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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2005

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)

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

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

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

Shares outstanding at May 2, 2005

Class A Common Stock, $.001 par value, 46,652,704 shares outstanding

Shurgard Storage Centers, Inc.

Form 10-Q

For the Three Months ended March 31, 2005

Table of contents

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Shurgard Storage Centers, Inc.

Part I, Item 1: Condensed Consolidated Balance Sheets

(unaudited)

(Amounts in thousands except share data)

The accompanying notes are an integral part of these statements.

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Shurgard Storage Centers, Inc.

Part I, Item 1: Condensed Consolidated Statements of Net Income

(unaudited)

(Amounts in thousands except per share data)

The accompanying notes are an integral part of these statements.

4

Shurgard Storage Centers, Inc.

Part I, Item 1: Condensed Consolidated Statements of Net Income

(unaudited)

(Amounts in thousands except per share data)

The accompanying notes are an integral part of these statements.

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Shurgard Storage Centers, Inc.

Part I, Item 1: Condensed Consolidated Statements of Cash Flows

(unaudited)

(Amounts in thousands)

The accompanying notes are an integral part of these statements.

6

Shurgard Storage Centers, Inc.

Part I, Item 1: Condensed Consolidated Statements of Cash Flows

(unaudited)

(Amounts in thousands)

The accompanying notes are an integral part of these statements.

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Shurgard Storage Centers, Inc.

Part I, Item 1: Notes to Condensed Consolidated Financial Statements

Three months ended March 31, 2005

(unaudited)

Note 1—Organization

Shurgard Storage Centers, Inc. and our subsidiaries (we, us, the Company or Shurgard), are engaged principally in investing in, acquiring, developing and operating self storage centers located throughout the United States and in Western Europe. Our revenues are generated primarily from leasing self-storage space to tenants on a month-to-month basis. We also provide ancillary services at our storage centers consisting primarily of truck rentals and sales of storage products.

Note 2—Summary of significant accounting policies

Basis of presentation:  The Condensed Consolidated Financial Statements include the accounts of Shurgard and our consolidated subsidiaries presented on an accrual basis in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in accordance with the requirements of Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the informative disclosures required by GAAP for complete financial statements. In our opinion, the accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of our financial condition at March 31, 2005 and December 31, 2004 and the results of operations and cash flows for the three-month periods ended March 31, 2005 and 2004. Interim results are not necessarily indicative of the results for the year. The interim financial statements should be read in conjunction with our 2004 Annual Report on Form 10-K. All intercompany balances and transactions have been eliminated in consolidation.

Consolidated and unconsolidated subsidiaries:  We consolidate all wholly-owned subsidiaries. We assess whether our subsidiaries are Variable Interest Entities (VIEs) as defined by the Financial Accounting Standards Board’s (FASB) Interpretation No. (FIN) 46R, “Consolidation of Variable Interest Entities,” a revision to FIN 46 (FIN 46R). Upon implementation of FIN 46R in January 1, 2004, 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. We evaluate partially-owned subsidiaries and joint ventures held in partnership form in accordance with the provisions of Statement of Position (SOP) 78-9, “Accounting for Investments in Real Estate Ventures,” to determine whether the rights held by other investors constitute “important rights” as defined therein. For partially-owned subsidiaries or joint ventures held in corporate form (including limited liability companies with governance provisions that are the functional equivalent of regular corporations), we consider the guidance of Statement of Financial Accounting Standard (SFAS) No. 94 “Consolidation of All Majority-Owned Subsidiaries” and Emerging Issues Task Force (EITF) 96-16, “Investor’s Accounting for an Investee When the Investor has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights” and, in particular, whether rights held by other investors would be viewed as “participating rights” as defined therein.

We accounted for unconsolidated subsidiaries and joint ventures over which we have significant influence using the equity method. In applying the equity method, our proportionate share of intercompany profits are eliminated as a component of equity in earnings of unconsolidated entities. We had an investment in one domestic unconsolidated entity accounted for using the equity method as of March 31, 2005 and December 31, 2004. Our investment in this joint venture is reported in other real estate investments as a component of other assets on our Condensed Consolidated Balance Sheet (see Note 5).

