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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

For the fiscal year ended December 31, 2004

OR

For the transition period from              to              .

Commission file number 0-11455

SHURGARD STORAGE CENTERS, INC.

(Exact name of registrant as specified in its charter)

1155 Valley Street, Suite 400, Seattle, Washington 98109

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code:  (206) 624-8100

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 (§ 229.405 of this chapter) 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 Exchange Act).    Yes  x    No  ¨

Aggregate market value of voting stock held by nonaffiliates of the registrant, based on the closing price of the registrant’s common stock, as of June 30, 2004: $1,663,202,258

Class A Common Stock, par value $.001 per share, outstanding as of March 1, 2005: 46,649,730 shares

Documents incorporated by reference:    Portions of the registrant definitive proxy statement for the 2005 annual meeting of shareholders are incorporated by reference in Part III of this Form 10-K. The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.

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PART I

Item 1—Business

Overview

This annual report on Form 10-K contains forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and in Section 21F of the Securities Exchange Act of 1934 as amended. The statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of these terms or other similar terminology. These statements are only predictions. Forward-looking statements are inherently uncertain. Our actual results may differ significantly from our expectations due to uncertainties, including the risk that:

Other factors that could affect our financial results are described below and in Item 1 (Business) of this annual report on Form 10-K. Forward-looking statements are based on estimates as of the date of this report. We disclaim any obligation to publicly release the results of any revisions to these forward-looking statements reflecting new estimates, events or circumstances after the date of this report.

Shurgard Storage Centers, Inc. (we, our, the Company or Shurgard) is an equity real estate investment trust, or REIT, that develops, acquires, invests in, operates and manages self storage centers and related operations in the United States and Europe. Our self storage centers offer easily accessible storage space for personal and business uses. We are one of the largest owners and operators of self storage centers in the United States and the largest owner in Europe. As of December 31, 2004, we operated a network of 633 storage centers containing approximately 40 million net rentable square feet located throughout the United States and in Europe.

We were incorporated in Delaware on July 23, 1993 and began operations through the consolidation on March 1, 1994 of 17 publicly held real estate limited partnerships that were sponsored by Shurgard Incorporated. Shurgard Incorporated together with its predecessors have operated a self storage business since 1972. On March 24, 1995, Shurgard Incorporated merged with and into Shurgard Storage Centers, Inc. and we became self-administered and self-managed. In May 1997, we reincorporated in the state of Washington. We have elected to

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be taxed as a REIT under the Internal Revenue Code of 1986, as amended. To the extent that we continue to qualify as a REIT, we will not be subject to U.S. federal and state income tax, with certain limited exceptions, on the taxable income that is distributed to our shareholders.

Our investment objective is to increase shareholder value through:

We believe our access to capital, the geographic diversification of our portfolio, and operating economies of scale will enhance our ability to achieve this objective. A summary of revenues, consolidated NOI and total assets for each of our segments for the years ended December 31, 2004, 2003 and 2002 is set forth in Note 23 to our consolidated financial statements included elsewhere in this report and is incorporated by reference.

Business Strategy

Our mission is to become the global leader in storage products and services and to ensure satisfaction and value for our customers through security, quality and innovation. Our strategy in the United States and Europe involves an emphasis on customer service and satisfaction, portfolio management, storage center development and acquisitions and property management systems.

Customer Service and Satisfaction

Our customer service and satisfaction strategy focused on training and developing store employees, locating our stores in convenient, easy to access locations, providing security for our self storage centers and devoting resources to grow our self storage business and to promote the Shurgard brand.

Quality Employees.    We view the quality of customers’ interaction with employees as critical to our long-term success. Accordingly, we emphasize customer service and teamwork in our employee training programs. Through our focus on training, personnel development and decentralized decision-making, we believe we attract well-qualified, highly motivated employees who are committed to providing superior levels of customer service.

Convenient and Secure Storage Centers.    Our storage centers are easily accessible, offer a range of storage products and services for customer convenience and emphasize security and product quality. We believe our strategy of offering high-quality, convenient storage centers strengthens our Shurgard brand image, attracts and retains customers and enables us to achieve and maintain premium rents.

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Marketing and Sales.    We train storage center managers in fundamental sales and customer service skills to elicit customer needs and turn prospects into customers. We also have a national sales and customer service center in the United States to field telephone calls from current and prospective customers. Employees at our U.S. sales center are able to lease space at the storage center most convenient to the customer. We have implemented additional sales and marketing programs to broaden our distribution channels, such as a website for our enhanced e-commerce business, business directed marketing and an expanded direct sales force in selected markets.

Portfolio Management.    Our portfolio management strategy is to increase cash flow by achieving the highest rental rate structure consistent with strong occupancy rates, cost containment, improved operating leverage and expansion of our existing storage centers.

Revenue Optimization.    We seek to optimize our revenue by achieving the highest rental rate structure for our storage centers, and high levels of occupancy, through the use of teams of storage center employees and district managers who are trained and authorized to change rental rates based on their analysis of demand and availability at a particular storage center. Market personnel regularly evaluate their properties’ rental rates, based on unit demand and unit availability, and can quickly change marginal rental rates to ensure that revenue is optimized.

Cost Containment and Improved Operating Leverage.    We seek to increase cash flow by carefully containing operating expenses. For example, we closely monitor our real estate tax assessments, appealing such assessments as appropriate, and engage consultants to manage certain utility costs. In addition, as we increase the number of properties in our targeted markets, we achieve economies of scale because we can do so without incurring significant incremental overhead expense. We believe that our management and operational

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procedures, which can be implemented over a large number of properties, enable us to add new properties quickly and with little disruption to our operations.

Strategic Expansions.    We seek to increase revenue by building additional rentable storage space at suitable storage centers either through on-site expansion or acquisition of property adjacent to existing storage centers. We typically receive higher incremental returns on these investments, because resulting revenue increases are achieved with little increase in fixed operating costs.

Economies of Scale.    We will continue to focus our growth in markets where we are already present so that we improve the efficiency of our support system and achieve economies of scale.

Development and Acquisitions

Our external growth strategy is to develop new, high-quality self storage properties and to acquire additional self storage properties that meet, or can be upgraded to meet our standards. In general, we plan to develop or acquire new properties or acquire existing properties primarily in our existing markets and in new markets that create economies of scale for our current network of storage centers. In most markets, we seek to own at least 15 storage centers in order to realize operating and marketing efficiencies and increase brand awareness. We believe that the experience of our management team in developing and acquiring self storage properties strengthens our ability to pursue our external growth strategy.

We rely on our market personnel to target areas in which to develop new, redevelop existing or acquire existing storage centers. We have developed comprehensive market expansion plans for each of our target markets, including those in Europe, and use these plans as the basis for selecting new storage center locations and acquisition targets. The market expansion plans use a demographic analysis of an area along with an evaluation of competitors’ locations, rates and product quality to determine the optimum number and location of new storage centers.

Development.    We believe that several factors favor our development strategy:

Redevelopments.    Our management teams constantly review our existing portfolio of stores to identify areas of underperformance or underutilization of our real estate. This review process evaluates all aspects of the property and related local market conditions in order to identify new investment opportunities through redevelopment. Redevelopment projects may include upgrading storage space by converting it to be temperature controlled, expansions, office modernization and other improvements to the storage centers outlook and features. All redevelopment proposals are subjected to the same investment underwriting analysis and return expectations as we have for new developments.

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Acquisitions.    We also selectively acquire high-quality operating properties that are consistent with our business plan. Acquisitions allow us to spread overhead and certain management, marketing and advertising costs over a greater number of revenue-producing assets. As a result, we can achieve increasing economies of scale with each new property acquired. We complete a thorough analysis of each property that we intend to acquire, including, but not limited to, a review of capital expenditures that will be required for the property to meet our standards. In addition to adding high-quality properties, we look for high-quality portfolios of properties that would establish a market presence for us in a new market.

Joint Venture Investments.    Our joint venture strategy is important as it allows us to partner with experienced self storage developers in domestic markets in which we otherwise lack a significant presence, to share the development and rent-up risk of new developments, which expand our brand through the use of our partners’ capital, and to access cost effective capital for expansion and growth.

Property Management Systems

We have integrated property management systems and procedures for marketing, advertising, leasing, operations and security of properties and the management of on-site personnel. In both the United States and Europe, our computerized management information systems link our corporate offices with each storage center. We use proprietary software that facilitates financial statement and budget preparations, allows the daily exchange of information with our corporate office and manages detailed information with respect to the tenant mix, demographics, occupancy levels, rental rates, revenue optimization, payroll and other information relating to each storage center. Additionally, we use network-based email, accounting, and consolidation software packages that aid in the compilation and dissemination of information from and to our storage centers. Software integration enables our national sales center, commercial accounts department and our corporate employees to have access to storage center information. In the United States, we are developing significant upgrades to our property management software that we expect will improve management information and increase effectiveness in compiling information and disseminating it to our storage centers.

Third Party Management

We also manage, under the Shurgard name, self storage properties owned by others that meet our quality standards. Management of such properties enables us to spread the cost of our overhead across a greater number of properties. Additionally, it allows us to expand our presence in the markets in which we operate, to offer customers a broader geographic selection of self storage properties to suit their needs and to establish relationships with property owners that may lead to future acquisitions. Management fees that we earn are not qualifying income for REIT qualification purposes. Accordingly, we closely monitor the level of these activities to ensure our continued qualification as a REIT.

Capital Strategy

We seek to maintain a strong, flexible capital structure with a corporate strategy of:

We believe these strategies will continue to enable us to maintain an unsecured credit rating and allow us to access a broad array of capital sources, including bank or institutional borrowings, secured and unsecured debt and private and public equity financings.

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In order to mitigate our currency and interest rate risk, we contract with financial institutions for derivative products that help us manage this exposure. Our investment policy prohibits us from entering into any such contract solely to secure profit by speculating on the direction of currency exchange or interest rates if unrelated to capital borrowed or invested by us.

