2005.  Due to the fact that we were unable to acquire sufficient properties that met our targets for return on investment, we determined that we would de-emphasize our acquisitions program and focus, instead, on selling individual properties in the current seller-favorable market in order to supplement our net operating income. However, following the conclusion of our review of strategic alternatives, and as part of repositioning ourselves as a multi-tenant REIT, we may acquire additional properties as opportunities arise. We may acquire industrial and suburban office properties and portfolios of these properties, which may include the acquisition of other companies and business entities owning the properties. Although we engage in due diligence review for each new acquisition, we may not be aware of all potential liabilities and problems associated with a property. We may have limited contractual recourse, or no contractual recourse, against the sellers of a property.

We may abandon development opportunities resulting in direct expenses to us.

From time to time, we may invest significant time and resources exploring development opportunities that we subsequently decide are not in our best interest. The costs of investigating these opportunities will still be considered a direct expense and may harm our financial condition.

Our uninsured or underinsured losses could result in a loss in value of our properties.

We currently maintain general liability coverage with primary limits of $1 million per occurrence and $2 million in the aggregate, as well as $40 million of umbrella/excess liability coverage. This coverage protects us against liability claims as well as the cost of legal defense. We carry property “ All Risks ” insurance of $200 million on a replacement value basis covering both the cost of direct physical damage and the loss of rental income. Separate flood and earthquake insurance is provided with an annual aggregate limit of $10 million, subject to a deductible of the greater of $100,000 or 5% of total insurable value per building and respective rent loss with respect to earthquake coverage. Additional excess earthquake coverage with an aggregate limit of $20 million is provided for properties located in California, which represent approximately 45% of our portfolio’s annualized base rent as of December 31, 2004. Some losses, including those due to acts of war, nuclear accidents, pollution, mold, or terrorism, may be either uninsurable or not economically insurable. However, we do presently carry insurance for terrorism losses as defined under the Terrorism Risk Insurance Act of 2002 under our “ All Risks ” property policies, liability policies, primary and umbrella/excess policies. In addition, “ non-certified ” terrorism coverage is provided under our property policy for losses in excess of $10 million up to the $200 million limit.

Some losses could exceed the limits of our insurance policies or could cause us to bear a substantial portion of those losses due to deductibles under those policies. If we suffer an uninsured loss, we could lose both our invested capital in and anticipated cash flow from the property while being obligated to repay any outstanding indebtedness incurred to acquire the property. In addition, a majority of our properties are located in areas that are subject to earthquake activity. Although we have obtained earthquake insurance policies for all of our properties, if one or more properties sustain damage as a result of an earthquake, we may incur substantial losses up to the amount of the deductible under the earthquake insurance policy and, additionally, to the extent that the damage exceeds the policy’s maximum coverage, we would not have insurance compensation for that portion of the losses. Although we have obtained owner’s title insu rance policies for each of our properties, the title insurance may be in an amount less than the current market value of some of the properties. If a title defect results in a loss that exceeds insured limits, we could lose all or part of our investment in, and anticipated gains, if any, from, the property. Furthermore, the current insurance market is characterized by rising premium rates, increasing deductibles, and more restrictive coverage language. Continued increases in the costs of insurance coverage or increased limits or exclusions in insurance policy coverage could negatively affect our financial results.

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If we fail to maintain our qualification as a real estate investment trust, we could experience adverse tax and other consequences, including the loss of deductibility of dividends in calculating our taxable income and the imposition of federal income tax at regular corporate rates.

We have elected to qualify as a real estate investment trust (REIT) under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended. We believe that we have been organized and have operated in a manner so as to have satisfied the REIT qualification requirements since 1985. However, the IRS could challenge our qualification as a REIT for taxable years still subject to audit, and we may fail to qualify as a REIT in the future.

Qualification as a REIT involves the application of highly technical and complex tax provisions, and the determination of various factual matters and circumstances not entirely within our control may have an impact on our ability to maintain our qualification as a REIT. For example, in order to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying sources and we must make distributions to stockholders aggregating annually at least 90% of our REIT taxable income, excluding net capital gains. In addition, we cannot assure that new legislation, Treasury Regulations, administrative interpretations, or court decisions will not significantly change the tax laws with respect to our qualification as a REIT or the federal income tax consequences of such qualification. We are not aware of any proposal to amend the tax laws that would significantly and negatively affect our ability to continue to operate as a REIT .

If we fail to maintain our qualification as a REIT, or are found not to have qualified as a REIT for any prior year, we would not be entitled to deduct dividends paid to our stockholders and would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. In addition, unless entitled to statutory relief, we would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. This treatment would reduce amounts available for investment or distribution to stockholders because of any additional tax liability for the year or years involved. In addition, we would no longer be required by the Internal Revenue Code to make any distributions. As a result, disqualification as a REIT would harm us and our ability to make distributions to our stockholders. To the extent that distributions to stockholders have been ma de in anticipation of our qualification as a REIT, we might be required to borrow funds or to liquidate investments to pay the applicable tax.

We must comply with strict income distribution requirements to maintain favorable tax treatment as a REIT. If our cash flow is insufficient to meet our operating expenses and the distribution requirements, we may need to incur additional borrowings or otherwise obtain funds to satisfy these requirements.