Use of estimates:  The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent

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liabilities at the date of the financial statements and the amounts of revenues and expenses recognized during the reporting period. Significant estimates are inherent in the preparation of our financial statements and include the evaluation of impairment of long-lived assets and goodwill, valuation allowance for deferred tax assets, estimated lives of depreciable assets and the allocation of the purchase price of acquired properties. Actual results could differ from these and other estimates.

Reclassifications:  Certain prior year amounts have been reclassified to conform to the current presentation with no effect on shareholders’ equity or net income.

Storage centers:  Storage centers to be developed or held and used in operations are carried at amortized cost, reduced for impairment losses where appropriate. Acquisition, development and construction costs of properties in development are capitalized including, where applicable, salaries and related costs, real estate taxes, interest and preconstruction costs directly related to the project. The preconstruction stage of development of a storage center (or the expansion or redevelopment of an existing storage center) includes efforts to secure land control and zoning, evaluate feasibility and complete other initial tasks which are essential to development. Costs of preconstruction efforts related to projects not considered probable to be completed are charged to operations. Development and construction costs and costs of significant improvements and replacements and renovations at storage centers are capitalized, while costs of maintenance and repairs are expensed as incurred.

Depreciation of each operating storage center is computed using the straight-line method based on an estimated useful life of 30 years. Storage centers that are built on leased land are depreciated over the shorter of 30 years or the lease term. Estimates of the useful lives of specific storage centers are evaluated and revised, if necessary, when we plan to demolish, replace them or redevelop such assets. Equipment and furniture and fixtures are depreciated based on estimated useful lives of five years.

If events or circumstances indicate that the carrying value of an operating storage center may be impaired, a recoverability analysis is performed based on expected undiscounted cash flows to be generated from the property. If the analysis indicates that the carrying value is not recoverable from estimated future cash flows, the property is written down to its estimated fair value and an impairment loss is recognized. Fair values are determined based on expected future cash flows using appropriate discount and capitalization rates.

Storage centers held for sale are carried at the lower of their carrying value (i.e., cost less accumulated depreciation and any impairment loss recognized) or estimated fair value less costs to sell. The net carrying values of properties are classified as held for sale when the properties are actively marketed, their sale is considered probable within one year and various other criteria relating to their disposition are met. Depreciation of the operating storage centers is discontinued at that time, but operating revenues, operating expenses and interest expense continue to be recognized until the date of sale. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” revenues and expense of properties classified as held for sale are reported in discontinued operations for all periods presented if the properties will be or have been sold on terms where we have limited or no continuing involvement with them after the sale. If active marketing ceases or the properties no longer meet the criteria to be classified as held for sale, the properties are reclassified as held for use, depreciation is resumed and recognized for the period the properties were classified as held for sale and deferred selling costs, if any, are charged to expense.

Gains from sales of properties are recognized using the full accrual method provided that various criteria relating to the terms of the transactions and any continuing involvement by us with the properties sold are met. Gains relating to transactions that do not meet the established criteria are deferred and recognized when the criteria are met or using the installment or cost recovery methods, as appropriate in the circumstances. Other sales of interests in properties that are substantially financing arrangements are accounted for as such.

Acquisitions of businesses and storage centers:  We allocate the purchase price of acquired storage centers and businesses to tangible and identified intangible assets based on their fair values. In making estimates of fair

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values for the purposes of allocating the purchase price, we use a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective assets and other market data. We also consider information obtained about each property as a result of our pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired.

The fair values of intangible assets include leases to customers with above market rents and in-place lease values. The fair values of these identifiable intangible assets are generally not significant because substantially all leases in our business are month-to-month, and most customers use our facilities for less than one year.

Any purchase price in excess of the value of acquired net tangible and intangible assets is classified as goodwill and assigned to the reporting unit expected to benefit from the acquisition. Goodwill is tested for impairment annually and whenever events or circumstances indicate that impairment may have occurred.

Internal costs related to the acquisition of a business or an operating storage center are expensed as incurred.

Discontinued operations:  We report real estate dispositions as discontinued operations separately as prescribed under the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Under SFAS No. 144, we are required to separately report as discontinued operations the historical operating results attributable to operating properties sold and held for sale and the applicable gain or loss on the disposition of the properties. The Condensed Consolidated Statements of Net Income for prior periods are also adjusted to conform to this classification. There is no impact on our previously reported consolidated financial position, net income (loss) or cash flows.