We have maintained consistent dividend growth. We paid dividends of $2.19 per Share of Common Stock in 2004, representing a 24% increase from the annualized rate in 1994, the year we became a public company. Additionally, we have paid 44 consecutive quarterly dividends. However, there can be no assurance of future dividend payments.

We have and may continue to enter into joint ventures, partnerships and limited liability companies as an alternative method to investing directly in real estate. Our decision whether to hold a property directly or indirectly is based on a variety of facts and considerations, including:

Substantially all of these joint ventures, partnerships and limited liability companies use secured mortgage financing for a portion of their overall capitalization, which may affect our ability to maintain high credit ratings.

We have and will continue to seek opportunities to issue our common equity in exchange for self storage and other real estate investments where and when appropriate. Future issuance will depend upon market conditions at the time including the market price of our equity securities.

Seasonality

Our revenues are impacted by rental patterns of our customers, and as a result, we do not generate revenues evenly throughout the year. We experience peak occupancy by our customers during the spring and summer, which results in higher revenues for our second and third fiscal quarters relative to our first and fourth fiscal quarters.

Employees

As of December 31, 2004, Shurgard had approximately 2,000 employees. None of our employees in the United States are covered by a collective bargaining agreement. Two countries in Europe have employees represented through an internal collective bargaining council. We believe that our relations with our employees are good.

Regulation

Environmental Regulations

We are subject to federal, state, local and foreign environmental regulations that apply to the ownership, management and development of real property, including regulations affecting both the construction and operation of self storage properties.

Generally, in assessing potential acquisition targets, developing properties and constructing improvements, we use environmental consultants to advise us of any recognized environmental concerns with respect to the property. If any such areas are identified, development and construction are planned in conformance with applicable environmental and land-use requirements. The principal laws in the United States that could affect us

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are the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act. Foreign, state and local governments have also adopted separate but similar environmental laws and regulations that vary from country to country, state to state and locality to locality.

Under various federal, state, local and foreign laws, and ordinances and regulations, an owner or operator of real property may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property. Such laws may impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. The presence of hazardous substances on a property may adversely affect the owner’s ability to sell the property or to borrow using the property as collateral and may cause the owner or manager of the property to incur substantial remediation costs. In addition to claims for cleanup costs, the presence of hazardous substances on a property could cause the owner or manager to incur substantial liabilities as a result of a claim by a private party for personal injury or a claim by an adjacent property owner for property damage.

We have not been notified by any governmental authority of any current, material environmental noncompliance, claim or liability in connection with any of the properties we own or manage, except for one property in St. Louis discussed below. We have not been notified of any current claims for personal injury or property damage by a private party in connection with environmental conditions at any of the properties we own or manage. We obtained a Phase I environmental assessment report prepared by an independent environmental consultant for the properties we own in the United States, and similar environmental reports for properties we own in Europe.

In 1995, we notified the Missouri Department of Natural Resources (MDNR) of elevated levels of hydrocarbons found in groundwater monitoring wells on a property in St. Louis, Missouri that we had been monitoring in accordance with a work plan approved by the MDNR. In 1998, a quarterly monitoring report revealed continued contamination in the groundwater samples. The MDNR notified us that it would continue requiring quarterly groundwater monitoring. During 1999, at the MDNR’s request, with the help of an environment consultant, we developed a work plan to address the MDNR’s question regarding whether on-site contamination might be spreading to adjacent properties. The work plan encompasses a broader scope of monitoring, including installation of four additional monitoring wells on adjacent properties. The work plan required on-going monitoring through April 2003, when the MDNR indicated that based on test results, on-going testing was no longer required. In 2004, Missouri adopted a new program that required us to conduct additional testing on this site. Our proposed plan to address the new program was approved by the MDNR and initial testing has been completed. The results have been presented to MDNR; however, MDNR has yet to determine whether testing is complete, more testing or remediation is required, or if the test results provide a basis for no further action letter. Based on the results of the testing the MDNR may require identification of the location of the groundwater contamination and construction of a system to remediate the problem.

We are not aware of any environmental condition with respect to the properties we own or manage that could have a material adverse effect on our financial condition, operating results and cash flows. We cannot give assurance however, that any environmental assessments undertaken with respect to the properties have revealed all potential environmental liabilities, that any prior owner or operator of the properties did not create any material environmental condition not known to us or that an environmental condition does not otherwise exist as to any one or more of the properties that could have a material adverse effect on our financial condition, operating results or cash flows. In addition, we cannot give assurance that

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Risk Factors

The following factors are risks associated with our business:

Real Estate Investment Risks

We have significant real estate holdings that can be difficult to sell in unfavorable economic conditions and that can have unpredictable decreases in value.    Our primary business involves owning real estate-related assets and operating self storage centers in the United States and Europe. Real estate investments can be difficult to sell, especially when economic conditions are unfavorable. This makes it difficult for us to diversify our investment portfolio and to limit our risk when economic conditions change. Decreases in market rents, negative tax, real estate and zoning law changes, and changes in environmental protection laws may also increase our costs, lower the value of our investments and decrease our income, which would adversely affect our business, financial condition, operating results and cash flows.

Our real estate development and acquisition activities can result in unforeseen liabilities and increases in costs.    Real estate development involves risks in addition to those involved in owning and operating existing properties. For example, we must hire contractors or subcontractors to develop our properties. Problems can develop with these relationships, including contract and labor disputes and unforeseen property conditions that require additional work and construction delays. These problems can increase construction and other costs and delay the date when tenants can occupy the property and pay us rent. Properties that we acquire may not meet our performance expectations, including projected occupancy and rental rates, and we may have overpaid for acquisitions. Failure of our properties to perform as expected or the cost of unforeseen significant capital improvements could decrease our cash flow. We may also have underestimated the cost of improvements needed for us to market a property effectively, requiring us to pay more to complete a project. If a number of these events were to occur, our business, financial condition, operating results and cash flows would be adversely affected.

We focus almost exclusively on the self storage business, which makes us vulnerable to changes in the profitability of self storage properties.    Our investments focus on self storage business and related real estate interests. We do not expect to invest in other real estate or businesses to hedge against the risk that industry trends might decrease the profitability of our self storage-related investments. As a result, unfavorable changes in the self storage industry may have a material adverse effect on our business, financial condition, operating results and cash flows.

Our occupancy rates may decline if we are unable to compete successfully against other companies in the self storage industry.    We face intense competition in every U.S. market in which our storage centers are located and to a lesser extent in Europe. Our competitors include national, regional and many local self storage operators and developers. Entry into the self storage business by acquiring existing properties is relatively easy for persons or entities with the required initial capital. Competition may increase if available funds for investment in real estate increase. Some of our competitors may have more resources than we do, including better access to financing, greater cash reserves and less demanding rules governing distributions to shareholders. Some competitors may have lower prices, better locations, better services or other advantages. Local market conditions will play a significant part in how competition affects us; additional competition has lowered occupancy levels and rental revenue of our self storage properties in specific markets from time to time. For example, from 2003 to 2004, occupancy of our properties declined in the Chicago market resulting in decreased revenue of $51,000. If our occupancy rates or rental revenues decline, our business, financial condition, operating results and cash flows will be adversely affected.

We would have great difficulty acquiring or developing properties without access to financing.    In order to acquire and develop properties, we need access to financing sources. Currently, we finance acquisitions and development of properties through our existing credit facilities. Fluctuations in market conditions or in our operating results may cause us to violate the covenants of these existing credit facilities. If we cannot access our existing financing sources, we may need to obtain equity and/or alternative debt financing in order to continue to

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acquire and develop properties. If we obtain financing by issuing additional capital stock, we could further dilute the ownership of our existing shareholders. If we attempt to obtain financing by entering into alternative debt financing, we might not be able to obtain financing at reasonable interest rates, or at all. The inability to acquire and develop properties would have a material, adverse effect on our future business, financial condition, operating results and cash flows.

We face risks due to our investments through joint ventures.    We invest and may continue to invest in properties through joint ventures. We often share control over the operations of the joint venture assets. Therefore, these investments may, under certain circumstances involve risks such as the possibility that our partner in an investment might become bankrupt, or have economic or business interests or goals that are inconsistent with ours, or be in a position to take action contrary to our instructions or requests or our policies or objectives. Although we generally seek to maintain a sufficient level of control of any joint venture to permit our objectives to be achieved, we may be unable to take action without the approval of our joint venture partners or our joint venture partners could take actions binding on the joint venture without our consent. A significant loss on these investments could have a material, adverse effect on our future business, financial condition, operating results and cash flows.

We face possible liability for environmental cleanup costs and damages for contamination related to our properties.    Because we own and operate real property, various federal, state, local and foreign laws (including European Union requirements) might impose liability on us for the costs of removal or remediation of various hazardous substances released on, from or in our property. The principal U.S. federal laws that could affect us are the Resource Conservation and Recovery Act and the Comprehensive Environmental Response Compensation, and Liability Act. Foreign, state and local governments have also adopted separate but similar environmental laws and regulations that vary from country to country, state to state and locality to locality. These laws may impose liability whether or not we knew of or caused the release.

Some of our properties were used for commercial activities involving matters regulated under environmental laws before we acquired them. We obtain environmental assessment reports on the properties we acquire, own or operate as we deem appropriate. However, the environmental assessments that we have undertaken might not have revealed all potential environmental liabilities or claims for such liabilities. The presence of hazardous substances on a property or the failure to meet environmental regulatory requirements may materially adversely affect our ability to use or sell the property, or to use the property as collateral for borrowing, and may cause us to incur substantial remediation or compliance costs. In addition, if hazardous substances are located on or released from one of our properties, we could incur substantial liabilities through a private party personal injury claim, a claim by an adjacent property owner for property damage or a claim by a governmental entity for other damages. This liability may be imposed on us under environmental laws or common law principles. It is also possible that future enacted, amended or reinterpreted laws, ordinances or regulations will impose material environmental liability on us, that the current environmental conditions of properties we own or operate will be affected by other properties in the vicinity or by the actions of third parties unrelated to us or that our tenants will violate their leases by introducing hazardous or toxic substances into the properties we own or manage and expose us to liability under federal, state, local or foreign environmental laws or otherwise engage in activities that could expose us to such liabilities. The costs of defending these claims, conducting this environmental remediation, resolving liabilities caused by tenants or third parties or responding to such changed conditions could materially adversely affect our financial condition, operating results and cash flows.