To maintain REIT status, we are required each year to distribute to our stockholders at least 90% of our REIT taxable income, excluding net capital gains. In addition, we are subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income and 95% of our capital gain net income for the calendar year plus any amount of such income not distributed in prior years. Although we anticipate that cash flow from operations will be sufficient to pay our operating expenses and meet the distribution requirements, we cannot assure you that this will occur, and we may need to incur borrowings or otherwise obtain funds to satisfy the distribution requirements associated with maintaining the REIT qualification. In addition, differences in timing between the receipt of income and payment of expenses in arriving at our taxable income could require us to incu r borrowings or otherwise obtain funds to meet the distribution requirements necessary to maintain our qualification as a REIT. We cannot assure you that we will be able to borrow funds or otherwise obtain funds if and when necessary to satisfy these requirements.

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As a REIT, we are subject to complex constructive ownership rules that limit any holder to 9.8% in value of our outstanding common and preferred stock, taken together. Any shares transferred in violation of this rule are subject to redemption by us and any such transaction is voidable.

To maintain REIT qualification, our charter provides that no holder is permitted to own more than 9.8% in value of our outstanding common and preferred stock, taken together, or more than 9.8% (in value or number) of our outstanding common stock. In addition, no holder is permitted to own any shares of any class of our stock if that ownership would cause more than 50% in value of our outstanding common and preferred stock, taken together, to be owned by five or fewer individuals, would result in our stock being beneficially owned by less than 100 persons or would otherwise result in our failure to qualify as a REIT. Acquisition or ownership of our common or preferred stock in violation of these restrictions results in automatic transfer of the stock to a trust for the benefit of a charitable beneficiary or, under specified circumstances, the violative transfer may be deemed void or we may choose to redeem the violative shares. Peter B. Bed ford is subject to higher ownership limitations than our other stockholders. Specifically, Mr. Bedford is not permitted to own more than 15% of the lesser of the number or value of the outstanding shares of our common stock.

The ownership limitations described above are applied using the constructive ownership rules of the Internal Revenue Code. These rules are complex and may cause common or preferred stock owned beneficially or constructively by a group of related individuals and/or entities to be constructively owned by one individual or entity. As a result, the acquisition of less than 9.8% of our outstanding common or preferred stock or the acquisition of an interest in an entity that owns our common or preferred stock by an individual or entity could cause that individual or entity or another individual or entity to constructively own stock in excess of the limits and subject that stock to the ownership restrictions in our charter.

If we fail to maintain an effective system of internal controls or discover material weaknesses in our internal controls over financial reporting, we may not be able to report our financial results accurately or detect fraud, which could harm our business and the trading price of our stock.

Effective internal controls are necessary for us to produce reliable financial reports and are important in our effort to prevent financial fraud. We are required to periodically evaluate the effectiveness of the design and operation of our internal controls. These evaluations may result in the conclusion that enhancements, modifications or changes to our internal controls are necessary or desirable. While management evaluates the effectiveness of our internal controls on a regular basis, we cannot provide absolute assurance that these controls will always be effective.  There are inherent limitations on the effectiveness of internal controls including collusion, management override, and breakdowns in human judgment. Because of this, control procedures are designed to reduce rather than eliminate business risks. If we fail to maintain an effective system of internal controls or if management or our independent registered public accounting firm were to discover material weaknesses in our internal controls, we may be unable to produce reliable financial reports or prevent fraud and it could harm our financial condition and results of operations and result in loss of investor confidence and a decline in our stock price.

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We rely on the services of our key personnel, and their expertise and knowledge of our business would be difficult to replace.

We are highly dependent on the efforts of our senior officers.  While we believe that we could find suitable replacements for these key personnel, the loss of their services could harm our business.  On April 20, 2004, our board of directors announced that they had launched a search to replace Peter Bedford as our c hief e xecutive o fficer upon his retirement.  After conducting this search for several months and as a result of subsequent developments in the real estate market, in September 2004, the board of directors determined that it would be in the best interests of our stockholders to pursue various strategic alternatives, including a possible sale or merger of our company to a third party or selling certain of our assets. Based on this shift in strategy, the board requested, and Peter Bedford agreed, to defer his retirement and remain as our CEO while we evaluated and pursued these strategic alternatives. In connection with the board's conclusion of its review of strategic alternatives in February 2005, the board decided to discontinue its previously suspended search for a successor candidate to serve as CEO and Peter Bedford's term of employment as CEO was extended until December 31, 2007. In addition, James Moore, our President and former c hief o perating o fficer, has also announced his intention to retire in July 2005. As a result, we have restructured our organization and Stephen M. Silla has assumed the position of c hief o perating o fficer, effective January 31, 2005. Changes in our senior management and any future departures of key employees or other members of senior management could have a material adverse effect on our ability to implement our business strategy and on our results of operations.

The commercial real estate industry is highly competitive, and we compete with companies, including REITs, that may be able to purchase properties at lower capitalization rates than would be accretive for us.

We have historically sought to grow our asset base through the acquisition of industrial and suburban office properties and portfolios of these properties, as well as through the development of new industrial and suburban office properties. Many real estate companies, including other REITs, compete with us in making bids to acquire new properties. The level of competition to acquire income-producing properties is largely measured by the capitalization rates at which properties are trading. The capitalization rate is the annual yield that property produces on the investment. Currently, capitalization rates are low due to the amount of capital available for investment and attractive debt financing terms. As a result, we may not be able to compete effectively with companies, including REITs, that may be able to purchase properties at lower capitalization rates than would be accretive for us.

Many of our properties are located in markets with an oversupply of space, and our ability to compete effectively with other properties to attract tenants may be limited to the extent that competing properties may be newer, better capitalized or in more desirable locations than our properties.

