Forward-Looking Information May Prove Inaccurate

This report contains statements about the future, sometimes referred to as "forward-looking" statements. Forward-looking statements are typically identified by the use of the words "believe," "may," "could," "should," "expect," "anticipate," "estimate," "project," "propose," "plan," "intend" and similar words and expressions. Statements that describe future strategic plans, goals or objectives of Montgomery are also forward-looking statements. Montgomery intends the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

Readers of this report are cautioned that any forward-looking statements, including those regarding Montgomery or its management's current beliefs, expectations, anticipations, estimations, projections, proposals, plans or intentions are not guarantees of future performance or results of events and involve risks and uncertainties. The forward-looking information is based on present circumstances and on Montgomery's predictions respecting events that have not occurred, that may not occur, or that may occur with different consequences from those now assumed or anticipated. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors. The forward-looking statements included in this report are made only as of the date of this report. Montgomery is not obligated to update such forward-looking statements to reflect subsequent events or circumstances.

The following discussion should be read in conjunction with the financial statements of Montgomery and the notes thereto.

Overview

Montgomery is a real estate company that emphasizes investment in both developmental real estate assets and income-producing real estate assets. Montgomery is engaged in the ownership, leasing, management, operation, development, redevelopment, acquisition and sale of real estate assets in the Greater San Francisco Bay Area. Montgomery currently owns a retail shopping center in Contra Costa County, California, two office buildings in the City and County of San Francisco, California, and an undeveloped parcel of land referred to as the "Eccles Project" in South San Francisco, California, as discussed in more detail in Montgomery's report on Form 10-KSB.

Montgomery's management believes the most significant challenge facing Montgomery is the negative cash flow generated by the Front Street Office Building. Coupled with the anticipated renovation costs of that property, the continued ownership of the Front Street Office Building may have an adverse effect on Montgomery's results of operations until at least such time as the anticipated renovation is completed or a sale of the Front Street Office Building may occur.

Basis of Presentation of Financial Information

Montgomery accounts for its real estate assets using the historical cost method consistent with accounting principles generally accepted in the United States of America. Montgomery acquired the majority of its real estate assets from its principal shareholder, Dinesh Maniar, in a "reverse acquisition" in 1999. The historical cost, as shown on the financial statements, for those assets is Mr. Maniar's original purchase cost, which in most cases is significantly below the estimated current market value. For example, the historical cost of the Eccles Project is $539,500 dating back to 1980. The appraised value of the Eccles Project as of February 2002 was $12,370,000. While the Eccles Project is the most extreme example of such a disparity between historical cost and appraised value, other disparities are identified under Capital Requirements below. For the Front Street Office Building, which was acquired in 2003, the historical cost as shown on the financial statements is the July 2003 purchase price.

Results of Operations

Montgomery had a net loss of $19,279 for the three months ended September 30, 2004, as compared to net income of $517,916 for the same period ended September 30, 2003, a decrease of 103.7%. This significant change is primarily the result of the $537,593 gain reported in the three-month period ended September 30, 2003, when Montgomery sold the San Ramon Retail Center, which was a one-time event. Montgomery's loss for the three-month period ended September 30, 2003, from continuing operations was $22,455, compared to a loss from continuing operations of $29,714 for the three-month period ended September 30, 2004, which represents a 32.3% increase. This change is primarily the result of increases in operating expenses from the acquisition of the Front Street Office Building.

Montgomery's total revenue from continuing operations increased to $226,675 for the three months ended September 30, 2004, as compared to $208,661 for the three months ended September 30, 2003, or 8.6%. This change is primarily the result of increases in base rent from the acquisition of the Front Street Office Building in July 2003.

Total operating expenses from continuing operations increased to $130,055 for the three months ended September 30, 2004, from $119,395 for the same period ended September 30, 2003, or 8.9%. This change is primarily the result of the increase in related operating expenses resulting from the operation of the Front Street Office Building.

Net interest expense from continuing operations increased to $142,336 for the three months ended September 30, 2004, from $120,483 for the three months ended September 30, 2003, or 18.2%. This change is primarily the result of the increase in notes payable due to the increased mortgage debt on the Front Street Office Building and the unsecured loans from Dinesh Maniar.

Montgomery had a net loss of $75,733 for the nine months ended September 30, 2004, as compared to net income of $470,026 for the same period ended September 30, 2003. The sale of the San Ramon Retail Center in the nine-month period ended September 30, 2003, generated income of $537,593. But for the sale of the San Ramon Retail Center, the results of continuing operations for the nine-month period ended September 30, 2003, were a net loss of $69,346, compared to the net loss for the nine-month period ended September 30, 2004, of $94,428, which represents a 36.2% increase. This change is primarily the result of increases in operating expenses from the acquisition of the Front Street Office Building.

Montgomery's total revenue from continuing operations increased to $680,557 for the nine months ended September 30, 2004, from $563,801 for the nine months ended September 30, 2003, or 20.7%. This change is primarily the result of increases in base rent from the operation of the Front Street Office Building.

Total operating expenses from continuing operations increased to $410,199 for the nine months ended September 30, 2004, from $325,648 for the same period ended September 30, 2003, or 26.0%. This change is primarily the result of the increase in real estate taxes and other related operating expenses from the operation of the Front Street Office Building.

Net interest expense from continuing operations increased to $415,633 for the nine months ended September 30, 2004, from $340,619 for the nine months ended September 30, 2003, or 22.0%. This increase is primarily the result of increases in notes payable due to the increased mortgage debt on the Front Street Office Building and the loans from Dinesh Maniar.

Liquidity and Capital Resources

Montgomery has met its requirements for liquidity and capital resources principally from cash provided by operations and through short-term loans from its principal shareholder. Montgomery also obtains liquidity through refinancing its real estate assets to convert the equity into cash, and further realizes the equity of the real estate assets by means of sales and/or tax-free exchanges.

Montgomery's liquidity consists of cash on hand at September 30, 2004, of $37,218.

Operating activities used $73,486 net cash for the nine months ended September 30, 2004, as compared with $87,697 of net cash used by operating activities for the nine-month period ended September 30, 2003. This change is primarily the result of a decrease in development activities for the Front Street Office Building.

Interest and principal payments on Montgomery's various mortgages totaled $914,805 for the nine months ended September 30, 2004, as compared to $863,764 for the same nine-month period in the prior fiscal year.

The maturity date on the second mortgage loan in the amount of $700,000 on the Front Street Office Building, previously extended to June 1, 2004, has now been extended to February 1, 2005. In addition, as of July 19, 2004, the principal amount of the mortgage loan was increased to $900,000.

On September 3, 2004, Montgomery renegotiated the first mortgage loan on the Front Street Office Building to extend the maturity date to February 26, 2005. At September 30, 2004, the loan had a principal balance of $2,800,000.

On September 27, 2004, Montgomery renegotiated the first mortgage loan on the Eccles Project to extend the maturity date to September 15, 2005. The loan had an outstanding balance at September 30, 2004, of $2,246,054.

Investing Activities

Montgomery did not use cash for investing activities for the period ended September 30, 2004, but $742,051 in cash was provided by investing activities for the period ended September 30, 2003. Montgomery's investing activities for the period ended September 30, 2003, involved a net increase in cash from the sale of the San Ramon Retail Center on July 25, 2003, which provided cash of $1,827,051, while cash of $1,085,000 was used to acquire the Front Street Office Building. In addition, renovation activities involving the Front Street Office Building have used a total of $289,646 as of September 30, 2004.

Financing Activities

During the nine months ended September 30, 2004, financing activities provided cash of $85,272, as compared to cash used of $983,003 by financing activities for the nine months ended September 30, 2003. The primary reason for this cash provided from financing activities was unsecured loans in the amount of $150,000 from Montgomery's principal shareholder, Mr. Maniar. The first note for $100,000 was issued on March 31, 2004, bore interest at the rate of 10% per annum, payable monthly, and was due in full by April 1, 2005. That note was paid in full on July 13, 2004. The second note of $50,000 was issued on June 29, 2004, bears interest at the rate of 10% per annum, payable monthly, and is due in full by June 30, 2005. In addition, Montgomery renegotiated its second mortgage loan on the Front Street Office Building increasing the principal amount of $200,000. The cash used in financing activities for the nine months ended September 30, 2003, was primarily due to the repayment of the loan on the San Ramon Retail Center.

Capital Requirements

Although Montgomery does not have net cash flow from its current activities, it believes that its ability to obtain short-term loans from related parties; refinance existing assets to convert equity to cash; and sell or exchange its real estate assets to realize the benefit of its strong equity position, will permit Montgomery to continue to operate on a long-term basis, so as to provide sufficient cash to cover activities, other than new acquisitions or redevelopment activities.

Montgomery's principal methods for obtaining acquisition and development capital come from either additional financing activities, as discussed below, or the sale or exchange of existing real estate assets to realize a cash or trade value from the equity generated by appreciation of real estate assets. Absent additional capital from financing activities or the sale or exchange of real estate assets, Montgomery may not have sufficient cash flow to fund its ongoing operations or expansion, acquisition, or redevelopment activities.

Montgomery anticipates that its principal means of finalizing its redevelopment of the Front Street Office Building will be to obtain a construction loan to cover the redevelopment costs. Any such construction loan will likely require the personal guaranty of Montgomery's principal shareholder, Dinesh Maniar. There can be no assurance that a construction loan will be forthcoming or that, if offered, Mr. Maniar would be willing to personally guarantee the construction loan.

When the capitalized expenses related to the Front Street Office Building and the operating expenses related to the Front Street Office Building are combined, ownership of the Front Street Office Building by Montgomery uses cash each year in the amount of approximately $166,000. Because of this negative cash flow and the subsequent need for the principal shareholder to fund the cash shortfall with loans, management is considering a sale of the Front Street Office Building prior to redevelopment and releasing. Montgomery may make such a sale to its principal shareholder, subject to the approval of the audit committee, or to an independent third party; however, no specific buyer has been identified, no sales efforts have been initiated, and no written offers have been received.

Equity in Real Estate

Based upon independent appraisals performed between September 1998 and July 2003, Montgomery's properties had a combined value of approximately $31,100,000 at September 30, 2004, as compared to the historical cost, net of depreciation of $11,154,077, at which such properties are reported in Montgomery's financial statements as of September 30, 2004. The related indebtedness secured by such properties totaled $15,245,089 as of September 30, 2004, such that Montgomery has equity of approximately $14,404,911 in its real estate assets as of September 30, 2004.

Montgomery's real estate assets are a valuable source of equity and the difference between their historical cost (net) and fair market value is shown as follows (see Footnote 2 to Montgomery's audited financial statements for the year ended December 31, 2003):

Assets:                             Historical Cost (Net)    Fair Market Values
-------                             ---------------------    ------------------

 Keker & Van Nest Building              $ 2,560,753              $ 6,750,000
 Orchard Supply Shopping Center(1)        3,611,463                7,950,000
 Eccles Project                             539,500               12,370,000
 Front Street Office Building             4,442,361                4,030,000
                                        -----------              -----------
          Total                         $11,154,077              $31,100,000
                                        ===========              ===========
----------------

Montgomery believes that diversification is the key to long-term real estate industry viability and success. Therefore, Montgomery plans to continue to diversify its current portfolio with future acquisitions of income-producing real estate and/or real estate with development potential. Montgomery may seek the capital for such growth and diversification through a combination of asset sales or exchanges, refinancing through commercial loan sources, as well as through the sale of debt or equity securities.

Sale of Orchard Supply Shopping Center

On September 8, 2004, Montgomery entered into a binding Purchase and Sale Agreement for the sale of the Orchard Supply Shopping Center with an unrelated third party for a purchase price of $7,950,000. The Orchard Supply Shopping Center has a book value of $3,611,463 as of September 30, 2004, such that Montgomery's gain on the sale would be approximately $4,300,000, less standard prorations and closing costs. The Orchard Supply Shopping Center is encumbered by a first mortgage loan in the amount of $4,763,725 as of September 30, 2004, which the buyer has agreed to assume. Therefore, at the closing,

Montgomery will have cash proceeds of approximately $3,180,000. Montgomery intends to reinvest theses proceeds and may structure the transaction to qualify, in whole or in part, as a tax-free exchange so as to acquire new income-producing property.

The Purchase and Sale Agreement provided for a 30-day due diligence period for the buyer to determine if title was acceptable to him and a 45-day due diligence period for the buyer to determine if the condition of the property was acceptable to him. Buyer waived these contingencies.

The Purchase and Sale Agreement also provides for a 75-day period for the buyer to assume the existing first mortgage loan on the property. To date, the first mortgage lender has forwarded the loan assumption application to buyer, and buyer is in the process of assuming the existing loan. Montgomery and the buyer have extended the date for waiver of this contingency until such time as buyer is actually able to assume the existing first mortgage loan. The loan assumption is an important aspect to the sale transaction. If the buyer is not able to assume the loan and Montgomery instead accepts all cash, Montgomery will be required to prepay the existing loan. A prepayment of the existing $5,100,000 first mortgage loan would cause Montgomery to pay a substantial prepayment penalty of approximately $160,000. Montgomery has extended the waiver date for this contingency because of the financial impact upon Montgomery of a failure of the loan assumption by the buyer.

The closing date for the sale is currently set for December 27, 2004, and Montgomery anticipates that the sale will close on the scheduled closing date.

Lease Status of Real Estate Assets

The Keker & Van Nest lease is due to expire on November 18, 2004. However, on March 9, 2004, the tenant exercised its option to extend the term of the lease for an additional five-year period. The lease requires that Montgomery, the landlord, and the tenant either agree to a "fair market value" rental rate or submit the matter to arbitration in which both Montgomery and the tenant each select an arbitrator with these two arbitrators choosing a third arbitrator. Although Montgomery and the tenant continue to negotiate in an informal manner, each party has selected its own arbitrator. The two arbitrators plan to meet mid-November 2004 to select the third arbitrator. No date has been set for the final arbitration.

Montgomery's counsel has retained the services of a national brokerage firm to compile the raw data on fair market value rental rates in San Francisco, California. Keker & Van Nest is currently paying monthly rent of $59,190 and Montgomery anticipates that the future rental rate will be between $40,000 and $60,000 per month, although no assurances can be given that such rental rates will be received.

The Front Street Office Building, which currently has one tenant, Schroeders' Restaurant, is subject to a lease expiring in 2012, with rights of renewal. Management is currently negotiating with a new tenant to take over the space currently occupied by Schroeders' Restaurant (at a higher lease rate) and Schroeders' has indicated its willingness to sell its lease rights to Montgomery.

The Orchard Supply Shopping Center has as its major tenant Orchard Supply Hardware, a division of Sears Roebuck & Co., and has possession of over 50,000 square feet, or approximately 95% of the leasable space through 2016. The remaining space of the Orchard Supply Shopping Center is leased to three small tenants occupying approximately 4,804 square feet. Although each tenant pays a slightly different rental rate (together with reimbursements for taxes, insurance and common area expenses), the average rent paid by these tenants exceeds $2.00 per square foot. None of the leases is scheduled to terminate in 2004.

The only real estate asset owned by Montgomery that is not income-producing is the Eccles Project, which consists of approximately 7.4 acres of land suitable for sale, development or other disposition.

Operating Agreements with Affiliated Corporations

Montgomery has two separate agreements with a corporation owned by Dinesh Maniar, the majority shareholder of Montgomery. These two agreements are:

(1) a property management agreement executed June 1999 and filed as an exhibit to Montgomery's registration statement on Form 10-SB; and

(2) a Development and Consulting Agreement executed August 2003 and filed as an exhibit to Montgomery's quarterly report on Form 10-QSB for the quarter ended September 30, 2003.

Montgomery's audit committee has reviewed the transactions and believes that they are fair and in the best interests of Montgomery. Montgomery's board of directors has imposed a current moratorium on any increases in the management fees paid by Montgomery to Diversified Investment & Management Corporation, or DIMC, and those fees therefore remain at $10,000 per month until such time as the board of directors of Montgomery may authorize a fee increase. No payments were made from Montgomery to DIMC under the Development and Consulting Agreement during the nine months ended September 30, 2004.

Loans from Shareholders

On July 13, 2004, Montgomery repaid its March 31, 2004, note of $100,000, plus accrued interest of $3,069, to Dinesh Maniar.

On June 29, 2004, Dinesh Maniar made a loan of $50,000 to Montgomery on an unsecured basis. The loan bore interest at the rate of 10% per annum, payable monthly, with all principal and interest due on June 30, 2005. During October 2004, Montgomery repaid the balance of the loan plus interest of $1,392.

On October 21, 2004, Dinesh Maniar, the principal shareholder of Montgomery, made a loan of $40,000 to Montgomery on an unsecured basis. The loan bears interest at the rate of 10% per annum and is payable monthly, with all principal and interest due on October 21, 2005.

Front Street Office Building Renovation

Montgomery is considering renovating the Front Street Office Building property to increase leasable space to approximately 18,000 square feet above ground and another 5,000 square feet of basement space. Montgomery, with the assistance of Diversified Investment & Management Corporation, or DIMC, as its agent, has obtained the initial entitlements and is in the process of filing the plans with the San Francisco Planning Department to obtain building permits. If permits are issued, as Montgomery expects, and Montgomery retains ownership of the property, Montgomery anticipates renovating the top three floors into first-class office space in downtown San Francisco when and if Montgomery is able to obtain the necessary funding.

Montgomery currently estimates that renovation pursuant to the plans to be filed with the City of San Francisco Planning Department would entail a construction cost of approximately $2,000,000. With the assistance of DIMC, Montgomery has begun to look for a construction lender; however, until building permits are actually issued, it is unlikely that a commitment will be obtained by Montgomery. Additionally, given Montgomery's lack of history in real estate

development and the successful record of Montgomery's president, Dinesh Maniar, any construction lender may well require that Mr. Maniar personally guarantee the construction loan. There can be no assurance that a construction loan will be forthcoming or that, if offered, Mr. Maniar would be willing to personally guarantee the construction loan.

Montgomery is also seeking to reacquire certain transferable development rights, or TDRs. TDRs are purchased and sold in San Francisco to erect office buildings in downtown San Francisco in excess of the height restrictions otherwise controlled by San Francisco's master plan. TDRs were commonly purchased and sold in San Francisco in the 1980s, when a great deal of construction was going on, and developers that wished to erect large buildings were forced to acquire TDRs from others, so that the initial development space could be expanded. Owners with no intent to expand often sold their TDRs to good economic advantage. The TDRs associated with the Front Street Office Building were sold prior to Mr. Maniar's acquisition of the property in 2002; however, local counsel has indicated that the TDRs may be recaptured, subject to payment of a fair market price, so that the current building can be expanded, providing even more space for offices and/or other amenities.

The renovated building is pre-leased in part. Schroeders' Restaurant has orally agreed to restructure its leasehold premises to take a remodeled basement that will provide more effective storage space for it, while at the same time leaving the portion of the basement facing the entry and street available for a lease to Diamond Oaks Vineyard as a wine tasting room, at a rent of $72,000 per annum ($44 per square foot) as set forth in the Purchase and Sale Agreement. The prospective new tenant, another affiliate of our majority stockholder Dinesh Maniar, has also agreed to this arrangement. Also, DIMC has agreed to lease the renovated top floor of the Front Street Office Building for $120,000 per annum ($26 per square foot) as set forth in the Purchase and Sale Agreement. The renovation will leave two floors vacant, with each floor having approximately 5,000 square feet of leasable space. Current San Francisco rents vary from a low of $25 per square foot per year to a high of $60 per square foot per year. No assurance can be given such activities will be completed or rents will be achieved.

While Montgomery currently anticipates being able to lease the remaining office space in the Front Street Office Building, consisting of approximately 10,000 square feet, and while it is currently anticipated that the lease rate will be approximately $30 to $40 per square foot per year, such that post-renovation lease income would be increased by $300,000 to $400,000 per annum over and above the Schroeders' lease income and the pre-leased space, no assurance can be given that such additional rents will materialize, nor can any assurance be given as to the length of time required to lease the property, the costs for leasing commissions, or similar matters.

In August 2003, Montgomery entered into a development agreement with DIMC for DIMC to act as Montgomery's agent with respect to obtaining the building and other necessary permits and planning department approvals, obtaining TDRs, assisting in the construction bid process, and supervising and monitoring the construction. DIMC will also offer its services to assist Montgomery in obtaining a construction loan for the renovation and will act as a real estate broker to assist Montgomery in leasing the building once all renovation is underway. Fees for DIMC personnel will range from $75 to $225 per hour. Additionally, Montgomery has paid $14,000 for plans and will incur approximately another $500,000 in soft costs for additional professional services and carrying costs as part of the renovation.

Due to the uncertainty in obtaining financing and the need for the principal shareholder to fund current cash shortfalls, management is also considering a sale of the Front Street Office Building prior to redevelopment and releasing. The Front Street Office Building currently uses cash of approximately $13,000 per month. Montgomery may make such a sale to its principal shareholder, subject to the approval of the audit committee, or to an independent third party; however, no specific buyer has been identified, no sales efforts have been initiated, and no written offers have been received.

Eccles Project

The Eccles Project area consists of approximately 7.4 acres of unimproved land located at Eccles Avenue and Gull Road in South San Francisco, California. This area, known as Oyster Point, is approximately four miles from the downtown central business district of South San Francisco, California.

Management has evaluated three alternatives with respect to the Eccles Project land: (1) development by Montgomery, either alone or through a joint . . .