Revenue recognition:  The majority of our customers rent under month-to-month lease agreements and revenue is recognized at the contracted rate for each month occupied. Revenue related to customers who sign longer period leases is recognized ratably over the term of the lease. Management fee revenue is recognized each month for which services are rendered; these contracts are generally cancelable by either party on specified advanced notice.

We recognize revenue related to profit sharing contracts related to our tenant insurance referral program based on the excess of premiums over claims and administrative costs.

Capitalized interest:  We capitalize interest incurred during the construction period of storage centers and during the development period of internally developed computer software. Interest is capitalized to the related assets using a weighted-average rate of our credit facilities and senior notes payable. For the three-month periods ended March 31, 2005 and 2004, we capitalized interest of $559,000 and $632,000, respectively.

Income taxes:  We have elected to be taxed as a Real Estate Investment Trust (REIT) pursuant to the Internal Revenue Code of 1986, as amended. To qualify as a REIT, we must distribute annually to our shareholders at least 90% of our REIT taxable income and meet certain other requirements relating primarily to the nature of our assets and the sources of our revenues. As a REIT, we are not subject to U.S. Federal income taxes to the extent of distributions. We believe that we met the qualifications for REIT status at December 31, 2004 and intend to meet the qualifications in the future and to distribute at least 90% of our REIT taxable income to shareholders in 2005 and future years. As a result, no provision for U.S. federal income taxes for the REIT has been made in our financial statements. We are subject to certain state income taxes as well as certain franchise taxes. Our European subsidiaries are subject to income taxes in the respective jurisdictions of the countries in which they operate.

We have deferred tax assets arising primarily from cumulative net operating losses arising in certain taxable subsidiaries. We 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 recorded. One significant factor representing

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negative evidence in the evaluation of whether deferred tax assets arising from cumulative net operating losses will be realized is the 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 a valuation allowance is provided.

Derivative financial instruments:  We use derivative financial instruments to reduce risks associated with movements in interest and foreign currency exchange rates. We may choose to reduce cash flow and earnings volatility associated with interest rate risk exposure on existing variable-rate borrowings or forecasted variable and fixed-rate borrowings. In some instances, lenders may require us to do so. In order to limit interest rate risk on variable-rate borrowings, we may enter into interest rate swaps or interest rate caps to hedge specific risks. In order to limit interest rate risk on forecasted borrowings, we may enter into interest rate swaps, forward starting swaps, forward rate agreements, interest rate locks and interest rate collars. We may also use derivative financial instruments to reduce foreign currency exchange rate risks to our earnings, cash flows and financial position arising from forecasted intercompany foreign currency denominated transactions and net investments in certain foreign operations. In order to limit foreign currency exchange rate risks associated with forecasted intercompany foreign currency denominated transactions, we may enter into cross-currency interest rate swaps. In order to limit foreign currency exchange rate risks associated with net investments in foreign operations, we may enter into foreign currency forward contracts. We may also use derivative financial instruments to reduce earnings volatility associated with other derivative financial instruments that are not designated as cash flow hedges. We do not use derivative financial instruments for speculative purposes.

Under purchased interest rate cap agreements, we make initial premium payments to the counterparties in exchange for the right to receive payments from them if interest rates exceed specified levels during the agreement period. Under sold interest rate cap agreements, we receive initial premium payments from the counterparties in exchange for the obligation to make payments to them if interest rates exceed specified levels during the agreement period. Under interest rate swap agreements, we and the counterparties agree to exchange the difference between fixed-rate and variable-rate interest amounts calculated by reference to specified notional principal amounts during the agreement period. Notional principal amounts are used to express the volume of these transactions, but the cash requirements and amounts subject to credit risk are substantially less.

Under cross currency interest rate swaps, we and the counterparties agree to exchange fixed amounts of foreign currencies calculated by reference to fixed interest rates and notional principal amounts during the agreement period. We also agree to exchange the notional amounts at the end of the agreement period. Under foreign currency forward contracts, we and the counterparties agree to exchange fixed amounts of foreign currencies at the end of the agreement period.

Parties to interest rate and foreign currency exchange agreements are subject to market risk for changes in interest rates and currency exchange rates and risk of credit loss in the event of nonperformance by the counterparty. We do not require any collateral under these agreements but deal only with highly rated financial institution counterparties (which, in certain cases, are also the lenders on the related debt) and expect that all counterparties will meet their obligations.