Numerous industrial and suburban office properties compete with our properties in attracting tenants. Some of these competing properties are newer, better located, or better capitalized than our properties. Many of our investments are located in markets that have a significant supply of available space, resulting in intense competition for tenants and lower rents. We believe the oversupply of available space relative to demand has increased in recent years due to the softened U.S. economy. The number of competitive properties in a particular area could negatively impact our ability to lease space in the properties or at newly acquired or developed properties.

We could incur costs from environmental liabilities even though we did not cause, contribute to, or know about them.

Under various federal, state, and local laws, ordinances and regulations, an owner or operator of real estate may be held liable for the costs of removal or remediation of hazardous or toxic substances released on, above, under or in a property. These laws often impose liability regardless of whether the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. In addition, environmental laws often impose liability on a previous owner of property for hazardous or toxic substances present during the prior ownership period. A transfer of the property may not relieve an owner of all liability. Accordingly, we could be liable for properties previously sold or otherwise divested. The costs of removal or remediation could be substantial. Additionally, the presence of the substances, or the failure to properly remove them, may harm our ability to borrow using the real estate as collateral.

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All of our properties have had Phase I environmental site assessments, which involve inspection without soil sampling or groundwater analysis, by independent environmental consultants and have been inspected for hazardous materials as part of our acquisition inspections. None of the Phase I assessments has revealed any environmental problems requiring material costs for clean up. The Phase I assessment for Milpitas Town Center, however, indicates that the groundwater under that property either has been or may in the future be, impacted by the migration of contaminants originating off-site. According to information available to us, the responsible party for this offsite source has been identified and has begun clean up. We do not believe that this environmental matter will impair the future value of Milpitas Town Center in any significant respect or that we will be required to fund any portion of the cost of remediation. We cannot assure you, however, that these Phase I assessments or our inspections have revealed all environmental liabilities and problems relating to this or any other of our properties.

We believe that we are in compliance in all material respects with all federal, state, and local laws regarding hazardous or toxic substances. To date, compliance with federal, state, and local environmental protection regulations has not had a material effect on us. However, we cannot assure you that costs relating to the investigation and remediation of environmental issues for properties currently or previously owned by us, or properties that we may acquire in the future, or other expenditures or liabilities, including claims by private parties, resulting from hazardous substances present in, on, under, or above the properties or resulting from circumstances or other actions or claims relating to environmental matters, will not harm us and our ability to pay dividends to our stockholders.

Costs associated with moisture infiltration and resulting mold remediation may be significant.

Concern about indoor exposure to mold, fungi, and mycotoxins has been increasing because this exposure is allegedly linked to various adverse effects on health. Increasingly, insurance companies are excluding mold-related risks from their policy coverage, and it is now excluded from our coverage. Costs and potential liability stemming from tenant exposure to mold and the increased costs of renovating and remodeling buildings with exposure to mold could harm our financial position and results. We have in the past incurred costs for mold remediation in certain of our properties and may incur such costs in the future.

We could incur unanticipated costs to comply with the Americans with Disabilities Act, and any non-compliance could result in fines.

Under the Americans with Disabilities Act (the ADA), all public accommodations and commercial facilities are required to meet federal requirements related to access and use by disabled persons. Compliance with the ADA requires removal of access barriers, and any non-compliance may result in the imposition of fines by the U.S. government or an award of damages to private litigants. Although we believe that our properties are substantially in compliance with these requirements, in the future we may incur costs to comply with the ADA with respect to both existing properties and properties acquired in the future, which could limit our ability to make distributions to stockholders.

We are subject to numerous federal, state, and local regulatory requirements, and any changes to existing regulations or new laws may result in significant, unanticipated costs.

Our properties are, and any properties we may acquire in the future will be, subject to various other federal, state, and local regulatory requirements, including local building codes. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. We believe that our properties are currently in substantial compliance with all applicable regulatory requirements, although expenditures at properties owned by us may be necessary to comply with changes in these laws. Although no material expenditures are contemplated at this time to comply with any laws or regulations, we cannot assure you that these requirements will not be changed or that new requirements will not be imposed that would require significant unanticipated expenditures by us, which could harm us and our ability to make distributions to our stockholders. Similarly, changes in laws increasing the p otential liability for environmental conditions existing on our properties could result in significant unanticipated expenditures.

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Our $150 million credit agreement and our mortgage loans are collateralized by approximately 91% of our total real estate assets, and in the event of default under any of these debt instruments, our lenders could foreclose on the collateral securing this indebtedness.

As of December 31, 2004, our $150 million credit facility was collateralized by mortgages on 20 properties that accounted for approximately 22% of our annualized base rent and approximately 21% of our total real estate assets. All of our mortgage loans were collateralized by 67 properties that accounted for approximately 73% of our annualized base rent and approximately 70% of our total real estate assets. If we fail to meet our obligations under the credit facility, the mortgage loans, or any other debt instruments we may enter into from time to time, including failure to comply with financial covenants, the holders of this indebtedness generally would be entitled to demand immediate repayment of the principal and to foreclose upon any collateral securing this indebtedness. In addition, default under or acceleration of any debt instrument could, pursuant to cross-default clauses, cause or permit the acceleration of other indebtedness. Any defa ult or acceleration would harm us, jeopardizing our qualification as a REIT and threatening our continued viability. In addition, upon the sale of any property subject to a mortgage loan or which forms part of the collateral for our credit facility, we would be required to apply the proceeds of any such sale first to pay off any mortgage loan on the property or (to the extent the total value of the collateral securing our credit facility after such sale is less than the total amount outstanding under the credit facility) to pay down our credit facility, as applicable.