We must comply with the Americans with Disabilities Act and fire and safety regulations, which can require significant expenditures.    All of our properties must comply with the applicable portions of the Americans with Disabilities Act and the related regulations, rules and orders, commonly referred to as the ADA, or similar applicable foreign laws. The ADA, for example, has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to persons with disabilities. If we fail to comply with the ADA and other applicable laws, the U.S. or foreign

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government might impose fines on us and award damages to individuals affected by the failure. In addition, we must operate our properties in compliance with numerous local and foreign fire and safety regulations, building codes and other land use regulations. Compliance with these requirements could require us to spend substantial amounts of money, which could adversely affect our operating results. Failure to comply with these requirements may also affect the marketability of the properties.

If property taxes increase, our earnings and cash flows could decline.    Each of our properties is subject to real property taxes. These real property taxes may increase in the future as property tax rates change and as our property values are assessed or reassessed by tax authorities. Depending on local market conditions, we may not be able to offset the tax increases through increases in rents or other income, which may adversely affect our business, financial condition, operating results and cash flows.

We face potential underinsured losses on our investments.    We maintain title insurance on all of our U.S. properties and other property-related insurance on all of our U.S. and European properties. We exercise discretion in determining amounts, coverage limits and deductibility provisions of title, casualty and other insurance relating to our properties, taking into account the appraised or estimated value of the property in each case to obtain appropriate insurance coverage at a reasonable cost and on suitable terms. We currently carry the following insurance coverage:

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Depending on the type of insurance, and subject to deductibles and coverage limits, we either receive direct payment of the replacement value of losses or tender the defense of a claim to the insurance carrier. This might mean that, in the event of a loss, our insurance coverage would not pay the full current market value or current replacement cost of our lost investment. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also increase the replacement cost of a facility after it has been damaged or destroyed. In that case, the insurance proceeds that we receive might not be enough to restore us to our economic position with respect to the property.

Terrorist attacks and the possibility of armed conflict may have an adverse effect on our business, financial condition, operating results and cash flows and could decrease the value of our assets.    Terrorist attacks and other acts of violence or war, such as those that took place on September 11, 2001, or the recent war with Iraq, could have a material adverse effect on our business and operating results. There can be no assurance that there will not be further terrorist attacks against the United States or any of the European countries in which we operate. Attacks or armed conflicts that directly impact one or more of our properties could significantly affect our ability to operate those properties and thereby impair our ability to achieve our expected results. Further, we may not have sufficient insurance coverage for losses caused by a terrorist attack. Such insurance may not be available, or if it is available and we decide, or are required by our lenders, to obtain such terrorism coverage, the cost for the insurance may be significant in relationship to the risk covered. In addition, the adverse effects that such violent acts and threats of future attacks could have on the U.S. economy or relevant foreign economies could similarly have a material adverse effect on our business, financial condition, operating results and cash flows. Finally, further terrorist acts could cause the United States or other countries where we operate to enter into armed conflict, which could further impact our business, financial condition, operating results and cash flows.

International Operations

We have significant international operations that carry additional risks.    We invest in, and conduct, operations outside the United States. With our increased investment and ownership position in Shurgard Europe, we face increased exposure to risks related to Shurgard Europe’s operations. The inherent risks that we face in international business operations include, but are not limited to:

Each of these risks might impact our cash flow or impair our ability to borrow funds, which ultimately could adversely affect our business, financial condition, operating results and cash flows.

Our European operations have not been profitable to date and may not become profitable.    New and recently developed self storage centers require a significant amount of start-up capital and generally take a considerable amount of time to complete the rent-up period. During the early stage of the rent-up period, properties are not profitable. Because over 45% of the European properties in which we have an investment have been developed since January 1, 2002 and are still undergoing rent-up, many of these properties, and therefore our European operations in general, have not been profitable. Also our expansion efforts may require more funding than we

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currently anticipate, and we will need to generate significant additional revenue once the rent-up period is achieved, before we will be able to sustain or increase profitability. We cannot assure you that these properties, or other properties that Shurgard Europe and its development joint ventures acquire and develop, will become profitable even after the rent-up periods. The failure of Shurgard Europe’s operations to become profitable would have a material adverse effect on our business, financial condition, operating results and cash flows.

Our growth strategy in Europe may not be successful.    We entered the European market in 1995 because we believed that the size and potential growth of that market made it a significant opportunity for our continued growth. Our ability to achieve our strategy in Europe depends on a number of factors, including:

We cannot assure you that we will be successful in implementing our strategy or overcoming these challenges or other problems encountered with our European operations, some of which may be beyond our control.

We do not have sole operating control over Shurgard Europe.    We hold a combined indirect and direct 87.23% ownership interest in Shurgard Europe as of December 31, 2004. Private equity funds managed by Fremont Realty Capital, which we refer to as Fremont, currently hold the remaining 12.77% ownership interest. Under the joint venture agreement governing Shurgard Europe, substantially all of the major decisions of Shurgard Europe require both our approval and the approval of Fremont, notwithstanding the difference in ownership positions. These decisions include among other things, the disposition and acquisition of assets, entry into new markets, approval of the annual business plan and financing arrangements and the hiring of key executives As a result, we may not be able to pursue business opportunities that we consider beneficial to Shurgard Europe if Fremont does not vote in favor of these actions.

The Shurgard Europe joint venture agreement provides that if, by December 31, 2004, Fremont did not have an opportunity to liquidate its interest through an initial public offering or a sale of its ownership interest, it could initiate steps to retain an investment bank to value Shurgard Europe, at which time we would have a preemptive right to purchase Fremont’s ownership interest at that value. As of March 2005, we were in negotiations with Fremont to acquire their interest. There can be no assurance at this time that our negotiations will reach a successful conclusion. There may be adverse consequences if we are unable to reach a successful conclusion to acquire Fremont’s interest. If we do not purchase Fremont’s interest, certain procedures under the joint venture agreement could lead to an initial public offering or to the sale of Shurgard Europe or its assets. Fremont’s interest in Shurgard Europe is subject to a right of first refusal. We are subject to other restrictions on the transfer and sale of our ownership interest in Shurgard Europe. The operation of these provisions could continue to affect our ownership interest in, and the structure of, our European investment.

Risks Relating to Qualification and Operation as a REIT

We might lose our REIT status and incur significant tax liabilities.    We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (Code), commencing with our taxable year ended December 31, 1994. So long as we meet the requirements under the Code for qualification as a REIT each year, we can deduct dividends paid to our shareholders when calculating our taxable income. For us to qualify as a REIT, we must meet detailed technical requirements, including income, asset, distribution and stock ownership tests, under several Code provisions that have not been extensively interpreted by judges or administrative officers. In addition, we do not control the determination of all factual matters and circumstances that affect our ability to qualify as a REIT. New legislation, regulations, administrative interpretations or court decisions might significantly change the tax laws with respect to REIT qualification or the federal income tax consequences of

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such qualification. We believe that we are organized so that we qualify as a REIT under the Code and that we have operated and will continue to operate so that we continue to qualify. However, we cannot guarantee that we will qualify as a REIT in any given year because:

For any taxable year that we fail to qualify as a REIT, we would not be entitled to deduct dividends paid to our shareholders from our taxable income. Consequently, our net assets and distributions to shareholders would be substantially reduced because of our increased tax liability. If we made distributions in anticipation of our qualification as a REIT, we might be required to borrow additional funds or to liquidate some of our investments in order to pay the applicable tax. If our qualification as a REIT terminates, we may not be able to elect to be treated as a REIT for the four taxable years following the year during which we lost the qualification.

We may pay taxes even if we continue to qualify as a REIT.    Even if we continue to qualify as a REIT, we are required to pay some federal, state, local and foreign taxes on our income and our property. For example, Shurgard TRS, Inc. and certain of our other corporate subsidiaries have elected to be treated as taxable REIT subsidiaries. We will be subject to a 100% penalty tax on payments we receive from these subsidiaries if the economic arrangements between the REIT and the taxable subsidiaries are not comparable to similar arrangements between unrelated third parties. In addition, all of our European subsidiaries are subject to local taxation. We also could be subject to tax in the event we, among other things:

Our REIT distribution requirements are complex and may create tax difficulties.    To maintain our status as a REIT for federal income tax purposes, we generally must distribute to our shareholders at least 90% of our taxable income each year. In addition, we are subject to a 4% nondeductible excise tax on the amount by which our distributions for a calendar year are less than the sum of:

For tax purposes, we may be required to treat interest, rent and other items as earned even though we have not yet received these amounts. In addition, we may not be able to deduct currently as expenses for tax purposes some items that we have actually paid. We could also realize income, such as income from cancellation of indebtedness that is not accompanied by cash proceeds. If one or more of these events happened, we could have taxable income in excess of cash available for distribution. In such circumstances, we might have to borrow money or sell investments on unfavorable terms in order to meet the distribution requirement applicable to a REIT.

Our indirect investments may result in liabilities against which we cannot protect.    We have and may continue to make participating mortgages or acquire equity interests in partnerships, joint ventures or other legal entities that have invested in real estate. Our bylaws require that we satisfy several conditions before we make these indirect investments, including that the joint investment not jeopardize our eligibility to be taxed as a REIT or result in our becoming an investment company under the Investment Company Act of 1940, as amended. These investments carry risks that are not present when we invest directly in real estate and against which we may not be able to protect ourselves, including the risk that we may not control the legal entity that has title to the real estate, the possibility that the enterprise in which we invest has liabilities that are not disclosed at the

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time of the investment and the possibility that our investments are not easily sold or readily accepted as collateral by our lenders.