Derivative financial instruments are measured at fair value and recognized as assets or liabilities in the balance sheet. Changes in the values of the effective portions of derivative financial instruments designated as cash flow hedges and changes in the values of derivative financial instruments designated as economic hedges of net investments in foreign subsidiaries are reported as components of other comprehensive income (loss). Changes in the values of the ineffective portions of cash flow hedges and all changes in the values of undesignated derivative financial instruments are recognized in earnings. Amounts receivable or payable under interest rate cap and swap agreements designated as cash flow hedges are accounted for as adjustments to interest expense on the related debt. To qualify for hedge accounting, the details of the hedging relationship must be formally documented at inception of the arrangement, including the risk management objective, hedging strategy, hedged item, specific risks that are being hedged, the derivative instrument and how effectiveness is being

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assessed. The derivative must be highly effective in offsetting either changes in fair value or cash flows, as appropriate, for the risk being hedged. Effectiveness is evaluated on a retrospective and prospective basis based on quantitative measures of correlation. When it is determined that a derivative has ceased to be highly effective as a hedge, we discontinue hedge accounting prospectively.

We discontinue hedge accounting prospectively when (1) we determine that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated or exercised; (3) it is no longer probable that the forecasted transaction will occur; (4) a hedged firm commitment no longer meets the definition of a firm commitment; or (5) we determine that designating the derivative as a hedging instrument is no longer appropriate.

When hedge accounting is discontinued due to our determination that the derivative no longer qualifies as an effective fair-value hedge, we will continue to carry the derivative on the balance sheet at its fair value but cease to adjust the hedged asset or liability for changes in fair value. When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, we will continue to carry the derivative on the balance sheet at its fair value, removing from the balance sheet any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings. When we discontinue hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, the gain or loss on the derivative remains in accumulated other comprehensive income and is reclassified into earnings when the forecasted transaction affects earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two month period of time thereafter, the gains and losses that were accumulated in other comprehensive income will be recognized immediately in earnings. If we discontinue a cash flow hedge because the variability of the probable forecasted transaction has been eliminated, we will reclassify the net accumulated other comprehensive income to income over the term of the designated hedging relationship. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, we will carry the derivative at its fair value on the balance sheet, recognizing changes in the fair value in current period earnings. Expenses recognized relating to changes in the time value of interest rate cap agreements were insignificant in 2005 and 2004.

Other comprehensive income

The following tables summarize components of other comprehensive income (loss) (in thousands):

The currency translation adjustment represents the net currency translation adjustment gains and losses related to our European subsidiaries. Amounts are presented net of minority interest.

Financial instruments with characteristics of both liabilities and equity:  We adopted the requirements of SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” in the third quarter of 2003, and there was no impact on our financial position, operating results or cash flows.

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However, the minority interests associated with certain of our consolidated joint ventures and our subsidiaries that have finite lives under the terms of the partnership agreements, represent mandatorily redeemable interests as defined in SFAS No. 150. As of March 31, 2005, the aggregate book value of these minority interests in finite-lived entities on our Condensed Consolidated Balance Sheet was $151.8 million and we believe that the estimated aggregate settlement value of these interests was approximately $211.9 million. This amount is based on the estimated liquidation values of the assets and liabilities and the resulting proceeds that we would distribute to our joint venture partners assuming dissolution as of March 31, 2005. As required under the terms of the respective partnership agreements, subsequent changes to the estimated fair value of the assets and liabilities of the consolidated joint ventures will affect our estimate of the aggregate settlement value. The partnership agreements do not limit the amount that the minority partners would be entitled to in the event of liquidation of the assets and liabilities and dissolution of the respective partnerships.

Stock compensation expense:  In December 2002 we adopted the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”, which amended SFAS No. 123 “Accounting for Stock-Based Compensation” and we continue to account for stock-based compensation under APB Opinion No. 25 “Accounting for Stock Issued to Employees”. Therefore, the adoption of SFAS No. 148 did not have any effect on our financial position, operating results or cash flows. In December 2004, the FASB issued SFAS No. 123R, a revision of SFAS No. 123. 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 as of January 1, 2006. 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 subject to disclosure. Although we are still evaluating the transition method under which 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 March 31, 2005.