Our $150 million credit agreement and some of our mortgage loans carry floating interest rates, and increases in market interest rates could harm our results of operations.

As of December 31, 2004, our $150 million credit facility did not have an outstanding balance. However, the average outstanding balance during 2004 was $81.2 million, and we had other outstanding floating rate loans of $36.2 million as of December 31, 2004. Borrowings under our credit facility bear interest at a floating rate, and we may from time to time incur or assume other indebtedness also bearing interest at a floating rate. In that regard, our results of operations for 2003 and 2004 have benefited from low levels of interest rates. Should this trend in interest rates reverse itself, our operating results could be harmed ..

We use borrowings to finance the acquisition, development and operation of properties and to repurchase our common stock, and we cannot assure you that financing will be available on commercially reasonable terms, or at all, in the future.

We borrow money to pay for the acquisition, development, and operation of our properties, to repurchase our common stock, and for other general corporate purposes. Our credit facility currently expires on March 31, 2007, when the principal amount of all outstanding borrowings must be paid. Since the term of our credit facility is limited, our ability to fund acquisitions and provide funds for working capital and other cash needs following the expiration or utilization of the credit facility will depend primarily on our ability to obtain additional private or public equity or debt financing.  Such financing may not be available to us on commercially reasonable terms, or at all, at the time we may require such financing.

A downturn in the economy could make it difficult for us to borrow money on favorable terms. If we are unable to borrow money on favorable terms, we may need to sell some of our assets at unfavorable prices in order to pay our loans. We could encounter several problems, including:

-

insufficient cash flow to meet required payments of principal and interest;

-

an increase on variable interest rates on indebtedness; and

-

an inability to refinance existing indebtedness on favorable terms or at all.

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Our leverage could harm our ability to operate our business and fulfill our debt obligations.

We have significant debt service obligations. As of December 31, 2004, we had total liabilities of approximately $443.0 million, excluding unused commitments under our credit facility, and total stockholders’ equity of approximately $350.5 million. Payments to service our outstanding debt obligations during the year totaled approximately $33.2 million for 2004. Our debt level increases the possibility that we could be unable to generate cash sufficient to pay the principal of, interest on, or other amounts due in respect of our indebtedness. In addition, we may incur additional debt from time to time to fund our stock buy back program, finance strategic acquisitions, investments, or for other purposes, subject to the restrictions contained in our debt instruments.

We have not used derivatives extensively to mitigate our interest rate risks.

Historically, we have not used interest rate swaps, caps and floors, or other derivative transactions extensively to help us mitigate our interest rate risks because we have determined that the cost of these transactions outweighed their potential benefits and could have, in some cases, jeopardized our status as a REIT. We have entered into a swap agreement to hedge our exposure to the variable interest rate on a mortgage with a remaining principal balance of approximately $11.5 million as of December 31, 2004. Even if we were to use derivative transactions more extensively, we would not be fully insulated from the prepayment and interest rate risks to which we are exposed. However, we do not have any policy that prohibits us from using derivative transactions or other hedging strategies more extensively in the future. If we do engage in additional derivative transactions in the future, we cannot assure you that a liquid secondary market will e xist for any instruments purchased or sold in those transactions, and we may be required to maintain a position until exercise or expiration, which could result in losses.

An increase in market interest rates could cause the respective prices of our common stock and preferred stock to decrease.

One of the factors that may influence the respective market prices of our shares of common stock and preferred stock will be the annual dividend yield on the price paid for shares of our common stock or preferred stock as compared to yields on other financial instruments. An increase in market interest rates may lead prospective purchasers of our stock to seek a higher annual yield from their investments, which may adversely affect the respective market prices of our common stock and preferred stock. As of December 31, 2004, interest rates in the U.S. remained relatively low.

We may incur additional indebtedness, which may harm our financial position and cash flow and potentially impact our ability to pay dividends.

Our existing debt instruments permit us to incur additional indebtedness and other liabilities, subject to the restrictions contained in those debt instruments. As of December 31, 2004, we had approximately $351.3 million of indebtedness outstanding. We may incur additional indebtedness and become more highly leveraged, which could harm our financial position and potentially limit our cash available to pay dividends. As a result, we may not have sufficient funds to satisfy our dividend obligations relating to our preferred stock or pay dividends on our common stock, if we assume additional indebtedness.

We cannot assure you that we will be able to pay dividends regularly although we have done so in the past.

Our ability to pay dividends in the future is dependent on our ability to operate profitably and to generate cash from our operations. Although we have done so in the past, we cannot guarantee that we will be able to pay dividends on a regular quarterly basis in the future. Furthermore, any new shares of common stock issued will substantially increase the cash required to continue to pay cash dividends at current levels. Any common stock or preferred stock that may in the future be issued to finance acquisitions, upon exercise of stock options or otherwise would have a similar effect. In addition, our existing credit facility covenants have specific limits regarding our ability to pay quarterly dividends to stockholders.

37

Our ability to pay dividends is further limited by the requirements of Maryland law.

Our ability to pay dividends on our common stock and preferred stock is further limited by the laws of Maryland. Under the Maryland General Corporation Law, a Maryland corporation may not make a distribution if, after giving effect to the distribution, either the corporation would not be able to pay indebtedness of the corporation as the indebtedness becomes due in the usual course of business or the corporation’s total assets would be less than the sum of the corporation’s total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution. Accordingly, we cannot make a distribution, except by dividend, on our common stock or preferred stock if, after giving effect to the distribution, our total assets would be less than the sum of our l iabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of the holders of any shares of preferred stock then outstanding, or if we would not be able to pay our indebtedness as it became due.