All of our real estate investments in Europe, with the exception of one facility, are held indirectly through partnerships and joint venture arrangements. If we are unable to effectively control these indirect investments, or if they result in significant liabilities that were undisclosed at the time we entered into them, our business, financial condition, operating results and cash flows may be materially adversely affected.

Financing Risks

Inability to access the capital markets could delay or adversely affect execution of our business plan.    Due to the delay in filing our annual report on Form 10-K for 2003 and our quarterly report on Form 10-Q for the first quarter 2004, we are currently not eligible to access capital markets to raise equity or debt using a short-form registration statement on Form S-3. Instead we would be required to use a long-form registration statement on Form S-11, which may mean delays in registering additional securities for sale. In addition, we may face delays in applying to register our securities should the SEC conclude that our failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 renders this filing incomplete.

We have a substantial amount of debt outstanding and will continue to have significant interest payments. Our substantial debt may:

Market interest rates may negatively affect the price of our debt securities, preferred stock and common stock and increase our interest costs.    Annual yields on other financial instruments might exceed the yield from our interest payments, preferred stock dividends or common stock distributions. This could lower the market price of our debt securities, preferred stock or common stock and make it more difficult for us to raise capital. As of December 31, 2004 we had approximately $1.05 billion, and may incur more, of indebtedness that bears variable interest rates. We seek to mitigate this risk by entering into interest rate swaps and interest rate caps.

Covenants in our debt agreements could limit our activities.    Our unsecured senior notes and our unsecured line of credit contain customary restrictions, requirements and other limitations on our ability to incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt service coverage ratios and minimum ratios of unencumbered assets to unsecured debt, which we must maintain. Our credit facilities under our European joint ventures contain financial covenants based on the operating performance of our storage centers. Our continued ability to borrow under our credit facilities is subject to compliance with our financial and other covenants. In addition, our failure to comply with such covenants could cause a default under the applicable debt agreement, which could allow the lenders or other debt holders under the applicable debt to declare all borrowings outstanding to be due and payable and we may then be required to repay such debt with capital from other sources. Under those circumstances, other sources of capital may not be available to us, or be available only on unattractive terms. If the amounts outstanding under our credit facility or other debt were to be accelerated, we cannot assure you that our assets would be sufficient to repay in full money owed to the lenders or to our other debt holders.

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We may not be able to repay our debt financing obligations.    We might not have sufficient net cash flow from our operations to meet required payments of principal and interest under our loans. As a result, we might not be able to refinance the existing debt on our properties or might have to enter into credit terms that are less favorable than the terms of our existing debt. If we cannot generate sufficient cash from our operations to meet our debt service and repayment obligations, we may need to reduce or delay capital expenditures, the development of our business generally and any acquisitions. In addition, we may need to refinance our debt, obtain additional financing or sell assets, which we may not be able to do on commercially reasonable terms, or at all.

We have identified material weaknesses in our internal control.    As discussed in Item 9A and Status of Management’s Report on Internal Control over Financial Reporting below, management was unable to complete its assessment of our internal control over financial reporting by the filing deadline, and in the process of conducting this assessment to date, we have identified a number of control deficiencies that are characterized as “material weaknesses.” Management intends to complete its assessment of our internal control over financial reporting, and we intend to institute new processes and controls to remediate the deficiencies, but there can be no assurance that management will complete the assessment, or that we will completely remediate our deficiencies and material weaknesses such that management will be able to conclude that our internal control over financial reporting is effective and our independent registered public accounting firm will be able to express an opinion on the effectiveness of our internal control over financial reporting for the years ended December 31, 2004 or 2005.

Other Risks

The Jobs and Growth Tax Relief Reconciliation Act of 2003 may adversely affect the value of our common stock.    On May 28, 2003, President Bush signed the Jobs and Growth Tax Relief and Reconciliation Act of 2003 into law, which provides favorable income tax rates for certain corporate dividends received by individuals through December 31, 2008. Under this law, REIT dividends are not eligible for the preferential capital gain rates applicable to dividends unless the dividends are attributable to income that has been subject to corporate-level tax. As a result, substantially all of the distributions paid on our shares are not expected to qualify for such lower rates. This new law could cause stock in non-REIT corporations to be more attractive to investors than stock in REITs, which may negatively affect the value of, and the market for, our common stock.

Other Available Information

We file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports with the Securities and Exchange Commission (SEC). You may obtain copies of these documents by visiting the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549, by calling the SEC at 1-800-SEC-0330 or by accessing the SEC’s website at http://www.sec.gov. In addition, as soon as reasonably practicable, after such materials are filed with or furnished to the SEC, we make copies of these documents (other than exhibits) available to the public free of charge through our website at www.shurgard.com or by contacting our Secretary at our principal offices, which are located at 1155 Valley Street, Suite 400, Seattle, Washington 98109, telephone number (206) 624-8100.

In addition Shurgard’s corporate governance guidelines, director independence criteria, committee charters, codes of conduct and ethics, and other documents setting forth our corporate governance practices can be accessed in the “Corporate Governance” section of Shurgard’s web site at http://investorrelations.shurgard.com or by writing to Shurgard’s Investor Relations department at our address set forth above.

Item 2—Properties

As of December 31, 2004, we operated a network of 633 storage centers and two business parks located throughout the United States and in Europe. Of these properties, we own or lease, directly and through our subsidiaries and joint ventures, 610 properties containing approximately 38.5 million net rentable square feet and manage 23 properties containing approximately 1.3 million rentable square feet for third parties.

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Of the 610 properties:

Description and Utilization of Properties

Our self storage properties are designed to offer accessible storage space for personal and business use. Individuals typically rent one or more units in self storage properties for storage of personal belongings such as furniture, appliances, boats and other household and recreational goods. Businesses typically rent space for storage of business property such as equipment, products, seasonal goods, records and fixtures. We believe that it is desirable to have commercial customers because they tend to rent larger units, stay for longer terms and are reliable payers. Based on surveys of our customers, we estimate that commercial users account for approximately 25% of our total customer base in the United States and Europe.

Our self storage properties are divided into a number of self-enclosed rental units that generally range in size from approximately 25 to 900 square feet. Many properties have uncovered storage outside the buildings for parking motor vehicles, boats, campers and other similar items suitable for outside storage. Additionally, a number of our properties include temperature-controlled storage units for which we typically charge a premium.

Customers of self storage properties are generally responsible for delivering and retrieving their goods. Many leased spaces can be accessed directly by automobile or truck, but some properties, in particular the multistory buildings, have separate loading docks and elevators available for delivery and retrieval of stored goods. The leasing, maintenance and operation of our storage centers are the responsibility of our storage center managers.

Although our storage centers range considerably in size, most domestic properties consist of one or more single-story buildings. The smallest storage center has approximately 20,000 net rentable square feet, while the largest storage center has approximately 280,000 net rentable square feet. The properties generally are constructed with concrete block or tilt-up concrete panels, with steel columns or pre-cast concrete columns that rest on concrete footings and slabs, and have built-up tar roofs or pitched truss roofs with shingles or standing seam metal roofs. The interior walls are generally constructed with metal studs and partitions or other construction materials that are secure but readily movable. The parking areas and driveways are generally asphalt or concrete. All storage centers have fencing, floodlights and electronic gates.

In some cases, multistory buildings have been converted into self storage properties. In addition, similar multistory buildings for self storage have been constructed in dense urban areas where land costs, zoning and other development considerations make it impractical or undesirable to construct single-story buildings.

Rental of Storage Units:  Storage units are usually rented on a month-to-month basis. Based on our most recent evaluation of customer move-outs for the year ended December 31, 2004, the average rental period for a tenant is approximately 11 months. This average is comprised of the rental periods of business tenants, whose average stay approximates 17 months, and those of residential customers, whose average stay approximates 10 months. Rental rates vary substantially depending on the size of the storage space, the property location, the quality of the property and the proximity of competition.

Other Properties:  Shurgard owns two business parks located near Tacoma, Washington and Burke, Virginia. The business parks were built in 1979 and 1984, respectively, and they contain an aggregate of approximately 158,000 net rentable square feet.

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Location of Properties

The following table sets forth the geographic dispersion of our self storage properties as of December 31, 2004.

Ownership and Leasing Arrangements of Properties

We evaluate the performance of our real estate assets in two categories: Same Store and New Store (see definition in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations— SEGMENT ANALYSIS). Same Store includes storage centers and business parks that were acquired prior to January 1 of the prior year and developed properties that have been operating for at least two full years as of January 1 of the current year. New Store represents those storage centers recently acquired or developed for which performance is measured primarily based on original investment expectations. We evaluate all storage centers on the same basis regardless of ownership interest in the property. We believe NOI is a meaningful disclosure of operating performance as a supplement to net income because we rely on NOI for purposes of making decisions with respect to resource allocations, current property values, segment performance, and comparing period-to-period and market-to-market property operating results. NOI is defined as storage center operations revenues less direct operating and real estate tax expense for each of our properties. For a reconciliation of Same Store and New Store NOI to net income see Note 23 to our Consolidated Financial Statements.

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We have various ownership and leasing arrangements with respect to properties included in our Same Store and New Store portfolios. The table below includes information as of and for the year ended December 31, 2004 that identifies the proportion of Same Store and New Store results attributable to each of these arrangements. The following tables include 100% of the cost, operating results and other information presented regardless of our percentage ownership interest in that property.

Wholly-Owned or Leased

The majority of our storage centers are owned directly or through wholly-owned subsidiaries. Additionally, as of December 31, 2004, we operated 16 properties in the U.S. and 25 (including 5 capital leases) in Europe that are subject to land or building leases requiring non-contingent rent payments.

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Consolidated Joint Ventures

We develop and operate 233 properties in the United States and in Europe with various partners through joint ventures in which we have ownership interests ranging from 20% to 99%.