The following table reflects pro forma net income (loss) as if we had recognized stock based compensation expense using the fair value method in accordance with SFAS No. 123:

Recent accounting pronouncements:  In March 2005, the FASB issued FASB FIN 47 “Accounting for Conditional Asset Retirement Obligations”. FIN 47 clarifies that the term conditional asset retirement obligations as used in SFAS No. 143 “Accounting for Asset Retirement Obligations” refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlements are conditional on a future event that may or may not be within the control of the entity. FIN 47 indicates that an entity must record a liability for a conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated and also clarifies when an entity should have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This interpretation will be effective for reporting periods ending after December 15, 2005. We do not believe that the adoption of FIN 47 will have a material impact on our financial position, operating results or cash flows.

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In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets” an amendment of APB Opinion No. 29 “Accounting for Nonmonetary Transactions”. This Statement eliminates the exception to fair value for exchanges of similar productive assets and replaces it with an exception for exchange transactions that lack economic substance. The provisions of this statement will be effective for transactions occurring after June 15, 2005 and will be applied prospectively. Accordingly, any future exchange of properties or interests in properties will need to be evaluated for economic substance. We do not believe that the adoption of SFAS No. 153 will have a material impact on our financial position, operating results and cash flows.

Note 3—Variable Interest Entities and Cumulative Effect of Change in Accounting Principle

Under FIN 46R, a VIE must be consolidated by a company if that company is subject to a majority of the expected losses from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. FIN 46R also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. We adopted FIN 46R as of January 1, 2004.

We had a direct and indirect ownership interest in Shurgard Self Storage SCA (Shurgard Europe) of 87.23% as of March 31, 2005. We hold an indirect ownership interest in Shurgard Europe through Recom & Co., SNC (Recom) a Belgian partnership of which we were the sole shareholder as of March 31, 2005. We have assessed Shurgard Europe under the provisions of FIN 46R and have concluded that it meets the definition of a VIE. We have also concluded that we are the primary beneficiary effective as of June 2003. As a result, Shurgard Europe has been consolidated in our financial statements beginning January 1, 2004. As of March 31, 2005, Shurgard Europe had total assets of $920.6 million, total liabilities of $729.2 million and a credit facility collateralized by assets with a net book value of $537.0 million (see Note 7), this excludes the $247.9 million we paid for our ownership interest in Shurgard Europe over the net book value. Shurgard Europe’s creditors had no recourse to the general credit of Shurgard.

Shurgard Europe has created two joint venture entities: First Shurgard SPRL (First Shurgard) formed in January 2003 and Second Shurgard SPRL (Second Shurgard) formed in May 2004. Those joint ventures are expected to develop up to approximately 75 storage facilities in Europe. Shurgard Europe has a 20% interest in these ventures. We have also determined that First Shurgard and Second Shurgard are VIEs, of which Shurgard Europe is the primary beneficiary. Accordingly, First Shurgard has been consolidated in our financial statements since January 1, 2004, and Second Shurgard has been consolidated since inception. At March 31, 2005 First Shurgard and Second Shurgard had aggregate total assets of $287.2 million, total liabilities of $174.1 million, and credit facilities collateralized by assets with net book value of $250.9 million (see Note 7). As of March 31, 2005, First Shurgard’s and Second Shurgard’s creditors had no recourse to the general credit of Shurgard or Shurgard Europe other than Shurgard’s commitment to subscribe to up to $20 million in preferred bonds in a potential event of default of First Shurgard, which was increased by €5 million ($6.5 million as of March 31, 2005) in February 2005 in addition to a €2.5 million ($3.2 million as of March 31, 2005) working capital facility upon modification of certain of the debt covenants. We have an option to put 80% of the bonds issued by First Shurgard to Crescent Euro Self Storage Investments, Shurgard Europe’s partner in the joint venture.

Upon adoption of FIN 46R, in the quarter ended March 31, 2004, we recognized a cumulative effect of change in accounting principle of approximately $2.3 million relating 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.

We do not believe that any of our other investees are VIEs under the provisions of FIN 46R.

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Note 4—Storage Centers

During the quarter ended March 31, 2005, we acquired one new storage center and completed one expansion project of an existing storage center. We also sold two storage centers that we previously classified as properties held for sale, and we classified an additional property as held for sale.