38

FINANCIAL PERFORMANCE

Our Funds from Operations (FFO) during the three and twelve months ended December 31, 2004 was $5,316,000 and $40,250,000, respectively. During the same periods in 2003, FFO was $12,151,000 and $49,723,000, respectively. Although FFO is not a financial measure calculated in accordance with U.S. generally accepted accounting principles (GAAP), we believe that FFO may be an appropriate alternative measure of the performance of an equity REIT. Presentation of this information provides the reader with an additional measure to compare the performance of equity REITs. FFO is generally defined by the National Association of Real Estate Investment Trusts as net income (loss) (computed in accordance with GAAP), excluding extraordinary items and gains (losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. We computed our FFO in accordance with this definition. FFO doe s not represent cash generated by operating activities in accordance with GAAP; it is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to net income (loss) as an indicator of our operating performance or as an alternative to cash flow as a measure of liquidity. Furthermore, FFO as disclosed by other REITs may not be comparable to our presentation. The most directly comparable financial measure calculated in accordance with GAAP to FFO is net income available to common stockholders. The following table sets forth a reconciliation of the differences between our FFO and our net income available to common stockholders for each of the three and twelve months ended December 31, 2004 and 2003.

39

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to interest rate changes primarily as a result of our line of credit and long-term debt used to maintain liquidity and fund capital expenditures and expansion of our real estate investment portfolio and operations. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we balance our borrowings between fixed and variable rate debt. While we have in the past entered into interest swap agreements from time to time to minimize our exposure to interest rate fluctuations, we do not enter into derivative or interest rate transactions for speculative purposes.

We monitor our interest rate risk using a variety of techniques. The table below presents the principal amounts and related weighted average annual interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes (dollars in thousands):

As the table incorporates only those exposures that existed as of December 31, 2004, it does not consider those exposures or positions which could arise after that date. Moreover, because firm commitments are not presented in the table above, the information presented therein has limited predictive value. As a result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, our hedging strategies at that time, and interest rates. If interest rates were to increase by 10%, or an average of 27 basis points, interest expense on our outstanding variable rate debt would increase by approximately $146,000 annually.

In July 2003, we entered into an interest swap agreement with Bank of America, N.A. on our two floating-rate mortgages with Security Life of Denver Insurance Company. The agreement, which commenced on July 3, 2003 and terminates on September 1, 2005, exchanges a floating rate of 30-day LIBOR for a fixed rate of 1.595% on a notional amount of $24.5 million for the first 6 months and $23.5 million in 2004. As a result of the paydown of a portion of one of the mortgages and the pay off of the other mortgage in December 2004, the agreement was amended to reduce the notional amount to $11 million with no other term changes.  Interest rate pay differentials that arise under this swap agreement are recognized on an accrual basis in interest expense over the term of the contract. This interest rate swap agreement was considered to be fully effective in hedging the variable rate risk associated with the mortgages.

The following summarizes the notional value and fair value of our interest swap contract. The notional value below provides an indication of the amount that has been hedged in this contract but does not represent an obligation or exposure to credit risk at December 31, 2004 (dollars in thousands):    

40

To determine the fair values of derivative instruments in accordance with SFAS 133, we use the discounted cash flow method, which requires the use of assumptions about market conditions and risks existing at the balance sheet date. Judgment is required in interpreting market data to develop estimates of market value. Accordingly, estimated fair value is a general approximation of value, and such value may or may not actually be realized.

Item 8. Financial Statements and Supplementary Data

The response to this Item is submitted as a separate section of this Form 10-K. See Item 15.

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

On March 13, 2003, our board of directors, upon the recommendation of the audit committee, authorized the dismissal of KPMG LLP and the appointment of PricewaterhouseCoopers LLP as our new independent auditors for the fiscal year ended December 31, 2003.  The dismissal of KPMG LLP was not a result of disagreements between KPMG LLP and us on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.  Additional information relating to the change in independent auditors is contained in the current report on Form 8-K that we filed with the SEC on March 20, 2003.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our chief executive officer and chief financial officer, has conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2004. Based on that evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective. There have been no significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended December 31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  

Based on management’s assessment, we have determined that as of December 31, 2004, the company’s internal control over financial reporting was effective.  

As described by the Public Company Accounting Oversight Board in Auditing Standards No. 2, internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations.  Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures.  Internal control over financial reporting also can be circumvented by collusion or improper management override.  Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.  However, these inherent limitations are known features of the financial reporting process.  Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

41

Our management’s assessment of the effectiveness of the company’s internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Item 9B. Other Information

None .

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PART III

Item 10. Directors and Executive Officers of the Registrant

The information required by Item 10 of this report is incorporated by reference from the proxy statement that we will mail to our stockholders in connection with the solicitation of proxies for the annual meeting of our stockholders, scheduled to take place on May 11, 2005.

Item 11. Executive Compensation

The information required by Item 11 of this report is incorporated by reference from the proxy statement that we will mail to our stockholders in connection with the solicitation of proxies for the annual meeting of our stockholders, scheduled to take place on May 11, 2005.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by Item 12 of this report is incorporated by reference from the proxy statement that we will mail to our stockholders in connection with the solicitation of proxies for the annual meeting of our stockholders, scheduled to take place on May 11, 2005.