We operate 11 properties through Tennessee joint ventures and 21 properties through Florida joint ventures, in which our ownership ranges from 50% to 90%. Through December 31, 2004, those joint ventures were managed by two separate groups with whom we established affiliation relationships to develop and manage jointly-owned storage centers. As of January 1, 2005, we took over the property management of the Florida properties directly. Under the joint venture agreements, all major decisions require unanimous consent of both parties. However, we have the ability to exercise unilateral control without incurring significant costs and therefore we consider that we have effective control over those joint ventures.

We operate 43 properties in North Carolina and South Carolina through various joint ventures with Morningstar Storage Centers, LLC (Morningstar). We have entered into an agreement with Morningstar members to form one or more joint ventures to develop and operate additional self storage properties. As of December 31, 2004, we had two properties operating under one such joint venture in which we hold a 75% ownership interest. Additionally, we acquired one property in 2004. Morningstar’s members manage these properties and will manage the properties under development, through an affiliated entity using the Shurgard brand, management systems and standards. We pay Morningstar Property Management, LLC a property management fee equal to the greater of $1,000 per property per month or 4.25% of the gross revenues of each property per month.

We operate eight storage centers owned through a joint venture with a California developer. Under our agreement with this developer, the California developer purchases sites in southern California and constructs storage centers on them according to our specifications. On completion of the rent-up period, the storage centers may be purchased by a joint venture that is consolidated in our financial statements. Prior to such purchase, we have no ownership interest in the properties and accordingly, they are not included in any discussions of our operating results. In 2003 and 2004 we entered into loan agreements with this developer collateralized by three properties under construction. As of December 31, 2004, the developer had drawn $10.3 million under these loan agreements, which amount is included in other assets on our consolidated balance sheet, and $5.2 million remained available to finance the construction of the properties. We also have three properties under leasing arrangements with this developer.

Additionally, as of December 31, 2004, we had ownership interest ranging from 50% to 99% in joint ventures which held 16 properties with various partners in the United States. We manage all of these properties for a fee.

Shurgard Europe operates 32 properties through two consolidated joint ventures in each of which it holds a 20% ownership interest. These joint ventures, First Shurgard SPRL (First Shurgard) and Second Shurgard SPRL (Second Shurgard) were formed in January 2003 and July 2004, respectively, with Crescent Euro Self Storage Investments SARL and Crescent Euro Self Storage Investments II, respectively to develop up to 38 and 37 properties, respectively. Shurgard Europe has entered into development agreements with those joint ventures and receives fees for newly developed storage centers together with, certain financing fees. Also, Shurgard Europe has entered into a 20-year management agreement and receives fees to manage those properties.

Item 3—Legal Proceedings

We are a defendant in litigation filed on September 17, 2002, in the Superior Court of California for Orange County styled as Gary Drake v. Shurgard Storage Centers, Inc. et al (Case No. 02CC00152). The complaint alleges that we misrepresent the size of our storage units, seeks class action status and seeks damages, injunctive relief and declaratory relief against us under California statutory and common law relating to consumer protection, unfair competition, fraud and deceit and negligent misrepresentation. The Court recently ruled that

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the class of potential members in this lawsuit is limited to California customers of the Company. No class has yet been certified. We do not currently believe that the outcome of this litigation will have a material adverse effect on our financial position, results of operations or cash flows. However, we cannot presently determine the potential total damages, if any, or the ultimate outcome of the litigation. We are vigorously defending this action.

We are a defendant in litigation filed on October 30, 2002, in the U.S. District Court for the Northern District of California styled as Patricia Scura et al. v. Shurgard Storage Centers, Inc. (Case No. C 02-5246-WDB). The complaint alleges that we required our hourly store employees to perform work before and after their scheduled work times and failed to pay overtime compensation for work performed before and after hours and during meal periods. The lawsuit seeks class action status and seeks damages, injunctive relief and a declaratory judgment against us under the federal Fair Labor Standards Act and California statutory wage and hour laws and laws relating to unlawful and unfair business practices. In December 2004, we reached a tentative agreement to settle this lawsuit. The basis terms of the proposed agreement are reflected in a Memorandum of Understanding which will be incorporated into a definitive settlement agreement that must be submitted for approval by the District Court. Notwithstanding this proposed agreement, and as an express part thereof, Shurgard continues to deny any and all allegations of wrongdoing raised by this lawsuit. We recognized a $2.75 million liability for the proposed settlement in December 2004 and this amount is classified in accounts payable and other liabilities on our consolidated balance sheet as of December 31, 2004. We do not believe that the outcome of this litigation will have further material adverse effect on our financial position, results of operations or cash flows. However, we cannot determine whether the District Court will approve the terms of the settlement agreement and if significant numbers of plaintiffs will opt-out of the proposed settlement class.

On January 19, 2005, David Gross filed a purported class action suit in U.S. District Court for the Western District of Washington styled as David Gross v. Shurgard Storage Centers, Inc., Charles K. Barbo, and Harrell L. Beck. (Case No. CV05-0098) for alleged violations of federal securities law. Mr. Gross claimed that Shurgard made material misleading misstatements and omissions relating to our financial statements in various public statements and filings, which Mr. Gross alleges led to the artificial inflation of our stock price. On March 9, 2005, we received a copy of a Notice of Dismissal without Prejudice filed by the law firms that had represented the plaintiffs.

On March 15, 2005, the law firms in the Gross matter filed a class action suit in U.S. District Court for the Western District of Washington styled as Stephen Zak, et al. v. Shurgard Storage Centers, Inc., Charles K. Barbo, and Harrell Beck (Case No. CV05-0417C) for alleged violations of federal securities law. Mr. Zak’s complaint makes substantially similar claims to those in the Gross complaint summarized above. The suit seeks unspecified damages including attorneys’ fees and costs. We currently intend to vigorously defend this litigation.

The Company is party to various claims, complaints and other legal actions that have arisen in the normal course of business from time to time that are not described above. We believe that it is unlikely that the outcome of these other pending legal proceedings, including employment and tenant claims, in the aggregate, will have a material adverse effect upon the financial position, operating results, or cash flows of the Company.

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

No matters were submitted to a vote of shareholders during the fourth quarter of 2004.

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PART II

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

Our common stock is traded on the New York Stock Exchange (NYSE), under the symbol “SHU.” As of March 1, 2005 there were 15,915 holders of record of our common stock and the reported NYSE closing price per share of Common Stock was $40.43.

The table below sets forth for the fiscal periods indicated the high and low sales prices per share of Common Stock as reported in the NYSE composite tapes for applicable periods, and distributions declared.

Holders of shares of common stock are entitled to receive distributions when declared by our board of directors out of any assets legally available for payment. We are required to distribute annually to our shareholders at least 90% of our “REIT taxable income,” which, as defined by the relevant tax statutes and regulations, is generally equivalent to net taxable ordinary income in order to maintain our REIT status for federal income tax purposes.

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Item 6—Selected Financial Data

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Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Our Business

We own, operate and develop self storage properties in principal cities in the United States and in Western Europe. Headquartered in Seattle, Washington in the U.S and Brussels, Belgium in Europe, we operate as a REIT. Since our founding in 1972, we (and our predecessor company) have steadily grown our business of investing in and operating self-storage facilities. We own or lease, directly and through our subsidiaries and joint ventures, 610 properties containing approximately 38.5 million net rentable square feet and manage 23 properties containing approximately 1.3 million rentable square feet for third parties. Today we are estimated to be one of the largest self storage property owners in the United States with a network of 475 storage centers located in 21 different states. We are the largest self storage owner in Europe with 135 storage centers located in seven countries. We directly own most of these properties but also hold indirect interests through our subsidiaries and joint ventures.

Our Approach to Investment in Self Storage

Our objective is to maximize shareholder value through continued improvement in the performance of our existing portfolio and through acquisition and development and investment in additional self storage properties. Historically, we have been long-term holders of storage properties that we acquire or develop because we believe these assets have steady long-term growth characteristics, low functional obsolescence and cost benefits relating to economies of scale. However, we will, from time to time, sell properties when we feel market conditions warrant or where a property fails to fit into our strategic plans. We take a long-term view of planning and executing this objective.

We have observed that changes in people’s lives or circumstances are the key driver of demand for short-term storage space. Private individuals represent approximately 70% of our customer base. Business customers looking for expansion or transition storage space make up the balance, although this ratio may vary from storage center to storage center. Our customer base spans a wide range of economic strata and business types. Based on our experience in the business, we have determined that most customers place a high value on convenience through the location of the center and ease of renting, access and moving. Consequently, we have elected to focus our investment activities in densely populated, high quality neighborhoods and offer high quality products and services. We believe a growing segment of prospective customers are willing to pay higher rates for these benefits.

When we enter a new market, we seek highly visible, easily accessible locations in retail corridors to create customer awareness. Through multiple locations of this kind in a metropolitan area, we seek to establish brand recognition as well as economies of scale in operating our storage centers. In most markets, our goal is to own at least 15 storage centers in order to realize these efficiencies. To further enhance brand recognition, we strive to achieve a uniform look to our properties through the use of signage, color schemes, quality of the buildings and our trademark “lighthouse” office design in new developments.

Our Approach to Managing the Business

We believe that the supply and demand characteristics of the self storage industry are defined by neighborhood trade areas that can range in size from one to five miles in radius. To manage the business effectively at any given location, we must be aware of the local dynamics of demand, pricing and competition within the applicable neighborhood trade area.

As a result, we approach the management of our business and portfolio on a decentralized basis by maintaining local management and marketing expertise in all our key markets. Our field personnel constantly monitor market trends in demand, competition, pricing and internal performance, making strategic and tactical

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adjustments at the storage centers as needed. Key metrics in monitoring the supply of self storage properties include construction starts, sales of doors by suppliers to the industry and inquiry levels at the storage centers. We monitor competition and pricing by watching our closing rate on inquiries and our volume of discounting for new customers. Centrally, we maintain an in-house asset management team that evaluates all investment proposals and monitors progress and performance of each property.

We take a similar approach to the business in Europe where we have integrated a centralized European investment team and decentralized management teams made up almost entirely of local personnel in each of the countries where we invest.

Current Industry Trends and Outlook

Supply and Demand

After experiencing a general softening in demand at our U.S. self storage centers in 2002 and 2003, we noticed an increase in inquiries in the fourth quarter of 2003 that remained steady through March 2005. However, certain of our new storage centers, particularly in Europe, are taking a longer period of time, to reach rental stabilization, which we typically consider to be 85% occupancy. In the last several years, new storage centers have been taking 24 to 48 months to reach stabilization. In order to counteract this slow down in the rent up pace, we have offered reduced rates to attract new customers.

We believe there were two main factors contributing to the trends during 2002 and 2003: the slowdown in the U.S. economy, and the volume of new supply entering our markets. We believe some local economies have been more affected by downturns, such as Northern California, a market that continued to be slow in 2004. In other markets, such as Sweden, the Netherlands, Chicago and parts of Texas, we have seen a significant amount of new supply over the past three years, contributing to weaker operating results.

In our view, the sustained rate at which new supply came in to the markets during 2002 and 2003 was unusual. We attribute the continued development, in the face of declining industry fundamentals, to the historically low interest rates available to developers. Reported new construction starts have only noticeably started to decline over the past 12 months.

Beginning in 2002, in response to the reduced demand and increased competition, we became more aggressive with our sales training programs and increased our storage center operating hours. Additionally in 2003 and 2004 we intensified our storage center maintenance program and we expect in 2005 to increase capital expenditures to improve our existing storage centers. We believe these efforts began to show results in the third quarter of 2003 and throughout 2004. Although customer inquiries have been fairly stable in 2004 compared to 2003, we experienced an increase in our closing rates and we have been able to increase average occupancy and rental rates in most areas.

Customer inquiries have remained steady in the fourth quarter of 2004, compared to the fourth quarter of 2003, but average annual rental rates per square foot in our Same store portfolio of $13.02 in the fourth quarter 2004 grew by 3.5% and occupancy by 2.3%. This growth in rental rates and occupancy resulted in Same store operations revenue growth and NOI growth in 2004 of 5.8% and 6.1%, respectively, over the same period of 2003. (See SEGMENT ANALYSIS for details).

As we expand in Europe to reach targeted economies of scale in various markets, our newly developed storage centers have had an impact on our existing European storage centers, as evidenced by lower than expected occupancy. We believe this impact is temporary. Consumer awareness of the self storage product is dramatically different in Europe than in the United States. In the United States, where self storage has existed for over 30 years, the product is well known and accepted by the U.S. consumer. The European market penetration is only 1.5% of the current U.S. level (based on the ratio of number of self storage properties to the population).

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Today, there are a reported 37,000 self storage facilities in the United States. In Europe, however, self storage is still relatively new and general consumer awareness is lower. There are reported to be approximately 650 self storage properties in the European countries where we operate. As consumer awareness and acceptance grows in Europe, we believe that these effects of expansion will begin to decline.

Acquisition and Development of Real Estate

Historically, we have grown in the United States both through development and acquisition, taking advantage of current market conditions to select either alternative. In Europe, most of our growth has been through development of new storage centers. We have made limited dispositions of properties.

We believe that low interest rates in the United States have contributed to a rise in the price being paid by private and public investors to acquire existing self-storage facilities in the United States. In this environment, we have focused on acquisitions that we consider unique or strategic in nature. The current environment has also created opportunities to sell some of the assets in our portfolio that no longer meet our long-term strategic goals and we will continue to consider these opportunities.

Our development of new storage centers in the United States has slowed in recent years as quality opportunities have become more limited. In general, we view the U.S. market as mature, with a strong supply of self storage properties. Although current trends have been more encouraging, we believe future development growth opportunities will result from population growth in new markets and depends on the rent up of our properties, the economic growth of each region and competition. We have placed renewed emphasis on performance and opportunities for improvement within our existing portfolio, particularly through redevelopment of our older storage centers. Increases in steel, cement and other construction costs may further affect our ability to continue to develop or improve our existing properties cost effectively.

In Europe, where we have a significant market leadership position in an emerging industry, we continue to develop new storage centers due to the availability of quality real estate at attractive prices. From time to time we consider expanding into additional European markets when we feel conditions are appropriate. We believe continued growth in Europe will help solidify our position as market leader and improve our economies of scale in marketing and management.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of financial condition and operating results is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements and the amounts of revenues and expenses recognized during the reporting periods. We evaluate our assumptions and estimates on an on-going basis. We base our estimates on experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Significant estimates include the evaluation of impairment of long-lived assets and goodwill, estimated lives of depreciable assets, valuation allowances for deferred tax assets and the allocation of purchase prices of acquired properties. Actual results may differ from these and other estimates under different assumptions or conditions.

Consolidated and Unconsolidated Joint Ventures:  We consolidate all wholly-owned subsidiaries. As of January 1, 2004, we adopted Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 46R, “Consolidation of Variable Interest Entities”, a revision to FIN 46. Under FIN 46R, a variable interest entity (VIE) must be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns. We assess

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whether partially owned subsidiaries are VIEs and we consolidated all VIEs of which we are the primary beneficiary. Partially-owned subsidiaries and joint ventures that are not VIEs are consolidated when we control the entity, which could result from (i) the ability to elect a majority of the management committee, board of partners or similar authority, (ii) our being named as the managing investor of the entity, or (iii) our providing substantially all of the equity. In assessing the consolidation treatment of partially-owned entities, we also consider the nature of veto rights, if any, held by minority investors. To the extent that a minority investor has substantive veto rights over major decisions, the entity will generally not be consolidated. Entities not consolidated are generally accounted for under the equity method, as we typically have significant influence over unconsolidated subsidiaries and joint ventures. Under the equity method, we recognize our proportionate share of earnings or losses based on our ownership interest and the profit allocation provisions of the entity. See further discussion below on the adoption of FIN 46.

Revenue Recognition:  We recognize rental revenue from the majority of our customers at the contracted rate for each month occupied because they are under month-to-month lease agreements. Revenue related to customers who sign longer period leases is recognized ratably over the term of the lease.

Storage Centers:  Storage centers are recorded at cost unless circumstances indicate that cost cannot be recovered, in which case, the carrying value of the property is reduced to estimated fair value. In a business combination we also assess the value of in-place lease intangibles which are amortized to expense over the expected life of the leases. Using our best estimates based on reasonable and supportable assumptions and projections, we review storage centers for impairment whenever events or changes in circumstances indicate that the carrying amount of our assets might not be recoverable. Fair values are determined based on estimated future cash flows using appropriate discount and capitalization rates. The estimation of expected future net cash flows is inherently uncertain and relies on assumptions regarding current and future market conditions. If impairment analysis assumptions change, then an adjustment to the carrying amount of our long-lived assets could occur in the future period in which the assumptions change.

Goodwill:  We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that impairment may have occurred, such as a significant adverse change in the business climate. To determine if there is impairment we compare the carrying value of goodwill and our storage centers assets to the estimated fair market value of our Same Store portfolio storage centers. We use common industry methods to assess the value of our portfolio and we estimate future cash flows based on the storage centers’ NOI and current market capitalization rates.

Derivatives:  Gains or losses resulting from changes in the fair value of derivatives are recognized in earnings or recorded in other comprehensive income, and subsequently recognized in the statement of earnings when the hedged item affects earnings, depending on the purpose of the derivatives and whether they qualify for hedge accounting treatment. Changes in the fair value of derivative instruments not designated as hedging instruments are recognized in earnings. We evaluate the effectiveness of designated hedges at inception and on a quarterly basis. Our main objective in using derivatives is to add stability to interest expense, to manage our exposure to interest rate movements and to reduce our various foreign currency risks. To accomplish these objectives, we use interest rate swaps and caps as part of our cash flow hedging strategy and we use the sale of forward contracts and the purchase of call options to reduce our foreign currency risks. We assess the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. The changes in the fair value of derivative instruments may materially affect net income.

Dispositions and Financing Arrangements:  We account for sales of certain storage centers in which we have continuing involvement as financing arrangements. We use the effective interest method based on estimated future cash flows in determining the amortization of participation rights. This estimate is evaluated each period and is sensitive to both amount and timing of cash flows, and projected purchase price. Estimated amount and timing of distributions is based on projected property operating cash flows. Estimated amount and timing of

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purchase price is based on projected stabilized NOI and our estimate of when each property will reach stabilization. We periodically re-evaluate our estimate of the option price, the projected timing of our joint venture partner’s exercise of their put option and the related expected cash flows. Changes are accounted for as a change in estimate, affecting gross participation rights and subsequent amortization of participation rights.

Real Estate Investment Trust:  As a REIT, we generally will not be subject to corporate level federal income taxes if minimum distribution, income, asset and shareholder tests are met. However, not all of our underlying entities are qualified REIT subsidiaries and may be subject to federal and state taxes, when applicable. In addition, foreign entities may also be subject to taxes of the host country. An income tax provision is required to be estimated on our taxable income arising from our taxable REIT subsidiaries and foreign entities. A deferred tax component has arisen based upon the differences in GAAP versus tax income for items such as depreciation and gain recognition.

Deferred Tax Assets:  We have deferred tax assets resulting primarily from cumulative net operating losses arising in certain domestic taxable subsidiaries and in our European subsidiaries. We regularly evaluate both the positive and negative evidence that we believe is relevant in assessing whether the deferred tax assets will be realized. When we determine that it is more likely than not that we will not realize the tax asset either in part or in whole, a valuation allowance is provided. One significant factor representing negative evidence in the evaluation of whether deferred tax assets arising from cumulative net operating losses will be realized is historical taxable income or loss of the entity. In cases where a taxable entity has not demonstrated a history of achieving taxable income, this represents significant negative evidence in assessing whether the amounts will be realized and generally requires that we provide a valuation allowance.

Recent Accounting Pronouncements

In December 2004, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 123R, a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”. This statement eliminates the alternative to use APB Opinion No. 25’s intrinsic value method of accounting and generally requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. We will adopt the provisions of SFAS 123R when it becomes effective in the third quarter 2005. Under SFAS 123R we will recognize stock-based compensation expenses related to our stock option plans and our Employee Stock Purchase Plan which were previously only disclosed. Although we are still evaluating under which transition method we will adopt SFAS 123R and are still assessing the impact on our financial position and operating results, we believe that the disclosures required under SFAS 123 approximate our results if we had adopted the provisions of SFAS 123R as of December 31, 2004.

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RESULTS OF OPERATIONS

Our Consolidated Statements of Net Income

For periods prior to 2004, we did not consolidate Shurgard Europe or First Shurgard in our financial statements. Instead, we accounted for our investments in these entities under the equity method of accounting due to the substantive and important approval rights over significant operating decisions retained by our partners in these entities. Beginning in 2004, we consolidated these entities in accordance with FIN 46R. Because consolidation results in the inclusion of Shurgard Europe’s and First Shurgard’s revenues and expenses in the consolidated financial statements and the equity method did not, the financial statements for 2003 and 2002 are not directly comparable to the financial statements in 2004.

The following table summarizes the main components of the changes in net income for the year ended December 31, 2004 compared to the year ended December 31, 2003:

Net Income:  Net income was $45.3 million in 2004 compared to net income of $37.6 million in 2003 and $48.1 million in 2002. The increase in net income from 2003 to 2004 is primarily due to a gain on the sale of properties, lower impairment losses and an increase in our domestic storage centers operating results which were partially offset by higher losses and higher financing costs related to our increased ownership in Shurgard

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Europe, and higher general, administrative and other expense as further discussed below. The decline in net income from 2002 to 2003 is the result of impairment of long-lived assets recognized in 2003 and of higher general, administrative and other expense.

Storage Center Operations Revenue:  Storage center operations revenue of $420.6 million in 2004 increased $128.2 million, or 44%, compared to 2003 due substantially to the consolidation of Shurgard Europe, which contributed $101.5 million of revenue. Domestic storage center operations revenue increased $26.1 million, or 9%, compared to 2003 as a result of an increase in the number of storage centers, higher occupancy and increases in rates. Storage centers operations revenue of $292.4 million in 2003 increased $29.0 million, or 11%, from 2002 as a result of the increasing portfolio of stores in particular from stores acquired in 2002.

Other Revenue:  Other revenue of $5.1 million in 2004 decreased $1.8 million or 26% compared to 2003. Our containerized storage business, which had revenue of $3.2 million in 2003, ceased operations in the first quarter of 2004 and therefore had nominal revenue in 2004. This loss of revenue was partially offset in 2004 by a growth in revenue from our tenant referral insurance program which generated $1.8 million in 2004 compared to $1.4 million in 2003. Other revenue of $6.9 million in 2003 increased from $6.1 million in 2002 due primarily to the increased revenue from our tenant insurance referral program that started in 2002, which was $765,000 in 2002.

Operating Expenses:  Operating expenses of $185.5 million increased $85.7 million, or 86% compared to 2003, of which $75.7 million relate to our consolidation of Shurgard Europe in 2004. Domestic operating expenses increased $9.7 million or 9.7% compared to 2003 as a result of an increase in the number of storage centers and an increase in personnel expenses. See discussion of these expenses under SEGMENT ANALYSIS. Expenses associated with our containerized storage business, which ceased active operations in the first quarter of 2004, were $3.4 million in 2002, $4.0 million in 2003 and nominal in 2004. In addition to the expenses identified under SEGMENT ANALYSIS, operating expenses include internal acquisition costs and development expenses related to abandoned development efforts of $2.8 million in 2004 compared to $1.2 million in 2003 and $1.2 million in 2002. This is primarily due to abandoned development projects in Europe where we scaled down our developments in certain countries and in the abandonment of an acquisition project. Also in 2004 we incurred approximately $3.9 million of costs on two operating-related litigation matters, including $2.75 million in settlement costs that we recognized in December 2004 when we reached a proposed settlement. See Item 3: Legal Proceedings for further discussion of these matters. Operating expenses of $99.9 million in 2003 increased by $15.8 million or 19% compared to 2002. This was primarily a result of increased expenses attributable to new stores.

Depreciation and Amortization:  Depreciation and amortization of $87.7 million in 2004 increased $31.9 million or 57% compared to 2003. Consolidation of Shurgard Europe and the growth of our European operations accounted for $27.5 million of the increase, including an increase of $6.3 million related to the excess of the purchase price we paid for our additional ownership interests in Shurgard Europe over its book value in 2003, an amount that we allocated to buildings in which Shurgard Europe had ownership interests. Depreciation and amortization of domestic facilities increased $4.5 million or 8% to the prior year due to the increase in the number of storage centers and in particular due to the fact that we had a full year of depreciation on stores acquired mid-year in 2003. Depreciation and amortization of $55.8 million in 2003 increased $5.1 million or 10% compared to 2002 primarily due to the increase in number of stores.

Impairment Losses:  In 2004 we recognized $80,000 of impairment losses because we adjusted the value of one piece of excess land that we intend to sell. In 2003 the $12.7 million of impairment losses included $9.9 million of impairment losses related to certain real estate assets, of which $7.5 million relates to four properties associated with our joint venture CCP/Shurgard (see Note 11 to our Consolidated Financial Statements). Additionally in 2003 we recognized a $1.1 million impairment expense related to our decision to exit the containerized storage business and a $1.6 million write down of a note receivable. In 2002, impairment losses of $1.6 million related to one real estate property.

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General, Administrative and Other Expenses:  General and administrative expenses of $33.0 million in 2004 increased $14.9 million or 83% compared to 2003. Our consolidation of Shurgard Europe accounted for $6.5 million of the increase. Of the remaining $8.4 million, $2.3 million is due to exit costs incurred in connection with the closing of our containerized storage business, and the remainder consists primarily of increased professional fees incurred in connection with accounting, and financial reporting, as well as compensation expenses resulting from newly created management positions. Consultant fees associated with efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 were approximately $3.8 million and compensation expenses increased by approximately $2.7 million. The increase in compensation expenses was attributable primarily to higher stock based compensation resulting from our increased use of restricted stock instead of stock options to compensate our executives. These increases were partially offset by a decrease of approximately $900,000 in audit fees. Our 2003 audit fees were higher because after our former auditors resigned in November 2003, our new independent registered public accountants were required to re-audit 2001 and 2002 in addition to auditing 2003. The increase in stock based compensation expense accounts for $1.5 million of the increase in compensation expense and results from our increased use of restricted stock grants instead of stock option grants to compensate our executives. General and administrative expenses were $18.0 million for 2003, an increase of $8.1 million, or 82% compared to 2002. This increase is primarily attributable to a $5.2 million increase in accounting and professional fees and a $1.1 million increase in compensation expense related to newly created positions.

Interest on loans:  Interest expense of $82.9 million increased $31.7 million compared to $51.2 million in 2003, an increase of 62%. The consolidation of Shurgard Europe and the debt financing of new developments in Europe in 2004 account for $28.1 million of the increase. The interest expense incurred in the United States increased by $3.1 million in 2004 due to the higher aggregate indebtedness incurred during 2003 to finance the purchase of additional ownership interest in Shurgard Europe and to finance the acquisition and development of additional properties in 2004 and 2003. Interest expenses in 2003 totaled $51.2 million compared to $40.1 million in 2002. The increase in 2003 relates primarily to increased mortgage notes payable assumed as part of the purchase of our 74% interest in Morningstar in June 2002 and the issuance of $200 million senior notes payable in March 2003.

Amortization of Participation Rights discount:  We recognized amortization income of $1.1 million in 2004 compared to amortization income of $5.5 million in 2003 and amortization expense of $4.8 million in 2002. The adjustments to amortization are based on re-evaluations of our estimated participation rights liability each period based on the performance of the related properties and estimates of rights retirement dates. On June 25, 2004 we entered into an agreement to retire the remaining participation rights. This transaction closed in December 2004. See Note 11 to our Consolidated Financial Statements.

Loss on Derivatives:  The gain or loss on financial derivatives is the gain or loss recognized for the changes in the fair market value of those financial instruments that do not qualify for hedge accounting treatment under SFAS No.133. We had an unrealized loss of $615,000, $2.2 million and $11.0 million in 2004, 2003 and 2002 respectively. The loss in 2004 is primarily the net effect of the change in value of certain domestic interest rate swaps and certain currency forward contracts on the euro that do not qualify for hedge accounting. The losses in 2003 and 2002 related to the changes in values of domestic interest rate swaps we entered into in 2001 to mitigate the risk of interest rate fluctuations related to our various options on the financing of a development transaction. These swaps matured and were paid off in February 2005.

Foreign Exchange Gain (Loss):  The foreign exchange gain of $6.2 million in 2004 relates primarily to bonds with Shurgard Europe and a wholly-owned European subsidiary that are marked to the period end exchange rate. We had limited foreign operations in 2003 and in 2002.

Interest Income and Other, Net:  Interest income and other in 2004 was $4.4 million compared to a $4.9 million in 2003 and $6.3 million in 2002, respectively. Interest income is comprised primarily of interest income on notes receivable and of other gain. In 2002 we recognized a $1.8 million one-time lease termination.

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Minority Interest:  As a result of our consolidation of Shurgard Europe and its subsidiaries beginning January 1, 2004 we recorded a minority interest benefit of $18.4 million in 2004. Approximately, $13.3 million of this minority interest benefit in 2004 relates to First Shurgard and Second Shurgard, respectively, in which Shurgard Europe holds a 20% ownership interest and $5.1 million relates to our partner’s interest in Shurgard Europe. For the years ended 2004, 2003 and 2002 minority interest expenses related to our domestic joint ventures totaled $1.8 million, $1.2 million and $866,000, respectively.

Equity in Earnings (Losses) of Other Real Estate Investments:  In 2004, we had an interest in one entity that we accounted for under the equity method. In 2003 and 2002, we accounted for our interest in Shurgard Europe under the equity method of accounting and recorded losses of $3.1 million and $1.2 million, respectively for this investment. In 2004, we consolidated Shurgard Europe and therefore had no related comparable charge.

Income Tax Expense:  Shurgard Europe is subject to income taxation in the various jurisdictions in which it operates and, as a result of losses it has incurred since its inception, has generated deferred tax assets. Our domestic non-REIT activities (principally our containerized storage business) also incurred losses and generated tax deferred assets. Because we have been unable to demonstrate recoverability of such assets, we have recorded a valuation allowance offsetting these deferred tax assets for each reporting period. As a result, no material income tax expense or benefit is recorded in our Consolidated Statements of Net Income.

Cumulative effect of change in accounting principle:  Upon adoption of FIN 46R, we recorded a cumulative effect of change in accounting principle in the amount of $2.3 million due to the consolidation of First Shurgard. This is the result of eliminating all intercompany profits from inception of First Shurgard in 2003 as required under FIN 46R. Before 2004, prior to adoption of FIN 46R, we eliminated our 20% ownership share of intercompany profits.

Discontinued operations:  In 2004, we reclassified the operating income of six storage centers that we sold in 2004 and two additional storage centers that we sold in January and February 2005. We recognized a $16.2 million gain on the sale of the six storage centers in 2004. There were no comparable transactions in 2003 or 2002.

European Consolidated Statement of Income (See separate Note 6 of our Consolidated Financial Statements included in this Form 10-K)

Shurgard Europe began consolidating First Shurgard as of January 1, 2004 and has grown its storage center portfolio significantly since 2002. Consequently, Shurgard Europe’s results of operations are not directly comparable to its results for the same periods in 2003 and 2002. This analysis is included to explain operating and other trends occurring in Shurgard Europe.

Shurgard Europe’s statements of operations were converted from euros to U.S. dollars at an average exchange rate of $1.24 to the euro for the year ended December 31, 2004, $1.13 to the euro for the year ended December 31, 2003 and $0.94 to the euro for the year ended December 31, 2002. Accordingly, some portions of the changes discussed below are also attributable to the different exchange rates used in the currency translations. Revenues and total expenses increased $20.3 million and $22.3 million, respectively, from 2003 to 2004 at each period’s average exchange rate. At constant exchange rates, using the 2004 average rate, the respective increases in revenues and expenses from 2003 to 2004 would be $12.3 million and $13.9 million.

Storage Centers Operations Revenue:  Storage centers operations revenue of $101.5 million in 2004 increased by $31.4 million or 45%, from $70.1 million in 2003 and from $45.0 million in 2002. At constant exchange rates storage centers operations revenues increased to $101.5 million in 2004 from $77.0 million in 2003 and $58.9 million in 2002. These increases are the results of the increasing number of storage centers in Europe and the rent-up of existing stores, as well as the consolidation of First Shurgard as of January 1, 2004. The performance of the storage centers is discussed more fully under European Segment Analysis.

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Other Revenue:  Other revenue of $11.4 million in 2003 consisted primarily of development and management fee revenue paid by First Shurgard. Fees from joint ventures are eliminated in the consolidation in 2004. Shurgard Europe recognized $0.2 million in 2004 of development and management fees from Shurgard UK West London Ltd, a wholly-owned subsidiary of Shurgard which owns a storage center that is operated by Shurgard Europe. Such fees are eliminated upon consolidation with Shurgard.

Operating Expenses:  Operating expenses increased to $75.7 million in 2004 from $57.2 million in 2003 and $33.7 million in 2002. At constant exchange rates the operating expenses increased to $75.7 million in 2004 from $62.7 million in 2003 and $44.1 million in 2002. The increase results from higher storage center direct and indirect operating expense due to the growth of Shurgard Europe’s storage center portfolio. This increase was partially offset by the elimination of real estate development costs related to First Shurgard under FIN 46R in 2004. Such costs amounted to $6.8 million in 2003 and were not eliminated. Real estate operating expenses are affected by the adoption of FIN 46R as in 2003, the expenses relating to the development of First Shurgard sites were recognized in the Statements of Operations. The increase in costs results as well from abandoned acquisition and development projects in 2004 in France and the United Kingdom.

Real estate taxes:  Real estate taxes increased to $5.3 million in 2004 from $3.5 million in 2003 and $2.2 million in 2002. At constant exchange rates, the operating expenses in 2003 would have been $3.9 million and $2.9 million in 2002. The increase results from the growth of the storage center portfolio, the consolidation of First Shurgard in 2004, as opposed to 2003, and to one-time tax credits received in 2003.

Depreciation and amortization:  Depreciation and amortization increased to $21.1 million in 2004 from $19.4 million in 2003 and $13.0 million in 2002. At constant exchange rates the depreciation and amortization remained stable at $21.1 million in 2004 compared to $21.3 million in 2003. The stability in 2004 is due to the reduction of depreciation expense in certain countries to align to Shurgard’s accounting policy upon consolidation, which reduction offsets the increase in depreciation resulting from new operating storage centers.

General, Administrative and Other Expenses:  General, administrative and other expenses increased to $6.5 million in 2004 from $6.2 million in 2003 and $4.8 million in 2002. At constant exchange rates the general administrative and other expenses decreased to $6.5 million in 2004 from $6.8 million in 2003 primarily as a result of higher legal fees, consultancy fees and increased personnel costs which were incurred in the second half of 2003 resulting from the strengthening of Shurgard Europe’s accounting function and changes made in the organization.

Loss on derivatives:  The loss on derivatives in 2004 is primarily the result of a $1.9 million loss in the market value of a three-year amortizing cap to secure the interest charge for the period 2011 through 2014 on the €325 million bonds issued by Shurgard Europe. This cap does not qualify for hedge accounting; however, on consolidation with Shurgard, this loss is offset by a gain on a reverse sold cap. Within Shurgard Europe, the loss is partially offset by a gain of $700,000 due to the marking-to-market of a series of currency options maturing May 26, 2008 whereby First Shurgard has the right to purchase €15 million for $18.6 million.

Minority interest:  The minority interest of $13.3 million relates to Shurgard Europe’s ownership interests in First Shurgard and Second Shurgard. First Shurgard was consolidated with Shurgard Europe in 2004, but was not in 2003.

Interest income and other:  Interest income and other decreased to $630,000 in 2004 from $1.5 million in 2003 primarily due to interest recognized on properties prior to their transfer to First Shurgard.

Interest expense:  Interest expense of $36.1 million in 2004 increased from $28.4 million in 2003 and $24.1 million in 2002. Interest and other charges consist primarily of interest on the senior credit facilities of Shurgard Europe, First Shurgard and Second Shurgard and the €325 million senior notes that Shurgard Europe issued in October 2004. Interest and other charges of $28.4 million in 2004 increased from $21.5 million in 2003. Of this increase, $2.1 million is attributable to exchange rate variance. The remaining increase resulted primarily from

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increased borrowings under First Shurgard’s senior credit facility, which was used to fund its development activities as well as an increase in amortization of financing costs related to both the First Shurgard and Second Shurgard credit facilities. Also, the senior notes issued in the fourth quarter 2004 as fixed under swap agreements bear higher interest rates than Shurgard Europe’s credit facility and resulted in higher interest rate expense and amortization of financing costs in the second half of 2004. These increases in interest and other charges were offset by a $7.8 million decrease in interest expenses on a subordinated loan from Recom & Co., SNC (Recom) as a result of the repayment of that loan in September 2003. The increase in interest expense from 2002 to 2003 is primarily due to increased draws on Shurgard Europe’s line of credit and additional bonds issued to Shurgard to finance developments of new storage centers.

Unrealized Foreign Exchange Gain (Loss):  The unrealized foreign exchange gain of $4.9 million, $9.8 million and $2.4 million in 2004, 2003 and 2002, respectively, relate primarily to the $61.3 million bonds and related balances outstanding with Shurgard. Because these bonds are denominated in U.S. dollars and Shurgard Europe conducts business in Euros, variations in exchange rates result in unrealized gains or losses. The increase in 2003 compared to 2002 results from the increase in the loan balance in 2003 and exchange rate fluctuations.

Income Taxes:  Shurgard Europe is subject to income taxes in several of the jurisdictions in which it operates. It has paid no significant income taxes because it has incurred losses since its inception, but it has generated deferred tax assets. Because Shurgard Europe has been unable to demonstrate recoverability of such assets, it has recorded a valuation allowance offsetting these deferred tax assets. As of December 31, 2004, Shurgard Europe had deferred tax assets and offsetting valuation allowances of $75.3 million.

Cumulative effect of change in accounting principle:  Upon adoption of FIN 46R, we recorded a cumulative effect of change in accounting principle in the amount of $2.3 million due to the consolidation of First Shurgard in 2004 and the resulting elimination of all intercompany profits since the inception of First Shurgard in 2003.

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SEGMENT ANALYSIS

We have historically evaluated performance of our real estate assets in two segments: Domestic Same Store and New Store. Following the consolidation of Shurgard Europe beginning January 1, 2004, we added two new reportable segments, European Same Store and European New Store. Same Store includes those stores acquired prior to January 1 of the prior year and developed properties operating for two full years as of January 1 of the current year. New Store represents those storage centers recently acquired or developed for which performance is measured primarily based on original investment expectations. We evaluate all storage centers on the same basis regardless of our ownership interest in the property. We believe NOI is a meaningful measure of operating performance as a supplement to net income because we rely on NOI for purposes of making decisions with respect to resource allocations, current property values, segment performance, and comparing period-to-period and market-to-market property operating results. NOI is defined as storage center operations revenues less direct operating and real estate tax expense for each of our properties. For a reconciliation of Same Store and New Store NOI to net income see Note 23 to our Consolidated Financial Statements. The following sections discuss the performance of these segments.

The following table summarizes key operational data for our storage center portfolio as of December 31, 2004. This data is further discussed below in this section by segment:

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Domestic Same Store

The following table summarizes Same Store operating performance as defined at December 31, 2004.

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Same Store Results (1)