We acquired one property in North Carolina through a 74% owned consolidated subsidiary. We partially financed this $3.0 million acquisition with a mortgage note of $2.2 million collateralized by the property.

We completed the sale of a California storage center and a Washington storage center for proceeds of approximately $13.2 million and recognized aggregate gains of $6.4 million.

Construction in progress at March 31, 2005 consisted primarily of 12 storage centers under construction, nine of which were in Europe and three in the United States, and expansion projects for 18 existing storage centers in the United States.

Note 5—Other Assets

The following table summarizes other assets:

Note 6—Lines of Credit

The following table summarizes our lines of credit:

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As of December 31, 2004, we had an unsecured domestic line of credit to borrow up to $360 million and an unsecured term loan agreement for an additional $100 million. These facilities required monthly interest payments at 125 basis points over LIBOR. Both facilities matured on February 26, 2005 and were refinanced with borrowings on new unsecured credit facilities.

In February 2005, we entered into a three-year unsecured revolving credit facility with a group of syndicated banks to borrow up to $350 million and a six-month $150 million term loan facility. The term loan was fully drawn at closing. Each facility can be extended for one year at our option for a fee. The credit facility and the term loan require monthly interest payments which were 70 and 90 basis points, respectively, over LIBOR at March 31, 2005. As of March 31, 2005, the available amount was $81.9 million. Downgrades to our senior unsecured debt rating may result in higher margins on our interest rate. The credit agreements require us to maintain quarterly maximum debt and secured debt to gross asset value ratios, a minimum EBITDA to fixed charges and unemcumbered net operating income to unsecured interest expense ratios. The financial covenants also require us to maintain a minimum tangible net worth. A breach of these covenants and other various covenants may result in an acceleration of the maturity of amounts outstanding. The credit agreement restricts dividend and other distributions to a maximum of 95% of adjusted Funds From Operations as defined in the credit facility agreement. As of March 31, 2005, we believe we were in compliance with those financial covenants.

Note 7—Notes Payable

First Shurgard and Second Shurgard each have senior credit agreements denominated in euros to borrow up to €140 million ($180.8 million as of March 31, 2005). As of March 31, 2005, the available amount under those

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credit facilities was in aggregate €163.5 million ($211.1 million). Our draws under the First Shurgard and Second Shurgard credit facilities are determined on a development project basis and can be limited if the completion of projects is not timely and if we have certain cost overruns. The credit facilities also require us to maintain a maximum loan to value of the collateral ratio and a minimum debt service ratio. In December 2004, we notified the agent for the lenders of First Shurgard’s credit facility that First Shurgard would require modifications to certain of its covenants in order to be in compliance. The lenders agreed to modifications of these covenants in February 2005. No default or acceleration of the credit facility was declared by the lenders.

In February 2005, we entered into one new mortgage agreement to partially finance the purchase of a storage center in North Carolina (see Note 4). This $2.2 million note matures in February 2010 and bears monthly interest of 0.2% over LIBOR. In November 2004, we entered into a construction loan agreement to borrow up to $3.9 million to develop one storage center. This note matures in May 2007 and bears monthly interest of 0.195% over LIBOR. As of March 31, 2005 we had drawn $1.2 million on this facility that is collateralized by the construction in progress of the storage center.

As of March 31, 2005 and December 31, 2004, our notes payable were collateralized by storage centers with net book values of $1.34 billion and $1.18 billion, respectively.

Note 8—Derivative Financial Instruments

We use derivative instruments to manage risks associated with movements in interest rates and foreign currency exchange rates.

We had derivative liabilities of $21.3 million as of March 31, 2005 and $34.0 million as of December 31, 2004, that are included in other liabilities on our Condensed Consolidated Balance Sheets. We had $2.1 million and $3.5 million of derivative assets that are included in other assets on our Condensed Consolidated Balance Sheets at March 31, 2005 and December 31, 2004, respectively.

In the United States, we had entered into interest rate swaps that are not designated as hedges, which matured in February 2005 and were extinguished for $14.9 million.