Item 13. Certain Relationships and Related Transactions

The information required by Item 13 of this report is incorporated by reference from the proxy statement that we will mail to our stockholders in connection with the solicitation of proxies for the annual meeting of our stockholders, scheduled to take place on May 11, 2005.

Item 14. Principal Accounting Fees and Services

The information required by Item 14 of this report is incorporated by reference from the proxy statement that we will mail to our stockholders in connection with the solicitation of proxies for the annual meeting of our stockholders, scheduled to take place on May 11, 2005.

43

PART IV

Item 15. Exhibits, Financial Statement Schedules

2.

Financial Statement Schedule

All other schedules have been omitted as they are not applicable, not required or because the information is given in the Financial Statements or related Notes to Financial Statements.

3.

Exhibits

Exhibit No.

List of Exhibits

3.1(d)

Articles of Amendment and Restatement of Bedford Property Investors, Inc., filed on May 27, 2003, is incorporated herein by reference to Exhibit 3.1(d) to our Form 10-Q for the quarter ending June 30, 2003.

3.1(e)

Articles Supplementary relating to the Series A Cumulative Redeemable Preferred Stock of Bedford Property Investors, Inc., filed on August 4, 2003, is incorporated herein by reference to Exhibit 3.1(e) to our Form 10-Q for the quarter ending June 30, 2003.

3.1(f)

Articles Supplementary relating to the Series B Cumulative Redeemable Preferred Stock of Bedford Property Investors, Inc., filed on April 5, 2004, is incorporated herein by reference to Exhibit 4.2 to our Registration Statement on Form 8-A filed with the SEC on April 5, 2004.

3.2(b)

Second Amended and Restated Bylaws of Bedford Property Investors, Inc. are incorporated herein by reference to Exhibit 3.2(b) to our Form 10-Q for the quarter ending June 30, 2003.

4.4

Series A Cumulative Redeemable Preferred Stock Registration Rights Agreement, dated August 5, 2003, between Bedford Property Investors, Inc. and RBC Dain Rauscher Inc. is incorporated herein by reference to Exhibit 4.4 to our Form 10-Q for the quarter ending June 30, 2003.

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10.13

Promissory Note, dated as of March 20, 1996, by and between Bedford Property Investors, Inc. and Prudential Insurance Company of America, is incorporated herein by reference to Exhibit 10.13 to our Amendment No. 1 to our Registration Statement on Form S-2 (File No. 333-00921) filed on March 29, 1996.

10.14

Employment Agreement, dated February 17, 1993, by and between ICM Property Investors, Inc., and Peter B. Bedford, is incorporated herein by reference to Exhibit 10.14 to our Form 10-K for the year ended December 31, 1994.

10.15

Our Dividend Reinvestment and Stock Purchase Plan is incorporated herein by reference to our post-effective Amendment No. 1 to our Registration Statement on Form S-3 (File No. 333-33795) filed on November 20, 1997.

10.16

Our Amended and Restated Employee Stock Plan is incorporated herein by reference to Exhibit 10.16 to our Form 10-K for the year ended December 31, 1997.

10.22

Promissory Note, dated as of May 28, 1999, by and between Bedford Property Investors, Inc. and Teachers Insurance and Annuity Association of America, is incorporated herein by reference to Exhibit 10.22 to our Form 10-Q for the quarter ended June 30, 1999.

10.23

Promissory Note, dated as of May 28, 1999, by and between Bedford Property Investors, Inc. and Teachers Insurance and Annuity Association of America, is incorporated herein by reference to Exhibit 10.23 to our Form 10-Q for the quarter ended June 30, 1999.

10.24

Promissory Note, dated as of May 28, 1999, by and between Bedford Property Investors, Inc. and Teachers Insurance and Annuity Association of America, is incorporated herein by reference to Exhibit 10.24 to our Form 10-Q for the quarter ended June 30, 1999.

10.28

Promissory Note, dated as of November 22, 1999, by and between Bedford Property Investors, Inc. and Teachers Insurance and Annuity Association of America, is incorporated herein by reference to Exhibit 10.28 to our Form 10-K for the year ended December 31, 1999.

10.30

Loan Agreement, dated as of July 27, 2000, by and between Bedford Property Investors, Inc. and Security Life of Denver Insurance Company, is incorporated herein by reference to Exhibit 10.30 to our Form 10-Q for the quarter ended June 30, 2000.

10.31

Amended and Restated Promissory Note, dated as of May 24, 1996, by and between Bedford Property Investors, Inc. and Prudential Insurance Company of America, is incorporated herein by reference to Exhibit 10.13 to our Form 10-Q for the quarter ended June 30, 1996.

10.32

Loan Agreement, dated as of January 30, 1998, by and between Bedford Property Investors, Inc. and Prudential Insurance Company of America, is incorporated herein by reference to Exhibit 10.15 to our Form 10-K for the year ended December 31, 1997.

10.36

Promissory Note, dated as of July 23, 2001, by and between Bedford Property Investors, Inc. and Washington Mutual Bank, is incorporated herein by reference to Exhibit 10.36 to our Form 10-Q for the quarter ended June 30, 2001.

10.40

Amended and Restated Promissory Note, dated as of November 19, 2001, by and between Bedford Property Investors, Inc. and Union Bank of California, N.A., is incorporated herein by reference to Exhibit 10.40 to our Form 10-K for the year ended December 31, 2001.

45

10.41

Purchase Agreement and Escrow Instructions, Financial Agreement, and Holdback Escrow Agreement, each dated as of July 17, 2002, by and between Bedford Property Investors, Inc. and Dared 80, LLC, are incorporated herein by reference to Exhibit 10.41 to our Form 8-K filed on September 24, 2002.

10.42

Real Estate Sale Agreement dated as of July 17, 2002, by and between Bedford Property Investors, Inc. and EOP-Industrial Portfolio, LLC, is incorporated herein by reference to Exhibit 10.42 to our Form 8-K filed on September 24, 2002.

10.43

First Amendment, dated as of August 6, 2002, to the Real Estate Sale Agreement, dated as of July 17, 2002, by and between Bedford Property Investors, Inc. and EOP-Industrial Portfolio, LLC, is incorporated herein by reference to Exhibit 10.43 to our Form 8-K filed on September 24, 2002.

10.44

Second Amendment, dated as of August 14, 2002, to the Real Estate Sale Agreement, dated as of July 17, 2002, by and between Bedford Property Investors, Inc. and EOP-Industrial Portfolio, LLC, is incorporated herein by reference to Exhibit 10.44 to our Form 8-K filed on September 24, 2002.

10.45

Purchase Agreement and Escrow Instructions, dated as of July 26, 2002, by and between Bedford Property Investors, Inc. and Teachers Insurance and Annuity Association of America, is incorporated herein by reference to Exhibit 10.45 to our Form 8-K filed on September 24, 2002.

10.47

Note, dated as of October 7, 2002, by and between Bedford Property Investors, Inc. and Nationwide Life Insurance Company, is incorporated herein by reference to Exhibit 10.47 to our Form 10-Q for the quarter ended September 30, 2002.

10.48

Promissory Note, dated as of March 28, 2003, by and between Bedford Property Investors, Inc. and Teachers Insurance and Annuity Association of America, is incorporated herein by reference to Exhibit 10.48 to our Form 10-Q for the quarter ending March 31, 2003.

10.49

Form of Retention Agreement is incorporated herein by reference to Exhibit 10.49 to our Form 10-Q for the quarter ending June 30, 2003.

10.50

Interest Rate Protection Agreement, dated as of July 3, 2003, by and between Bedford Property Investors, Inc. and Bank of America, N.A., is incorporated herein by reference to Exhibit 10.50 to our Form 10-Q for the quarter ending June 30, 2003.

10.51

Master Agreement, dated as of March 15, 2002, by and between Bedford Property Investors, Inc. and Bank of America, N.A., is incorporated herein by reference to Exhibit 10.51 to our Form 10-Q for the quarter ending June 30, 2003.

10.52

Second Amendment to Employment Agreement, dated as of July 15, 2003, by and between Peter B. Bedford and Bedford Property Investors, Inc., is incorporated herein by reference to Exhibit 10.52 to our Form 10-Q for the quarter ending June 30, 2003.

10.53

2003 Employee Stock Plan of Bedford Property Investors, Inc., dated May 13, 2003, as amended on August 6, 2003, is incorporated herein by reference to Exhibit 10.53 to our Form 10-Q for the quarter ending June 30, 2003.

10.54

Promissory Note, dated as of October 30, 2003, by and between Bedford Property Investors, Inc. and Bank of America, N.A., is incorporated herein by reference to Exhibit 10.54 to our Form 10-Q for the quarter ending September 30, 2003.

10.55

Promissory Note, dated as of November 3, 2003, by and between Bedford Property Investors, Inc. and Bank of America, N.A., is incorporated herein by reference to Exhibit 10.55 to our Form 10-Q for the quarter ending September 30, 2003.

46

10.56

Fixed Rate Note, dated as of November 3, 2003, by and between Bedford Property Investors, Inc. and J.P. Morgan Chase Bank, is incorporated herein by reference to Exhibit 10.56 to our Form 10-Q for the quarter ending September 30, 2003.

10.57

Purchase and Sale Agreement, dated as of June 16, 2003, by and between Bedford Property Investors, Inc. and Roosevelt Commons Limited Partnership, is incorporated herein by reference to Exhibit 10.57 to our Form 8-K filed on December 12, 2003.

10.58

Amendment, dated as of July 16, 2003, to the Purchase and Sale Agreement, dated as of June 16, 2003, by and between Bedford Property Investors, Inc. and Roosevelt Commons Limited Partnership, is incorporated herein by reference to Exhibit 10.58 to our Form 8-K filed on December 12, 2003.

10.59

Second Amendment, dated as of July 31, 2003, to the Purchase and Sale Agreement, dated as of June 16, 2003, by and between Bedford Property Investors, Inc. and Roosevelt Commons Limited Partnership, is incorporated herein by reference to Exhibit 10.59 to our Form 8-K filed on December 12, 2003.

10.60

Purchase Agreement and Escrow Instructions, dated as of June 9, 2003, by and between Bedford Property Investors, Inc. and Arville & Russell, LLC, is incorporated herein by reference to Exhibit 10.60 to our Form 8-K filed on December 12, 2003.

10.61

Amendment, dated as of August 18, 2003, to the Escrow Instructions, dated as of June 9, 2003, by and between Bedford Property Investors, Inc. and Arville & Russell, LLC, is incorporated herein by reference to Exhibit 10.61 to our Form 8-K filed on December 12, 2003.

10.62

Purchase Agreement and Escrow Instructions, dated as of October 2, 2003, by and between Bedford Property Investors, Inc. and Foothill-Operon I, LLC, is incorporated herein by reference to Exhibit 10.62 to our Form 8-K filed on December 12, 2003.

10.63

Purchase Agreement and Escrow Instructions, dated as of August 29, 2003, by and between Bedford Property Investors, Inc. and CWA Acquisition, LLC, is incorporated herein by reference to Exhibit 10.63 to our Form 8-K filed on December 12, 2003.

10.64

Purchase Agreement and Escrow Instructions, dated as of November 4, 2003, by and between Bedford Property Investors, Inc. and Jackson-Shaw/Northport Limited Partnership, is incorporated herein by reference to Exhibit 10.64 to our Form 8-K filed on December 12, 2003.

10.65

Deed of Trust Note, dated as of November 25, 2003, by and between Bedford Laguna Hills Square SPE, Inc. and John Hancock Life Insurance Company, is incorporated herein by reference to Exhibit 10.65 to our Form 10-K for the year ended December 31, 2003.

10.66

Deed of Trust Note, dated as of November 25, 2003, by and between Bedford Petaluma SPE, Inc. and John Hancock Life Insurance Company, is incorporated herein by reference to Exhibit 10.66 to our Form 10-K for the year ended December 31, 2003.

10.67

Deed of Trust Note, dated as of November 25, 2003, by and between Bedford Philips Business Center SPE, Inc. and John Hancock Life Insurance Company, is incorporated herein by reference to Exhibit 10.67 to our Form 10-K for the year ended December 31, 2003.

10.68

Deed of Trust Note, dated as of November 25, 2003, by and between Bedford Phoenix Tech Center SPE, Inc. and John Hancock Life Insurance Company, is incorporated herein by reference to Exhibit 10.68 to our Form 10-K for the year ended December 31, 2003.

47

10.69

Deed of Trust Note, dated as of November 25, 2003, by and between Bedford Rio Salado SPE, Inc. and John Hancock Life Insurance Company, is incorporated herein by reference to Exhibit 10.69 to our Form 10-K for the year ended December 31, 2003.

10.70

Deed of Trust Note, dated as of November 25, 2003, by and between Bedford Village Green SPE, Inc. and John Hancock Life Insurance Company, is incorporated herein by reference to Exhibit 10.70 to our Form 10-K for the year ended December 31, 2003.

10.71

Sixth Amended and Restated Credit Agreement, dated March 31, 2004, by and among Bedford Property Investors, Inc., Bank of America, N.A., as Administrative Agent for the Banks, Swing Line Lender and L/C Issuer, and Union Bank of California, N.A., as Syndication Agent, is incorporated herein by reference to Exhibit 10.71 to our Form 10-Q for the quarter ending March 31, 2004.

10.72

Amended and Restated 2002 Directors' Stock Plan of Bedford Property Investors, Inc., dated May 13, 2004, is incorporated herein by reference to Exhibit 10.72 to our Form 10-Q for the quarter ending June 30, 2004.

10.73

Third Amendment to Employment Agreement, dated as of February 4, 2005, between Bedford Property Investors, Inc. and Peter B. Bedford, is incorporated herein by reference to Exhibit 10.73 to our Form 8-K filed on February 10, 2005.

10.74*

Promissory Note Secured by Deed of Trust, dated December 17, 2004, by and among Bedford Property Investors, Inc., as Holder, and Metzger Mountain Pointe, LLC, Mountain Pointe Office Investments, LLC, and RCH Mountain Pointe, LLC, as Maker.

16.1

Letter from KPMG LLP to the Securities and Exchange Commission re : Change in Certifying Accountant is incorporated herein by reference to Exhibit 16.1 to our Form 8-K filed on March 20, 2003.

21*

List of Subsidiaries.

23.1*

Consent of KPMG LLP.

23.2*

Consent of PricewaterhouseCoopers LLP.

24*

Power of Attorney (see signature page).

31.1*

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002.

32.2*

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith

48

F1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Bedford Property Investors, Inc.:

We have completed an integrated audit of Bedford Property Investors, Inc.’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Bedford Property Investors, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  These financial statements and the financial statement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements and fin ancial statement schedule based on our audits.  We conducted our audits of these statements 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 financial statements are free of material misstatement.  An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.  The consolidated financial statements of the Company for the year ended December 31, 2002 were audited by other auditors whose report dated February 10, 2003 expressed an unqualified opinion on those statements.

As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock Based Compensation – Transition and Disclosure – an amendment of SFAS 123, using the modified prospective method effective January 1, 2003.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria.  Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the COSO.  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 opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting 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.  An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and oper ating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinions.  

F1

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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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.

/s/ PricewaterhouseCoopers LLP

San Francisco, California

March 9, 2005

F2

Report of Independent Registered Public Accounting Firm

The Board of Directors
Bedford Property Investors, Inc.:

We have audited the accompanying statements of income, stockholders’ equity, and cash flows for the year ended December 31, 2002. In connection with our audit of the financial statements, we also audited the 2002 information included in Footnote A to the financial statement schedule, Real Estate and Accumulated Depreciation. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provided a reasonable basis for our opinion.

In our opinion, the 2002 financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Bedford Property Investors, Inc. for the year ended December 31, 2002, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the 2002 information in Footnote A to the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the 2002 information set forth therein.

/s/ KPMG LLP

San Francisco, California

February 10, 2003

F3

BEDFORD PROPERTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2004 AND 2003

(in thousands, except share and per share amounts)

See accompanying notes to consolidated financial statements.

F4

BEDFORD PROPERTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(in thousands, except share and per share amounts)

See accompanying notes to consolidated financial statements.

F5

BEDFORD PROPERTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(in thousands, except per share amounts)