Shurgard Europe has entered into an interest rate swap to effectively fix EURIBOR at 3.714% through October 2011 on €325 million of variable rate debt. This swap is designated as a cash flow hedge and was a liability of $13.3 million and $12.7 million at March 31, 2005 and December 31, 2004, respectively. Shurgard Europe has also entered into foreign currency exchange derivatives designated as cash flow hedges. These instruments were assets of $2.1 million and liabilities of $729,000 at March 31, 2005 and assets of $2.1 million and liabilities of $1.5 million at December 31, 2004. We had undesignated interest rate caps for interest rate changes between October 2011 and October 2014 that we entered into as part of Shurgard Europe’s bond issuance. These interest rate caps were assets of $4.7 million at March 31, 2005 and mature in October 2014. We sold an interest rate cap that expires in October 2014 and was a liability of $4.3 million at March 31, 2005.

First Shurgard has entered into interest rate swaps designated as cash flow hedges of interest payments on future borrowings under its credit facility. The weighted-average notional amounts and fixed pay rates of these swaps are as follows (euros in millions):

These swap agreements were liabilities of $4.3 million at March 31, 2005 and $4.1 million at December 31, 2004.

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First Shurgard has also entered into foreign currency exchange derivatives designated as cash flow hedges or economic hedges of net investments in subsidiaries outside the euro zone. These instruments, which mature in May 2008, comprised assets of $251,000 and liabilities of $0.4 million at March 31, 2005 and assets of $0.8 million and liabilities of $0.5 million at December 31, 2004. First Shurgard is also party to foreign currency exchange derivatives that mature in May 2008 that are not designated as hedges. These instruments were assets of $2.1 million at March 31, 2005 and $2.7 million at December 31, 2004.

In connection with financing agreements, First Shurgard also entered into call options maturing on May 27, 2008, for the purchase of €15 million for $18.6 million at a fixed exchange rate. This transaction does not qualify for hedge accounting.

Second Shurgard has entered into interest rate swaps designated as cash flow hedges of interest payments on future borrowings under its credit facility. The weighted-average notional amounts and fixed pay rates of these swaps are as follows (euros in millions):

These swap agreements were liabilities of $3.1 million at March 31, 2005 and $2.8 million at December 31, 2004.

Note 9—Shareholders’ Equity

During the three-month periods ended March 31, 2005 and 2004 we issued 23,412 shares and 127,076 shares, respectively, of common stock in connection with the exercise of employee stock options and our employee stock purchase plan. We issued 8,523 and 8,768 shares of Class A common stock, respectively, in connection with our Dividend Reinvestment Plan during the three-month periods ended March 31, 2005 and 2004, respectively. Additionally, 1,418 and 5,380 shares of unvested common stock were granted to employees and directors during the three-month periods ended March 31, 2005 and 2004, respectively. A total of 3,834 shares of restricted stock were cancelled due to the termination of employees during the three months ended March 31, 2004, and none were cancelled during the three months ended March 31, 2005. We recorded stock compensation expense for restricted shares and discounted stock options of $539,000 and $995,000 for the three-month periods ended March 31, 2005 and 2004, respectively.

Note 10—Income Taxes

Our domestic non-REIT activities are primarily conducted through Shurgard TRS, Inc., a taxable REIT subsidiary. Our foreign non-REIT activities are primarily conducted through our six European taxable REIT subsidiaries.

As of March 31, 2005 and December 31, 2004, Recom, a Belgian subsidiary that is subject to foreign income taxes had a tax liability of $1.8 million and $1.9 million, respectively, which represents the outstanding tax liability for the 2003 tax year due in May 2005.

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The components of deferred tax assets (liabilities) for Shurgard’s taxable operations at March 31, 2005 and December 31, 2004 are included in the table below. As of March 31, 2005 and December 31, 2004, we had established a valuation allowance against the value of our net deferred tax assets. Given the history of losses of our TRS and of our European operations, we have concluded that there is currently insufficient evidence to justify recognition of the benefits of these deferred tax assets on our books.

Note 11—Exit Costs

In December 2001 and 2003, our board of directors approved exit plans to discontinue our containerized operations. In connection with these decisions, we accrued incremental costs expected to be incurred during the closing of the warehouses. As of March 31, 2005, we had a remaining liability for those exit plans for operating lease obligations through 2008 for all the warehouses. The liability is recognized at its fair value for the remaining lease rentals reduced by estimated sublease rentals and is reevaluated periodically. As of March 31, 2005, we had entered subleasing agreements for six of the seven warehouses, including some on a month-to-month basis.

The following table summarizes costs incurred since January 2002 for exiting our containerized storage operations which have been applied to this accrual:

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Note 12—Net Income Per Share

The following summarizes the computation of basic and diluted net income per share for the three-month periods ended March 31, 2005 and 2004:

Note 13—Foreign operations

Our international operations are conducted through Shurgard Europe and other European subsidiaries. Our international revenues amounted to $30.3 million, or 27% of our total revenues, for the three months ended March 31, 2005 and $22.7 million, or 23% of our total revenues, for the three months ended March 31, 2004.

The functional currency of each of our European subsidiaries, and their subsidiaries, is the local currency of the country in which the entity has operations (euro for members of the European Union that have adopted the euro, Krona for Sweden, Pound Sterling for the United Kingdom and Krone for Denmark). Assets and liabilities are translated at the exchange rate in effect as of the end of each period and income statement accounts are translated at the average exchange rate for each period. Additionally, Recom, a consolidated foreign entity with a U.S. dollar functional currency, has transactions that are denominated in currencies other than U.S. dollars. For Recom, non-monetary assets and liabilities are translated to U.S dollars at historical exchange rates, monetary assets and liabilities are translated at the exchange rate in effect as of the end of the period and income statement accounts are translated at the average exchange rate for the period.

The results of our operations and our financial position are affected by the fluctuations in the value of the euro against the U.S. dollar. The effects of foreign currency exchange variances on our European assets liabilities and equity are recognized as a currency translation adjustment in other comprehensive income on our Condensed Consolidated Balance Sheets. Also, we are exposed to foreign currency exchange risk related to intercompany debt with or between our European subsidiaries that are not denominated in the functional currency of the subsidiary or the investee.

As a result of our international operations, we recorded a $3.8 million and a $2.0 million foreign exchange loss for the three-month periods ended March 31, 2005 and 2004, respectively. This includes $4.0 million and

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$2.0 million unrealized loss related to intercompany debt for the three-month periods ended March 31, 2005 and 2004, respectively.

Note 14—Discontinued Operations

In 2004, we designated eight storage centers as discontinued operations, six of which were sold in 2004. We completed the sale of a California storage center in January 2005 and a Washington storage center in February 2005 for an aggregate proceeds of approximately $13.2 million, resulting in aggregate gains of $6.4 million. These storage centers were classified as held for sale at December 31, 2004. In the first quarter of 2005, we designated one additional property in Arizona as held for sale. We have presented the results of these storage centers as discontinued operations for all periods presented.

The following table summarizes income from discontinued operations:

Note 15—Segment Reporting

Shurgard has four reportable segments: Domestic Same Store and New Store and European Same Store and New Store. Our definition of Same Store includes existing storage centers acquired prior to January 1 of the previous year as well as developed properties that have been operating for a full two years as of January 1 of the current year. We project that newly developed properties will reach stabilization in an average of approximately 24-48 months. New Store includes existing facilities that had not been acquired as of January 1 of the previous year as well as developed properties that have not been operating a full two years as of January 1 of the current year.

These reportable segments allow us to focus on improving results from our existing real estate assets and renting up our new facilities. We evaluate each segment’s performance based on net operating income (NOI) and NOI after indirect and leasehold expenses. NOI is defined as storage center operations revenue less direct operating expenses and real estate taxes, but does not include any allocation of indirect operating expenses. Indirect expenses include certain shared property costs such as bank fees, district and corporate management, purchasing, national contracts personnel and marketing, as well as certain overhead costs allocated to property operations such as business information technology, legal services, human resources and accounting. Indirect operating expenses are allocated to storage centers based on number of months in operation during the period and does not include containerized storage operations, internal real estate acquisition costs or abandoned development expenses.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. There are no inter-segment sales and transfers. We do not allocate development and acquisition expense, depreciation and amortization, general, administrative and other, impairment, interest expense, interest income and other, net or minority interest to the segments.

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The following table illustrates the results using the 2005 Same Store and New Store base for reportable segments as of and for the three-month periods ended March 31, 2005 and 2004. Same Store include all storage centers acquired prior to January 1, 2004, and developments opened prior to January 1, 2003. New Store represent all storage centers acquired after January 1, 2004, and developments opened after January 1, 2003. Inactive Store represent properties sold during 2005 and 2004: