KILROY REALTY CORP, 10-K, 1997-03-28

KILROY REALTY CORP
10-K, 1997-03-28
REAL ESTATE INVESTMENT TRUSTS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-12675

KILROY REALTY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

MARYLAND 95-4585158
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
OF INCORPORATION OR ORGANIZATION)
2250 EAST IMPERIAL HIGHWAY 90245
EL SEGUNDO, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (213) 772-1193

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.01 par value New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None

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

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

The aggregate market value of the shares of common stock held by non-
affiliates of the registrant was approximately $382,734,375 based on the
closing price on the New York Stock Exchange for such shares on
March 21, 1997.

As of March 21, 1997, 14,475,000 shares of common stock, par value $.01 per
share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

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TABLE OF CONTENTS

<TABLE>
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PAGE
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PART I

<C> <S> <C>
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 7
Item 3. Legal Proceedings.............................................. 23
Item 4. Submission of Matters to a Vote of Security Holders............ 23

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 24
Item 6. Selected Financial Data........................................ 25
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 26
Item 8. Financial Statements and Supplementary Data.................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 30

PART III

Item 10. Directors and Executive Officers of the Registrant............. 31
Item 11. Executive Compensation......................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and Management. 36
Item 13. Certain Relationships and Related Transactions................. 37

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K.............................................................. 39
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PART I

ITEM 1. BUSINESS

GENERAL

Kilroy Realty Corporation (the "Company") was incorporated in September 1996
and commenced operations effective with the completion of its initial public
offering on January 31, 1997. Kilroy Realty Corporation, through (i) its
direct controlling interest in Kilroy Realty, L.P. (the "Operating
Partnership"), (ii) its indirect controlling interest in Kilroy Realty Finance
Partnership, L.P. (the "Finance Partnership") and (iii) its financial interest
in Kilroy Services, Inc. (the "Services Company"), is engaged in the
ownership, acquisition, development, leasing and management of primarily Class
A suburban office and industrial buildings in prime locations, principally in
Southern California. The Company operates as a self-administered and self-
managed real estate company and expects to qualify as a real estate investment
trust ("REIT") for federal and state income tax purposes beginning with the
year ended December 31, 1997. As of December 31, 1996, the Company's portfolio
of properties (including properties owned by the Operating Partnership and the
Finance Partnership) included 14 suburban office buildings (the "Office
Properties") encompassing an aggregate of approximately 2.0 million rentable
square feet, 11 of which are located in Southern California, and 12 industrial
properties (the "Industrial Properties" and, together with the Office
Properties, the "Properties") encompassing an aggregate of approximately 1.3
million rentable square feet, 11 of which are located in Southern California.

The Company's major tenants include, among others, Hughes Electronics
Corporation's Space & Communications Company ("Hughes Space &
Communications"), a tenant since 1984, which is engaged in high-technology
commercial activities including satellite development and related applications
such as DirecTV, and other major tenants such as CompuServe, Inc., Employer's
Health Insurance Co., the Federal Aviation Administration, First Nationwide
Mortgage Corporation, Furon Co., Inc., GTE Directories Sales Corporation,
Great Western Bank, HealthNet, Mattel, Inc., North American Title Company,
Northwest Airlines, Inc., Olympus America, Inc., The Prudential Insurance
Company of America, R.L. Polk & Company, SCAN HealthPlan, Senn-Delaney
Leadership Consulting Group, Inc., Transamerica Financial Services, Inc., 20th
Century Industries and Unihealth. As of December 31, 1996, the Company's ten
largest office tenants and ten largest industrial tenants (based upon annual
base rents as of December 31, 1996) had leased office space from the Company
for an average of six years.

The Company's strategy is to own, develop, acquire, lease and manage Class A
properties in select locations in key suburban submarkets, primarily in
Southern California, that the Company believes have strategic advantages
compared to neighboring submarkets. The Company's Properties that are located
in Los Angeles and Orange Counties are situated in locations which the Company
believes are among the best within key submarkets, offering tenants: (i) lower
business taxes and operating expenses than adjoining submarkets; (ii) access
to highly skilled labor markets; (iii) access to major transportation
facilities such as freeways, airports and the expanded Southern California
light-rail system; (iv) proximity to the Los Angeles-Long Beach port complex,
which presently ranks as the largest commercial port in the United States; and
(v) for tenants with their names on certain Properties, visibility to freeway
and airline travelers.

BACKGROUND AND FORMATION OF THE COMPANY

The Company was formed to continue and expand the real estate business of
Kilroy Industries, a California corporation ("KI"), and certain of its
affiliated corporations, partnerships and trusts (collectively, the "Kilroy
Group"). On January 31, 1997, the Company completed an initial public offering
of 12,500,000 shares of $.01 par value common stock (the "Common Stock"). The
offering price was $23.00 per share resulting in gross proceeds of
$287,500,000. On February 4, 1997, in connection with the offering, the
underwriters exercised an over-allotment option and on February 7, 1997,
pursuant to the terms of such option, the Company issued an additional
1,875,000 shares of Common Stock and received gross proceeds of $43,125,000.
The issuance and sale of the initial 12,500,000 shares of Common Stock and the
additional 1,875,000 shares of Common Stock are collectively referred to as
the "Offering." The aggregate proceeds to the Company of the Offering, net of
underwriters' discount, advisory fees and offering costs, were approximately
$302,500,000.

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BUSINESS AND GROWTH STRATEGIES

As of December 31, 1996, the Company (through its ownership interests in the
Operating Partnership and the Finance Partnership) owned 14 Office Properties
encompassing an aggregate of approximately 2.0 million rentable square feet
and 12 Industrial Properties encompassing an aggregate of approximately 1.3
million rentable square feet. Eleven of the 14 Office Properties and 11 of the
12 Industrial Properties are located in Southern California. As of
December 31, 1996, the Office Properties were approximately 79.6% leased to
130 tenants and the Industrial Properties were approximately 98.3% leased to
21 tenants.

The Company's ten largest office tenants represented approximately 48.4% of
annual base rent for the year ended December 31, 1996 (giving pro forma effect
to the November 1996 extension of a lease with Hughes Space & Communications
with respect to two of the Office Properties), and its ten largest industrial
tenants represented approximately 15.8% of annual base rent for the same
period. Of this amount, its largest tenant, Hughes Space & Communications,
currently leases approximately 522,400 rentable square feet of office space,
representing approximately 25.7% of the Company's total base rent revenues for
the year ended December 31, 1996. The base periods of the Hughes Space &
Communications leases expire beginning in January 1999. The Company's revenues
and cash available for distribution to stockholders would be
disproportionately and materially adversely affected in the event of
bankruptcy or insolvency of, or a downturn in the business of, or the
nonrenewal of leases by, any of its significant tenants, or the renewal of
such leases on terms less favorable to the Company than their current terms.

The Company believes that a number of factors will enable it to achieve its
business objectives, including: (i) the opportunity to lease available space
at attractive rental rates because of increasing demand and, with respect to
the Office Properties, the present lack of new construction in the Southern
California submarkets in which most of the Properties are located; (ii) the
presence of distressed sellers and inadvertent owners (through foreclosure or
otherwise) of office and industrial properties in the Company's submarkets, as
well as the Company's ability to acquire properties with partnership units of
the Operating Partnership ("Units") (thereby deferring the seller's taxable
gain), all of which create enhanced acquisition opportunities; (iii) the
quality and location of the Properties; (iv) the Company's access to
development opportunities as a result of its predecessors' significant
relationships with large Southern California corporate tenants, municipalities
and landowners and its predecessors' nearly 50-year presence in the Southern
California market; and (v) the limited availability to competitors of capital
for financing development, acquisitions or capital improvements. Management
believes that the Company is well positioned to exploit existing opportunities
because of its extensive experience in its submarkets, its seasoned management
team and its proven ability to develop, lease and efficiently manage office
and industrial properties. In addition, the Company believes that public
ownership and its capital structure provide new opportunities for growth.

Operating Strategies. The Company focuses on enhancing growth in cash flow
per share by: (i) maximizing cash flow from existing Properties through active
leasing, contractual base rent increases and effective property management;
(ii) managing operating expenses through the use of in-house management,
leasing, marketing, financing, accounting, legal, construction management and
data processing functions; (iii) maintaining and developing long-term
relationship with a diverse tenant group; (iv) attracting and retaining
motivated employees by providing financial and other incentives to meet the
Company's operating and financial goals; and (v) continuing to emphasize
capital improvements to enhance the Properties' competitive advantages in
their submarkets.

Acquisition Strategies. The Company seeks to increase its cash flow per
share by acquiring additional quality office and industrial properties,
including properties that: (i) may provide attractive initial yields with
significant potential for growth in cash flow from property operations; (ii)
are strategically located, of high quality and competitive in their respective
submarkets; (iii) are located in the Company's existing submarkets and/or in
other strategic submarkets where the demand for office and industrial space
exceeds available supply; or (iv) have been under-managed or are otherwise
capable of improved performance through intensive management and leasing that
will result in increased occupancy and rental revenues. The Company believes
that the Southern California market is an established and mature real estate
market in which property owners

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generally have a low tax basis (and, accordingly, the potential for large
taxable gains) in their properties. Management believes that the Company's
extensive experience, capital structure and ability to acquire properties for
Units, and thereby defer a seller's taxable gain, if any, will enhance the
ability of the Company to consummate transactions quickly and to structure
more competitive acquisitions than other real estate companies in the market
which lack its access to capital or the ability to issue Units.

Development Strategies. The Company's interests in certain of its properties
provide it with significant growth opportunities. The Company is the master
ground lessee of, and has sole development rights in, Kilroy Airport Center
Long Beach, a planned four-phase, approximately 53-acre property entitled for
office, research and development, light industrial and other commercial
projects at which the Company owns all five existing Office Properties and
manages all ongoing leasing and development activities. The Company's
predecessors developed Phases I and II in 1987 and 1989/1990, respectively,
encompassing an aggregate of approximately 620,000 rentable square feet of
office space. The Company controls development of the Phase III and IV parcels
and receives rental revenue in connection with such parcels under current
leases expiring in July 2009 and September 1998, respectively, in amounts
sufficient to cover a substantial portion of the predevelopment carrying
costs. Phases III and IV presently are planned to be developed on the
projects' approximately 24 undeveloped acres and are entitled for an aggregate
of approximately 900,000 rentable square feet. Development of each of Phases
III and IV is subject to substantial predevelopment leasing activity and,
therefore, the timing for the commencement of development of Phases III and IV
is uncertain. No assurance can be given that the Company will commence such
development when planned, or that, if commenced, such development will be
completed.

Financing Policies. The Company's financing policies and objectives are
determined by the Company's Board of Directors. The Company presently intends
to limit the ratio of debt to total market capitalization (total debt of the
Company as a percentage of the market value of issued and outstanding shares
of Common Stock, including interests exchangeable therefor, plus total debt)
to approximately 50%. However, such objectives may be altered without the
consent of the Company's stockholders, and the Company's organizational
documents do not limit the amount of indebtedness that the Company may incur.
Upon completion of the Offering, total debt constituted approximately 19.7% of
the total market capitalization of the Company. In addition, upon completion
of the Offering, the Company had working capital cash reserves of
approximately $117.8 million. The Company intends to utilize one or more
sources of capital for future acquisitions, including development and capital
improvements, which may include undistributed cash flow, borrowings under the
proposed credit facility, the Company's approximately $117.8 million of
working capital cash reserves, the issuance of debt or equity securities and
other bank and/or institutional borrowings. There can be no assurance,
however, that the Company will be able to obtain capital for any such
acquisitions, developments or improvements on terms favorable to the Company.

DISTRIBUTION POLICY

The Company presently intends to make regular quarterly distributions to
holders of its Common Stock at an annualized rate of $1.55 per share. The
schedule of such distributions is to be set by the Board of Directors of the
Company. Units in the Operating Partnership and shares of Common Stock will
receive equal distributions. The Board of Directors may vary the percentage of
cash available for distribution which is distributed if the actual results of
operations, economic conditions or other factors differ from the assumptions
used in the Company's estimates.

GOVERNMENT REGULATIONS

Many laws and governmental regulations are applicable to the Properties and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently.

Costs of Compliance with Americans with Disabilities Act. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all places of public
accommodation, effective beginning in 1992, are required to meet certain
federal requirements related to access and use by disabled persons. Compliance
with the ADA might require removal of structural barriers to handicapped
access in certain public areas where such removal is

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"readily achievable." Noncompliance with the ADA could result in the
imposition of fines or an award of damages to private litigants. The impact of
application of the ADA to the Company's properties, including the extent and
timing of required renovations, is uncertain. If required changes involve a
greater amount of expenditures that the Company currently anticipates, the
Company's ability to make expected distributions to stockholders could be
adversely affected.

Environmental Matters. Under various federal, state and local laws,
ordinances and regulations relating to the protection of the environment, an
owner or operator of real estate may be held liable for the costs of removal
or remediation of certain hazardous or toxic substances located on or in the
property. These laws often impose liability without regard to whether the
owner was responsible for, or even knew of, the presence of such hazardous or
toxic substances. The costs of investigation, removal or remediation of such
substances may be substantial and, the presence of such substances may
adversely affect the owner's ability to rent or sell the property or to borrow
using such property as collateral. In addition, the presence of such
substances may expose it to liability resulting from any release or exposure
of such substances. Persons who arrange for the disposal or treatment of
hazardous or toxic substances at another location may also be liable for the
costs of removal or remediation of such substances at the disposal or
treatment facility, whether or not such facility is owned or operated by such
person. Certain environmental laws impose liability for release of asbestos-
containing materials into the air, and third parties may also seek recovery
from owners or operators of real properties for personal injury associated
with asbestos-containing materials and other hazardous or toxic substances. In
connection with the ownership (direct or indirect), operation, management and
development of real properties, the Company may be considered an owner or
operator of such properties or as having arranged for the disposal or
treatment of hazardous or toxic substances and, therefore, potentially liable
for removal or remediation costs, as well as certain other related costs,
including governmental penalties and injuries to persons and property.

The Company believes that the Properties are in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances or petroleum products. The Company has
not been notified by any governmental authority, and is not otherwise aware,
of any material noncompliance, liability or claim relating to hazardous or
toxic substances or petroleum products in connection with any of its present
properties.

In connection with the Offering, all of the Properties were subject to Phase
I or similar environmental assessments by independent environmental
consultants in connection with the formation of the Company. Phase I
assessments are intended to discover information regarding, and to evaluate
the environmental condition of, the surveyed property and surrounding
properties. Phase I assessments generally include an historical review, a
public records review, an investigation of the surveyed site and surrounding
properties, and preparation and issuance of a written report, but did not
include soil sampling or subsurface investigations. In connection with the
preparation of the Phase I environmental survey with respect to Kilroy Long
Beach Phase I, interviews of certain individuals formerly employed at the site
documented in a historical site assessment survey revealed the site's possible
prior use as a Nike missile storage facility. Further investigation performed
by the Company's environmental consultants and by the Company did not reveal
any additional information with respect to such use of the site. The Company's
investigation included whether the site might have been used previously for
the storage of missiles containing nuclear warheads, and did not reveal any
facts that would indicate that the prior use of the site would result in a
material risk of environmental liability. Consequently, the Company does not
believe that this site constitutes a risk of a liability that would have a
material adverse effect on the Company's financial condition or results of
operations taken as a whole. In connection with the preparation of the Phase I
environmental survey with respect to the Industrial Property located at
12752-12822 Monarch Street, soil sampling revealed trace elements of
contamination with cleaning solvents. However, based on the level of
contamination noted in the environmental survey, management does not believe
that such contamination will have a material adverse effect on the Company's
financial condition or results of operations, taken as a whole. None of the
Company's environmental assessments of the other Properties has revealed any
environmental liability that the Company believes would have a material
adverse effect on the Company's financial condition or results of operations
taken as a whole, nor is the Company aware of any such material environmental
liability.

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Nonetheless, it is possible that the Company's assessments do not reveal all
environmental liabilities or that there are material environmental liabilities
of which the Company is unaware. Moreover, there can be no assurance that (i)
future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Properties will not be affected by tenants, by the condition of land or
operations in the vicinity of the Properties (such as the presence of
underground storage tanks), or by third parties unrelated to the Company. If
compliance with the various laws and regulations, now existing or hereafter
adopted, exceeds the Company's budgets for such items, the Company's ability
to make expected distributions to stockholders could be adversely affected.

EMPLOYEES

As of March 21, 1997, the Company (primarily through the Operating
Partnership and the Services Company) employed approximately 49 persons. The
Company, the Operating Partnership and the Services Company employ
substantially all of the professional employees of the Kilroy Group that were
engaged in asset management and administration. As of March 21, 1997, the
Operating Partnership employed approximately 18 on-site building employees who
provided services for the Properties. The Company, the Operating Partnership
and the Services Company believe that relations with their employees are good.

BUSINESS RISKS

This document contains certain forward-looking statements (as such term is
defined in Section 27A of the Securities Act of 1933, as amended (the "Act"))
pertaining to, among other things, the Company's future results of operations,
cash available for distribution, property acquisitions, lease renewals,
increases in base rent, fee development activities, sources of growth, planned
development and expansion of owned or leased property, capital requirements,
compliance with contractual obligations and general business, industry and
economic conditions applicable to the Company. These statements are based
largely on the Company's current expectations and are subject to a number of
risks and uncertainties. Actual results could differ materially from these
forward-looking statements. Factors that can cause actual results to differ
materially include, but are not limited to, those discussed below. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The following factors should be
considered in addition to the other information contained herein in evaluating
the Company and its business:

. limitations on the Company's ability to withdraw as general partner of
the Operating Partnership, to transfer or assign its interest in the
Operating Partnership without the consent of at least 60% of the Units
and without meeting certain criteria with respect to the consideration
to be received by the limited partners of the Operating Partnership who
were members of the Kilroy Group (the "Continuing Investors"), or to
dissolve the Operating Partnership or sell the Office Property located
at 2260 E. Imperial Highway, El Segundo, California, at Kilroy Airport
Center at El Segundo without the consent of more than 50% of the Units
held by limited partners (excluding Units held by the Company), which
may in each case result in the Company taking action that is not in the
best interest of all stockholders;

. taxation of the Company as a corporation if it fails to qualify as a
REIT for federal income tax purposes, the Company's liability for
certain federal, state and local income taxes in such event and the
resulting decrease in cash available for distribution;

. the inability of the Company to control the operations of the Services
Company, which could result in decisions that do not reflect the
Company's interest because the Company does not control the election of
directors or the selection of officers of the Services Company;

. a portion of the Company's anticipated cash flow may be generated from
development activities, which are partially dependent on the
availability of development opportunities, and are subject to the risks
inherent in development as well as general economic conditions and
limitations on such activities imposed by the requirements to qualify
and maintain status as a REIT, which in turn may negatively impact the
Company's ability to make distributions;

. geographic concentration of 22 of the 26 Properties in Southern
California, creating a dependence on demand for office, industrial and
retail space in such market and increasing the risk that the Company
will be materially adversely affected by general economic conditions in
a single market;

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. the Company's results of operations are dependent on certain key
tenants, particularly Hughes Space & Communications, which accounted for
approximately 25.7% of the Company's total base rental revenues for the
year ending December 31, 1996, thereby increasing the potential negative
impact to the Company of downturns in the business of, or its
relationship with, such tenants. The base periods of the Hughes Space &
Communications' leases expire beginning in January 1999;

. the possibility that acquisitions of office or industrial properties
will fail to be consummated, or that any such acquired properties will
fail to perform in accordance with management's expectations, including
the possibility that estimates of the costs of improvements to bring an
acquired property up to standards established for the market position
intended for that property may prove inaccurate;

. the distribution requirements for REITs under federal income tax laws
may limit the Company's ability to finance future acquisitions,
developments and expansions without additional debt or equity financing
and may limit cash available for distribution;

. real estate investment considerations such as the effect of economic and
other conditions on real estate values, the general lack of liquidity of
investments in real estate, the ability of tenants to pay rents, the
possibility that leases may not be renewed or will be renewed on terms
less favorable to the Company, the possibility of uninsured losses,
including losses associated with earthquakes, the ability of the
Properties to generate sufficient cash flow to meet operating expenses,
including debt service, and competition in seeking properties for
acquisition and in seeking tenants, which, individually or in the
aggregate, may negatively impact the Company's ability to make
distributions;

. risks associated with debt financing, including the potential inability
to refinance mortgage indebtedness upon maturity and the potential
increase in the level of indebtedness incurred by the Company since its
organizational documents do not limit the amount of indebtedness which
the Company may incur, which may adversely affect the ability of the
Company to repay debt, particularly in the event of a downturn in the
Company's business;

. potential antitakeover effects of provisions generally limiting the
actual or constructive ownership by any one person or entity of Common
Stock to 7.0% of the outstanding shares, a classified board of directors
and other charter and statutory provisions and provisions in the
Operating Partnership's partnership agreement that may have the effect
of inhibiting a change of control of the Company or making it more
difficult to effect a change in management or limiting the opportunity
for stockholders to receive a premium over the market price for the
Common Stock;

. dependence on key personnel;

. the Company's cash available for distribution may be less than the
Company expects and may decrease in future periods from expected levels,
materially adversely affecting the Company's ability to make the
expected annual distributions of $1.55 per share during the 12-month
period following consummation of the Offering or to sustain such
distribution rate in the future;

. the Company's historical operating losses for financial reporting
purposes;

. the ability of the Company to incur more debt, thereby increasing its
debt service, which could adversely affect the Company's cash flow;

. the potential liability of the Company for environmental matters and the
costs of compliance with certain governmental regulations, which may
negatively impact the Company's financial condition, results of
operations and cash available for distribution;
. potential adverse effects on the value of the shares of Common Stock of
fluctuations in interest rates or equity markets, which may negatively
impact the price at which shares of Common Stock may be resold and may
limit the Company's ability to raise additional equity to finance future
development; and

. the possible issuance of additional shares of Common Stock, including
2,652,374 shares of Common Stock issuable upon exchange of presently
outstanding Units, which may adversely affect the market price of the
shares of Common Stock or result in dilution on a per share basis of
cash available for distribution.

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ITEM 2. PROPERTIES

GENERAL

The Company (through the Operating Partnership and the Finance Partnership)
owns 14 Office Properties encompassing an aggregate of approximately 2.0
million rentable square feet and 12 Industrial Properties encompassing an
aggregate of approximately 1.3 million rentable square feet. Eleven of the 14
of the Office Properties as well as 11 of the 12 Industrial Properties are
located in Southern California suburban submarkets (including a complex of
three Office Properties located adjacent to the Los Angeles International
Airport, presently the nation's second largest air cargo port, and a complex
of five Office Properties located adjacent to the Long Beach Municipal
Airport). The Company also owns three Office Properties located adjacent to
the Seattle-Tacoma International Airport in the State of Washington, and one
Industrial Property located in Phoenix, Arizona. As of December 31, 1996, the
Office Properties were approximately 79.6% leased to 130 tenants and the
Industrial Properties were approximately 98.3% leased to 21 tenants. The
Company (through its predecessor entities) has developed, managed and leased
all but two of the 14 Office Properties and all but five of the 12 Industrial
Properties. The Company believes that all of its Properties are well-
maintained and, based on recent engineering reports, do not require
significant capital improvements.

In addition to the Office and Industrial Properties, the Company has
development rights with respect to approximately 24 acres of developable land
(net of acreage required for streets), located in Southern California. The
Company also has the option to purchase three office properties and 18 acres
of undeveloped land currently beneficially owned and controlled by John B.
Kilroy, Sr. and John B. Kilroy, Jr. All of these properties are managed by the
Company.

In general, the Office Properties are leased to tenants on a full service
basis, with the landlord obligated to pay the tenant's proportionate share of
taxes, insurance and operating expenses up to the amount incurred during the
tenant's first year of occupancy ("Base Year") or a negotiated amount
approximating the tenant's pro rata share of real estate taxes, insurance and
operating expenses ("Expense Stop"). The tenant pays its pro rata share of
increases in expenses above the Base Year or Expense Stop. All leases for the
Industrial Properties are written on a triple net basis, with tenants paying
their proportionate share of real estate taxes, operating costs and utility
costs.

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THE OFFICE AND INDUSTRIAL PROPERTIES

The following table sets forth certain information relating to each of the
Properties as of December 31, 1996, unless indicated otherwise. This table
gives pro forma effect to (i) the November 1996 extension of one of the leases
with Hughes Space & Communications with respect to two of the Office
Properties located at Kilroy Airport Center at El Segundo as if such lease
renewal had occurred on January 1, 1996 and (ii) acquisition of the Properties
acquired upon consummation of the Offering as if such acquisitions had
occurred on January 1, 1996. The Company (through the Operating Partnership
and the Finance Partnership) owns a 100% interest in all of the Office and
Industrial Properties other than the five Office Properties located at Kilroy
Airport Center Long Beach and the three Office Properties located at the
SeaTac Office Center, each of which are held subject to ground leases expiring
in 2035 and 2064 (assuming the exercise of the Company's options to extend
such lease), respectively.

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<CAPTION>
PERCENTAGE PERCENTAGE EFFECTIVE
NET LEASED AS 1996 1996 OF 1996 AVERAGE BASE RENT
YEAR RENTABLE OF BASE RENT EFFECTIVE TOTAL BASE RENT SQ. FT. PER SQ. FT.
PROPERTY LOCATION BUILT SQUARE FEET 12/31/96 (1) ($000)(2) RENT ($000)(3) RENT ($)(4) ($)(5)
----------------- ----- ----------- ------------ --------- -------------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Office
Properties:
Kilroy Airport
Center at
El Segundo
2250 E. Imperial 1983 291,187 86.5% 4,736 4,467 12.0% 18.81 17.75
Highway(7).....
2260 E. Imperial 1983 291,187 100.0% 7,160 6,545 18.0% 24.59 22.48
Highway(8).....
2240 E. Imperial 1983 118,933 100.0% 1,130 1,121 2.9% 9.50 9.43
Highway
El Segundo,
California(9)...
Kilroy Airport
Center Long
Beach
3900 Kilroy 1987 126,840 94.0% 2,282 2,092 5.8% 19.14 17.55
Airport Way....
3880 Kilroy 1987 98,243 100.0% 1,296 1,022 3.3% 13.19 10.40
Airport Way....
3760 Kilroy 1989 165,278 72.2% 3,805 3,117 9.6% 31.88 26.11
Airport Way....
3780 Kilroy 1989 219,745 93.8% 4,590 3,980 11.5% 22.26 19.31
Airport Way....
3750 Kilroy
Airport Way
Long Beach, 1989 10,457 100.0% 75 28 0.2% 7.21 2.66
California.....
SeaTac Office
Center
18000 Pacific 1974 207,092 60.7% 1,810 1,610 4.6% 14.41 12.81
Highway........
17930 Pacific 1980 210,899 0.0% -- -- 0.0% -- --
Highway........
17900 Pacific
Highway
Seattle, 1980 113,605 87.7% 1,356 1,209 3.4% 13.6 12.12
Washington.....
La Palma
Business Center
4175 E. La Palma
Avenue
Anaheim, 1985 42,790 93.2% 557 536 1.4% 13.97 13.45
California.....
2829 Townsgate
Road
Thousand Oaks, 1990 81,158 100.0% 1,888 1,760 4.8% 23.26 21.69
California.....
185 S. Douglas
Street
El Segundo, 1978 60,000 100.0% 1,313 898 3.3% 21.89 14.96
California(10).
--------- ----- ------ ------ ----
Subtotal/Weighted 2,037,414 79.6% 31,998 28,385 80.8% 19.76 17.53
Average
Industrial
Properties:
2031 E. Mariposa
Avenue
El Segundo, 1954 192,053 100.0% 1,556 1,296 3.9% 8.10 6.75
California......
340 E. La Palma
Avenue
Anaheim, 1966 153,320 100.0% 941 838 2.4% 6.14 5.47
California.....
260 E. El
Segundo
Boulevard
El Segundo, 1979 113,820 100.0% 553 510 1.4% 4.86 4.48
California(11).
265 E. El
Segundo
Boulevard
El Segundo, 1978 76,570 100.0% 554 493 1.4% 7.23 6.44
California.....
1000 E. Ball
Road
Anaheim, 1956 100,000 100.0% 639 519 1.6% 6.39 5.19
California(12).
<CAPTION>
TENANTS LEASING 10% OR MORE
OF NET RENTABLE SQUARE FEET PER
PROPERTY LOCATION PROPERTY AS OF 12/31/96(6)
----------------- -------------------------------
<S> <C>
Office
Properties:
Kilroy Airport
Center at
El Segundo
2250 E. Imperial Hughes Space & Communications (42.5%)
Highway(7).....
2260 E. Imperial Hughes Space & Communications (100%)
Highway(8).....
2240 E. Imperial Hughes Space & Communications (94.6%)
Highway
El Segundo,
California(9)...
Kilroy Airport
Center Long
Beach
3900 Kilroy McDonnell Douglas Corporation (50.9%),
Airport Way.... Olympus America, Inc. (18.6%)
3880 Kilroy Devry, Inc. (100.0%)
Airport Way....
3760 Kilroy R.L. Polk & Co. (9.8%)
Airport Way....
3780 Kilroy SCAN HealthPlan (20.4%),
Airport Way.... Zelda Fay Walls (12.7%)
3750 Kilroy
Airport Way
Long Beach, Oasis Cafe (37.1%),
California..... Keywanfar & Baroukhim (16.1%),
SR Impressions (15.0%)
SeaTac Office
Center
18000 Pacific Principal Mutual (8.8%),
Highway........ Lynden (8.8%),
Rayonier (8.0%)
17930 Pacific --
Highway........
17900 Pacific
Highway
Seattle, Northwest Airlines (24.9%),
Washington..... City of Sea Tac (17.2%)
La Palma
Business Center
4175 E. La Palma
Avenue
Anaheim, Peryam & Kroll (26.7%),
California..... DMV/VPI Insurance Group (26.5%),
Midcom Corporation (15.5%)
2829 Townsgate
Road
Thousand Oaks, Worldcom, Inc. (34.2%),
California..... Data Select Systems, Inc. (13.0%),
Pepperdine University (12.7%),
Anheuser Busch, Inc. (12.0%)
185 S. Douglas
Street
El Segundo, Northwest Airlines, Inc. (100%)
California(10).
Subtotal/Weighted
Average
Industrial
Properties:
2031 E. Mariposa
Avenue
El Segundo, Mattel, Inc. (100%)
California......
340 E. La Palma
Avenue
Anaheim, Furon Co., Inc. (59.2%),
California..... Dovatron (40.8%)
260 E. El
Segundo
Boulevard
El Segundo, Ace Medical Co. (100%)
California(11).
265 E. El
Segundo
Boulevard
El Segundo, MSAS Cargo Intl., Inc. (100%)
California.....
1000 E. Ball
Road
Anaheim, Allen-Bradley Company (100%)
California(12).
</TABLE>
(footnotes on next page)

8
<PAGE>

(2) Total base rent for the year ended December 31, 1996, determined in
accordance with generally accepted accounting principles ("GAAP"). All
leases at the Industrial Properties are written on a triple net basis.
Unless otherwise indicated, all leases at the Office Properties are
written on a full service gross basis, with the landlord obligated to pay
the tenant's proportionate share of taxes, insurance and operating
expenses up to the amount incurred during the tenant's first year of
occupancy ("Base Year") or a negotiated amount approximating the tenant's
pro rata share of real estate taxes, insurance and operating expenses
("Expense Stop"). Each tenant pays its pro rata share of increases in
expenses above the Base Year or Expense Stop.

(3) Aggregate base rent received over their respective terms from all leases
in effect at December 31, 1996 minus all tenant improvements, leasing
commissions and other concessions for all such leases, divided by the
terms in months for such leases, multiplied by 12.

(4) Base rent for the year ended December 31, 1996 divided by net rentable
square feet leased at December 31, 1996.

(5) Effective rent at December 31, 1996 divided by net rentable square feet
leased at December 31, 1996.

(6) Excludes office space leased by the Company.

(7) For this Property, a lease with Hughes Space & Communications, for
approximately 96,000 rentable square feet, and with SDRC Software
Products Marketing Division, Inc., for approximately 6,800 rentable
square feet, are written on a full service gross basis except that there
is no Expense Stop.

(8) For this Property, the lease with Hughes Space & Communications is
written on a modified full service gross basis under which Hughes Space &
Communications pays for all utilities and other internal maintenance
costs with respect to the leased space and, in addition, pays its pro
rata share of real estate taxes, insurance, and certain other expenses
including common area expenses.

(9) For this Property, leases with Hughes Space & Communications for
approximately 101,000 rentable square feet are written on a full service
gross basis except that there is no Expense Stop.

(10) For this Property, the lease is written on a triple net basis.

(11) This Industrial Property was vacant until April 1996. The tenant began
paying rent in mid-October 1996 at an annual rate of $4.40 per rentable
square foot.

(12) The tenant subleased this Industrial Property on May 15, 1996 to RGB
Systems, Inc. (doing business as Extron Electronics), the tenant of the
Property located at 1230 S. Lewis Street, Anaheim, California, which is
adjacent to this Property. The sublease is at an amount less than the
current lease rate, and the tenant is paying the difference between the
current lease rate and the sublease rate. The lease and the sublease
terminate in April 1998. Extron Electronics has executed a lease for this
space from May 1998 through April 2005 at the current lease rate. Extron
Electronics continues to occupy the space located at 1230 S. Lewis
Street.

(13) This Industrial Property was originally designed for multi-tenant use and
currently is leased to a single tenant and utilized as an indoor multi-
vendor retail marketplace.

(14) The leases for this Industrial Property are written on a modified triple
net basis, with the tenants responsible for estimated allocated common
area expenses.

9
<PAGE>

OFFICE PROPERTIES

The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at the Office Properties which
were managed by the Company as of December 31, 1996 (i.e., all of the Office
Properties other than the Office Property located at 2829 Townsgate Road,
Thousand Oaks, California (the "Thousand Oaks Office Property") and the Office
Property located at 4175 E. La Palma Avenue, Anaheim, California (the "La
Palma Business Center Office Property") which were acquired concurrently upon
consummation of the Offering), since January 1, 1992 (based upon an average of
all lease transactions during the respective periods):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Number of lease transactions
during period(l)................. 27 19 36 27 47
Net rentable square feet leased
during period(l)................. 221,946 127,126 354,018 105,544 487,309
Base rent ($)(2).................. 21.41 19.32 18.89 19.31 18.76
Tenant improvements ($)(3)........ 9.04 6.82 15.01 7.30 9.71
Leasing commissions ($)(4)........ 1.37 2.18 2.66 3.03 2.44
Other concessions ($)(5).......... -- -- -- -- --
Effective rent ($)(6)............. 18.65 17.72 16.97 17.30 16.53
Expense Stop ($)(7)............... 6.05 6.15 6.77 6.77 6.02
Effective equivalent triple net
rent ($)(8)...................... 12.43 11.57 10.20 10.53 10.52
Occupancy rate at end of period... 74.8% 76.1% 75.8% 75.6% 78.42%
</TABLE>
- --------
(1) Includes only office tenants with lease terms of 12 months or longer.
Excludes leases for amenity, parking, retail and month-to-month office
tenants.

(2) Equals aggregate base rent received over the respective lease term from
all lease transactions during the period, divided by the total net
rentable square feet leased under all lease transactions during the
period.

(3) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.

(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.

(5) Includes moving expenses, furniture allowances and other concessions.

(6) Equals aggregate base rent received over the respective lease term from
all lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the total net rentable square feet leased
under all lease transactions during the period.

(7) Equals the amount of real estate taxes, operating costs and utility costs
which the landlord is obligated to pay on an annual basis. The tenant is
required to pay any increases above such amount.

(8) Equals effective rent minus Expense Stop.

10
<PAGE>

The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at the Thousand Oaks Office
Property since January 1, 1992 (based upon an average of all lease
transactions during the respective periods):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Number of lease transactions during
period(l)........................... -- 1 1 9 1
Net rentable square feet leased
during period(l).................... -- 1,437 2,745 76,266 2,745
Base rent ($)(2)..................... -- 25.01 23.40 23.09 24.00
Tenant improvements ($)(3)........... -- 16.25 -- 5.04 --
Leasing commissions ($)(4)........... -- -- -- 4.90 --
Other concessions ($)(5)............. -- -- -- -- --
Effective rent ($)(6)................ -- 22.73 23.40 21.42 24.00
Expense Stop ($)(7).................. -- 6.45 6.16 6.49 6.16
Effective equivalent triple net rent
($)(8).............................. -- 16.28 17.24 14.93 17.84
Occupancy rate at end of period(9)... NA NA NA 100.0% 100.0%
</TABLE>
- --------
(1) Includes only office tenants with lease terms of 12 months or longer.
Excludes leases for amenity, parking, retail and month-to-month office
tenants.

(3) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.

(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.

(5) Includes moving expenses, furniture allowances and other concessions.

(7) Equals the amount of real estate taxes, operating costs and utility costs
which the landlord is obligated to pay on an annual basis. The tenant is
required to pay any increases above such amount. Expense Stop for 1996 is
estimated.

(8) Equals effective rent minus Expense Stop.

(9) Occupancy data is not available for the years ended December 31, 1992,
1993 and 1994.

11
<PAGE>

The following table sets forth certain information (on per net rentable
square foot basis) regarding leasing activity at the La Palma Business Center
Office Property since January 1, 1992 (based upon an average of all lease
transactions during the respective periods):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1992 1993 1994 1995 1996
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Number of lease transactions during
period(1)........................... NA -- 1 1 3
Net rentable square feet leased
during period(1).................... NA -- 3,348 2,038 6,008
Base rent ($)(2)..................... NA -- 19.36 16.48 13.64
Tenant improvements ($)(3)........... NA -- -- 9.69 0.61
Leasing commissions ($)(4)........... NA -- -- 2.06 0.00
Other concessions ($)(5)............. NA -- -- -- --
Effective rent ($)(6)................ NA -- 19.36 14.17 13.18
Expense Stop ($)(7).................. NA -- 5.45 5.45 5.45
Effective equivalent triple net rent
($)(8).............................. NA -- 13.91 8.72 7.73
Occupancy rate at end of period(9)... NA NA 92.6% 93.2% 93.2%
</TABLE>
- --------
(1) Includes only office tenants with lease terms of 12 months or longer.
Excludes leases for amenity, parking, retail and month-to-month office
tenants.

(2) Equals aggregate base rent received over the respective lease term from
all lease transactions during the period, divided by the total rentable
square feet leased under all lease transactions during the period.

(3) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.

(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.

(5) Includes moving expenses, furniture allowances and other concessions.

(7) Equals the amount of real estate taxes, operating costs and utility costs
which the landlord is obligated to pay on an annual basis. The tenant is
required to pay any increases above such amount.

(8) Equals effective rent minus Expense Stop.

(9) Occupancy data is not available for the years ended December 31, 1992 and
1993.

Significant Office Properties

2240 E. Imperial Highway, El Segundo. Because the book value of the Office
Property located at 2240 E. Imperial Highway at Kilroy Airport Center at El
Segundo is in excess of 10% of the Company's total assets as of December 31,
1996, additional information regarding this Property is presented below. The
information presented below gives pro forma effect to the November 1996
extension of the tenant lease with Hughes Space & Communications with respect
to this Office Property as if such lease renewal had occurred on January 1,
1996.

The Office Property located at 2240 E. Imperial Highway had an occupancy
rate of 100.0% for each of the years ended December 31, 1992 through 1996. As
of December 31, 1996, Hughes Space & Communications occupied approximately
94.6% of the Property's net rentable square feet under two leases. The current
lease term under this lease expires on January 31, 1999, subject to a five-
year option to renew at fair market value, but not less that $15.84 per annum
per net rentable square foot, on a triple net basis. Hughes Space &
Communications also leases 11,556 rentable square feet (along with the 96,133
rentable square feet located at 2250 E. Imperial Highway) under a second lease
which expires October 31, 2001, at an annualized triple net base rental rate
of $14.04 and, for the first year of the lease term, the tenant's allocable
share of operating costs shall not exceed $7.32 per rentable square foot. The
lease also is subject to a five-year option to renew at fair market value,
adjusted bi-annually for Consumer Price Index ("CPI") adjusted increases in
base rent. The total annual rental income per net rentable square foot for the
years ended December 31, 1992 through December 31, 1996 was $24.42, $25.22,
$17.15, $11.83 and $11.70, respectively.

12
<PAGE>

The following table sets forth for such Property for the ten years beginning
with 1997 (i) the number of tenants whose leases will expire, (ii) the total
net rentable square feet covered by such leases, (iii) the percentage of total
leased net rentable square feet represented by such leases, (iv) the annual
base rent represented by such leases and (v) the average annual rent per net
rentable square foot represented by such leases.

<TABLE>
<CAPTION>
PERCENTAGE OF AVERAGE ANNUAL
TOTAL LEASED RENT PER NET
NET RENTABLE NET RENTABLE RENTABLE
SQUARE FOOTAGE SQUARE FEET ANNUAL BASE SQUARE FOOT
NUMBER OF SUBJECT TO REPRESENTED RENT UNDER REPRESENTED
LEASES EXPIRING BY EXPIRING EXPIRING BY EXPIRING
YEAR OF LEASE EXPIRATION EXPIRING LEASES LEASES LEASES(1) LEASES
- ------------------------ --------- -------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
1997.................... 0 -- -- -- --
1998.................... 0 -- -- -- --
1999.................... 1(2) 100,978 86.4% $1,085,716 $10.75
2000.................... 0 --
2001.................... 2(3) 15,898 13.6 196,670 $12.37
2002.................... 0 -- -- -- --
2003.................... 0 -- -- -- --
2004.................... 0 -- -- -- --
2005.................... 0 -- -- -- --
2006 and beyond......... 0 -- -- -- --
--- ------- ----- ----------
Totals................ 3 116,876(4) 100.0% $1,282,386 $10.97
=== ======= ===== ==========
</TABLE>
- --------
(1) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before December 31, 1996.

(2) The terms of this lease are described in the text preceding this table.

(3) The terms of a lease representing 11,556 rentable square feet are
described in the text preceding this table.

(4) The aggregate square footage reflected in each of the respective leases
differs from the actual aggregate square footage for this Property of
118,933 as shown on the table under the caption "The Office and Industrial
Properties." Subsequent to the execution of the leases, the Property was
remeasured at a larger aggregate number of square feet than is reflected
in the executed leases.

The Company's tax basis in the Property for federal income tax purposes as
of December 31, 1996 was approximately $2.3 million (net of accumulated
depreciation and reductions in depreciable basis), and was fully depreciated.
For the year ended December 31, 1996, the estimated average depreciation rate
for this Property under the modified accelerated cost recovery system was
4.3%. For the 12-month period ending December 31, 1996, the Company was
assessed property taxes on this Property at an effective annual rate of
approximately 1.0%. Property taxes on this Property for the 12-month period
ending December 31, 1996 totaled approximately $128,411. Management does not
believe that any capital improvements made during 1997, if any, should result
in an increase in annual property taxes.

2250 E. Imperial Highway, El Segundo. Because the gross revenues for the
Office Property located at 2250 E. Imperial Highway at Kilroy Airport Center
at El Segundo for the year ended December 31, 1996 were in excess of 10% of
the aggregate gross revenues for all of the Properties, additional information
regarding this Property is presented below. The information presented below
gives pro forma effect to the November 1996 extension of the tenant lease with
Hughes Space & Communications with respect to this Office Property as if such
lease renewal had occurred on January 1, 1996.

The Office Property located at 2250 E. Imperial Highway had an occupancy
rate of 82.5%, 77.8%, 79.8%, 80.9% and 86.45% for each of the years ended
December 31, 1992 through 1996, respectively. As of December 31, 1996, Hughes
Space & Communications occupied 46.0% of the Property's net rentable square
feet. The Property's other tenants include companies engaged in the
communications, technology, transportation and healthcare industries. Hughes
Space & Communications commenced occupancy of 96,133 rentable square

13
<PAGE>

feet on November 1, 1986 and has entered into an agreement to renew this space
(along with the 11,556 square feet located at 2240 E. Imperial Highway)
through October 31, 2001, at a triple net annual base rental rate of $14.04
per square foot and, for the first year of the lease term, the tenant's
allocable share of operating costs shall not exceed $7.32 per rentable square
foot. The lease also is subject to a five-year option to renew at fair market
value, adjusted bi-annually for CPI increases in base rent. The total annual
rental income per net rentable square foot for the years ended December 31,
1992 through December 31, 1996 was $18.73, $19.62, $18.89, $18.86 and $18.74,
respectively. The following table sets forth for such Property for each of the
ten years beginning with 1997 (i) the number of tenants whose leases will
expire, (ii) the total net rentable square feet covered by such leases, (iii)
the percentage of total leased net rentable square feet represented by such
leases, (iv) the annual base rent represented by such leases and (v) the
average annual rent per net rentable square foot represented by such leases.

<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL LEASED AVERAGE ANNUAL
NET RENTABLE RENT PER
NET RENTABLE SQUARE FEET ANNUAL BASE NET RENTABLE
NUMBER OF SQUARE FOOTAGE REPRESENTED RENT UNDER SQUARE FOOT
LEASES SUBJECT TO BY EXPIRING EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRATION EXPIRING EXPIRING LEASES LEASES(1) LEASES(2) EXPIRING LEASES
- ------------------------ --------- --------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
1997.................... 3 4,385 1.64% $ 83,025 $18.93
1998.................... 7 24,530 9.15 493,447 $20.12
1999.................... 6 39,865 14.87 854,336 $21.43
2000.................... 2 18,201 0.79 302,853 $16.64
2001.................... 6 141,173 52.66 2,059,680 $14.59
2002.................... 1 18,517 6.90 456,220 $24.64
2003.................... 0 -- -- -- --
2004.................... 2 21,418 7.99 485,244 $22.66
2005.................... 0 -- -- -- --
2006 and beyond......... 0 -- -- -- --
--- ------- ------ ----------
Totals................ 27 268,089 100.00% $4,734,805 $17.66
=== ======= ====== ==========
</TABLE>
- --------
(1) Excludes all space vacant as of December 31, 1996 unless a lease for a
replacement tenant had been dated on or before December 31, 1996.
(2) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before December 31, 1996. Certain leases became effective subsequent
to December 31, 1996.

The Company's tax basis in the Property for federal income tax purposes as
of December 31, 1996 was approximately $3.5 million (net of accumulated
depreciation and reductions in depreciable basis). The Property is depreciated
using the modified accelerated cost recovery system straight-line method,
based on an estimated useful life ranging from 31 1/2 years to 39 years,
depending upon the date of certain capitalized improvements to the Property.
For the year ended December 31, 1996, the estimated average depreciation rate
for this Property under the modified accelerated cost recovery system was
5.2%. For the 12-month period ending December 31, 1996, the Company was
assessed property taxes on this Property at an effective annual rate of
approximately 1.0%. Property taxes on this Property for the 12-month period
ending December 31, 1996 totaled approximately $237,532. Management does not
believe that any capital improvements made during 1997, if any, should result
in an increase in annual property taxes.

2260 E. Imperial Highway, El Segundo. Because the 1996 gross revenues for
the Office Property located at 2260 E. Imperial Highway at Kilroy Airport
Center at El Segundo were in excess of 10% of the aggregate gross revenues for
all of the Properties for the year ended December 31, 1996, additional
information regarding this Property is presented below.

The Office Property located at 2260 E. Imperial Highway had an occupancy
rate of 100.0% for each of the years ended December 31, 1992 through 1996. As
of December 31, 1996, Hughes Space & Communications

14
<PAGE>

occupied 100.0% of the Property's net rentable square feet. This lease runs
through July 31, 2004 with CPI adjusted increases in base rent every two
years. The next CPI adjustment is scheduled to occur on August 1, 1998 and
provides for an increase in base rent to the extent that such CPI adjustment
exceeds a minimum floor of 1.86% compounded annually. The remaining CPI
adjustments scheduled for August 1, 2000 and August 1, 2002, respectively,
provide for similar increases to the extent that the CPI adjustment exceeds a
minimum floor of 3% compounded annually. The total annual rental income per
net rentable square foot was $26.16, $26.66, $24.59, $24.59 and $25.00 for the
years ended December 31, 1992 through December 31, 1996, respectively. The
following table sets forth for such Property for each of the ten years
beginning with 1997 (i) the number of tenants whose leases will expire, (ii)
the total net rentable square feet covered by such leases, (iii) the
percentage of total leased net rentable square feet represented by such
leases, (iv) the annual base rent represented by such leases and (v) the
average annual rent per net rentable square foot represented by such leases.

<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL LEASED AVERAGE ANNUAL
NET RENTABLE RENT PER
NET RENTABLE SQUARE FEET ANNUAL BASE NET RENTABLE
NUMBER OF SQUARE FOOTAGE REPRESENTED RENT UNDER SQUARE FOOT
LEASES SUBJECT TO BY EXPIRING EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRATION EXPIRING EXPIRING LEASES LEASES LEASES(1) EXPIRING LEASES
- ------------------------ --------- --------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
1997.................... 0 -- -- -- --
1998.................... 0 -- -- -- --
1999.................... 0 -- -- -- --
2000.................... 0 -- -- -- --
2001.................... 0 -- -- -- --
2002.................... 0 -- -- -- --
2003.................... 0 -- -- -- --
2004.................... 1(2) 286,151 100.0% $7,160,207 $25.02
2005.................... 0 -- -- -- --
2006 and beyond......... 0 -- -- -- --
--- ------- ----- ----------
Totals................ 1 286,151(3) 100.0% $7,160,207 $25.02
=== ======= ===== ==========
</TABLE>
- --------
(1) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before December 31, 1996.

(2) The terms of this lease are described in the text preceding this table.

(3) The square footage reflected in the lease differs from the actual square
footage for this Property of 291,187 as shown on the table under the
caption "The Office and Industrial Properties." Subsequent to the
execution of the lease, the Property was remeasured at a larger aggregate
number of square feet than is reflected in the executed lease.

The Company's tax basis in the Property for federal income tax purposes as
of December 31, 1996 was approximately $2.3 million (net of accumulated
depreciation and reductions in depreciable basis), and was fully depreciated
for federal tax purposes. For the 12-month period ending December 31, 1996,
the Company was assessed property taxes on this Property at an effective
annual rate of approximately 1.0%. Property taxes on this Property for the 12-
month period ending December 30, 1996 totaled approximately $273,999.
Management does not believe that any capital improvements made during 1997, if
any, should result in an increase in annual property taxes.

3780 Kilroy Airport Way, Long Beach. Because the book value of the Office
Property located at 3780 Kilroy Airport Way at Kilroy Airport Center Long
Beach is in excess of 10% of the Company's total assets, additional
information regarding this Property is presented below.

The Office Property located at 3780 Kilroy Airport Way had an occupancy rate
of 70.5%, 69.1%, 78.6%, 63.6% and 93.8% for each of the years ended December
31, 1992 through 1996, respectively. As of December 31, 1996, SCAN HealthPlan,
a group health insurer, and Zelda Fay Walls, an operator of executive

15
<PAGE>

office suites, occupied approximately 20.4% and 12.7%, respectively, of the
Property's net rentable square feet. The Property's other tenants include
companies engaged in the insurance, healthcare, finance, high technology, law
and accounting industries. Base rent under the SCAN HealthPlan lease is
$941,325 per year. The lease expires on May 31, 2006, subject to two
successive five-year options to renew. Effective February 1, 1997, annual base
rent under the Zelda Fay Walls lease is $672,000, and the term of the lease
has been extended to 2007, subject to a five-year option to renew. The total
annual rental income per net rentable square foot for the years ended December
31, 1992 through 1996 was $17.53, $19.76, $20.54, $18.55 and $21.12,
respectively. The following table sets forth for such Property for each of the
ten years beginning with 1997 (i) the number of tenants whose leases will
expire, (ii) the total net rentable square feet covered by such leases, (iii)
the percentage of total leased net rentable square feet represented by such
leases, (iv) the annual base rent represented by such leases and (v) the
average annual rent per net rentable square foot represented by such leases.

<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL LEASED AVERAGE ANNUAL
NET RENTABLE ANNUAL RENT PER
NET RENTABLE SQUARE FEET BASE RENT NET RENTABLE
NUMBER OF SQUARE FOOTAGE REPRESENTED UNDER SQUARE FOOT
LEASES SUBJECT TO BY EXPIRING EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRATION EXPIRING EXPIRING LEASES LEASES(1) LEASES(2) EXPIRING LEASES
- ------------------------ --------- --------------- ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
1997.................... 4 22,469 11.23% $ 532,872 $23.72
1998.................... 2 3,439 1.72 79,219 $23.04
1999.................... 2 4,339 2.17 89,709 $20.68
2000.................... 8 76,907 38.44 1,877,678 $24.41
2001.................... 5 28,251 14.12 638,222 $22.59
2002.................... -- -- -- -- --
2003.................... 1 9,439 4.72 209,299 $22.17
2004.................... 1 3,922 1.96 85,656 $21.84
2005.................... -- -- -- -- --
2006 and beyond......... 2 51,290 25.64 1,077,090 $21.00
--- ------- ------ ----------
Totals................ 25 200,056 100.00% $4,589,745 $22.94
=== ======= ====== ==========
</TABLE>
- --------
(1) Excludes all space vacant as of December 31, 1996 unless a lease for a
replacement tenant has been dated on or before December 31, 1996.
(2) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before December 31, 1996. Certain leases became effective subsequent
to December 31, 1996.

The Company's tax basis in the Property for federal income tax purposes was
$10.4 million (net of accumulated depreciation) as of December 31, 1996. The
Property is depreciated using the modified accelerated cost recovery system
straight-line method, based on an estimated useful life ranging from 31 1/2
years to 39 years, depending upon the date of certain capitalized improvements
to the Property. For the year ended December 31, 1996, the estimated average
depreciation rate for this Property under the modified accelerated cost
recovery system was 3.5%. For the 12-month period ending December 31, 1996,
the Company was assessed property taxes on this Property at an effective
annual rate of approximately 1.2%. Property taxes on this Property for the 12-
month period year ending December 30, 1996 totaled $154,202. Management does
not believe that any capital improvements made during 1997, if any, should
result in an increase in annual property taxes.

16
<PAGE>

INDUSTRIAL PROPERTIES

The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at the Industrial Properties
(other than the Industrial Properties at the La Palma Business Center which
were acquired upon consummation of the Offering and the Industrial Property
located at 12752-12822 Monarch Street, Garden Grove, California, which was
acquired by KI on behalf of the Company prior to consummation of the Offering)
since January 1, 1992 (based upon an average of all lease transactions during
the respective periods):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1992 1993 1994 1995 1996
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Number of lease transactions
during period(1)................ 1 1 1 2 1
Net rentable square feet leased
during period(1)................ 100,000 70,000 76,570 171,550 62,574
Base rent ($)(2)................. 6.39 6.81 7.23 4.99 6.36
Tenant improvements ($)(3)....... 5.87 0.14 4.49 2.00 2.56
Leasing commissions ($)(4)....... 1.37 1.49 3.49 1.84 1.63
Other concessions ($)(5)......... -- -- -- -- --
Effective rent ($)(6)............ 5.19 6.48 6.44 4.63 5.52
Expense Stop ($)(7).............. -- -- -- -- --
Effective equivalent triple net
rent ($)(8)..................... 5.19 6.48 6.44 4.63 5.52
Occupancy rate at end of period.. 86.0% 77.6% 79.7% 98.4% 97.6%
</TABLE>
- --------
(1) Includes only industrial tenants with lease terms of 12 months or longer.

(3) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.

(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.

(5) Includes moving expenses, furniture allowances and other concessions.

(7) Leases for all Industrial Properties are written on a triple net basis,
providing for each tenant to be responsible, in addition to base rent, for
its proportionate share of real estate taxes, operating costs, utility
costs and other expenses without regard to a base year.

(8) Equals effective rent minus Expense Stop.

17
<PAGE>

The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at the La Palma Business Center
and Monarch Street Industrial Properties since January 1, 1992 (based upon an
average of all lease transactions during the respective periods):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1992 1993 1994 1995 1996
------ ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Number of lease transactions during
period(1).......................... NA 2 -- 4 5
Net rentable square feet leased
during period(1)................... NA 63,094 -- 229,952 107,381
Base rent ($)(2).................... NA 7.37 -- 3.66 4.72
Tenant improvements ($)(3).......... NA 2.65 -- 0.61 0.75
Leasing commissions ($)(4).......... NA 3.61 -- 0.55 1.25
Other concessions ($)(5)............ NA -- -- -- --
Effective rent ($)(6)............... NA 7.37 -- 3.48 4.34
Expense Stop ($)(7)................. NA -- -- -- --
Effective equivalent triple net rent
($)(8)............................. NA 7.37 -- 3.48 4.34
Occupancy rate at end of period(9).. NA NA 51.2% 78.7% 100.0%
</TABLE>
- --------
(1) Includes only industrial tenants with lease terms of 12 months or longer.

(3) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.

(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.

(5) Includes moving expenses, furniture allowances and other concessions.

(8) Equals effective rent minus Expense Stop.

(9) Occupancy data is not available for the years ended December 31, 1992 and
1993.

18
<PAGE>

TENANT INFORMATION

The Company's tenants include significant corporate and other commercial
enterprises representing a range of industries including, among others,
satellite communications, manufacturing, entertainment, banking, insurance,
telecommunications, health care, computer software, finance, engineering,
technology, legal and accounting. The following table sets forth information
as to the Company's largest tenants based upon annualized rental revenues for
the year ended December 31, 1996:

<TABLE>
<CAPTION>
PERCENTAGE OF
COMPANY'S
TENANT ANNUAL TOTAL BASE LEASE
BASE RENTAL RENTAL INITIAL LEASE EXPIRATION
REVENUES(2) REVENUES DATE(3) DATE
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
OFFICE TENANTS(1):
Hughes Aircraft
Corporation's Space &
Communications
Company(4)............. $10,170,792 25.68% August 1984 January 1999
McDonnell Douglas
Corporation(5)......... 2,041,519 5.15 February 1992 January 2002
Northwest Airlines:
El Segundo............ 1,313,418 3.32 August 1978 February 2001
Seattle............... 622,317 1.57 May 1980 April 2005
Devry, Inc. ............ 1,296,270 3.27 November 1994 October 2009
SCAN HealthPlan(6)...... 941,325 2.38 February 1996 May 2006
Zelda Fay Walls(7)...... 823,896 2.08 August 1989 August 2000
Worldcom, Inc. ......... 674,592 1.70 January 1995 December 1999
The Walls Group......... 456,220 1.16 October 1991 September 2002
Olympus America, Inc. .. 443,375 1.11 September 1993 December 1998
SITA.................... 378,359 0.96 June 1984 May 1999
----------- -----
Total................... $19,162,083 48.38%
=========== =====
INDUSTRIAL TENANTS(1):
Mattel, Inc. ........... $ 1,556,321 3.93% May 1990 October 2000
Festival Markets........ 640,348 1.62 May 1991 May 2001
Allen-Bradley/Rockwell.. 639,432 1.61 May 1992 April 1998
Cannon Equipment........ 592,548 1.50 August 1995 July 2003
MSAS Cargo International
Inc. .................. 553,934 1.40 September 1994 August 2004
Ace Medical............. 553,300 1.40 April 1995 April 2006
Furon, Inc. ............ 543,180 1.37 February 1990 July 2005
Rank Video Services..... 476,358 1.20 October 1984 May 1998
Dovatron................ 397,971 1.00 December 1996 November 2001
Household Finance
Corporation............ 319,199 0.81 June 1993 November 2003
----------- -----
Total................... $ 6,273,591 15.84%
=========== =====
</TABLE>
- --------
(1) Table excludes the lease with Key Bank of Washington (total annual base
rent of $667,587) which expired on December 31, 1996.

(2) Determined in accordance with GAAP.

(3) Represents date of first relationship between tenant and the Kilroy Group.

(4) Includes Hughes Space & Communications leases at Kilroy Airport Center at
El Segundo of (i) 96,133 and 11,556 net rentable square feet which expire
in October 2001, (ii) 286,151 net rentable square feet which expires in
July 2004, (iii) 100,978 net rentable space square feet which expires in
January 1999 and (iv) 9,387, 7,515, 5,158 and 5,559 net rentable square
feet which expires in October 2001, November 2001, October 1999 and
November 1999, respectively.

(footnotes continued on next page)

19
<PAGE>

Tenant annual base rental revenue for Hughes Space & Communications gives pro
forma effect to the November 1996 extension of the tenant lease with
respect to 96,133 rentable square feet of office space located at
2250 E. Imperial Highway (along with 11,556 rentable square feet located at
2240 E. Imperial Highway) as if such lease renewal had occurred on
January 1, 1996.

(5) Includes McDonnell Douglas Corporation leases at Kilroy Airport Center
Long Beach of 64,530 and 47,457 net rentable square feet which expire
January 2002 and December 1999, respectively.

(6) Tenant executed leases during 1995 representing approximately 44,825
square feet effective on February 15, 1996. Base rental revenue figure
included on a contract basis.

(7) The term of this lease was extended to 2007 and, effective February 1,
1997, annual base rent under this lease is currently $672,000.

LEASE EXPIRATIONS

The following table sets out a schedule of the lease expirations for the
Office Properties for each of the ten years beginning with 1997, assuming that
none of the tenants exercises renewal options or termination rights:

<TABLE>
<CAPTION>
AVERAGE ANNUAL
PERCENTAGE RENT PER NET
OF TOTAL LEASED RENTABLE
NET RENTABLE SQUARE FEET ANNUAL BASE SQUARE FOOT
NUMBER OF AREA SUBJECT TO REPRESENTED BY RENT UNDER REPRESENTED BY
EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING
YEAR OF LEASE EXPIRATION LEASES(1) LEASES (SQ. FT.) LEASES(2) LEASES(000)(3) LEASES(4)
- ------------------------ --------- ---------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
1997.................... 16 61,854 3.82% $ 1,226 $19.82
1998.................... 22 87,986 5.43 2,003 $22.75
1999.................... 32 319,256 19.72 5,557 $17.41
2000.................... 26 158,306 9.78 3,438 $21.72
2001(4)................. 25 330,578 20.42 5,697 $17.23
2002.................... 3 95,286 5.88 1,826 $19.17
2003.................... 3 17,574 1.09 346 $19.72
2004.................... 4 311,491 19.24 7,731 $24.82
2005.................... 4 52,983 3.27 1,099 $20.75
2006 and beyond......... 6 183,748 11.35 3,075 $16.73
--- --------- ------ -------
Totals.................. 140 1,619,062 100.00% $31,998 $19.76
=== ========= ====== =======
</TABLE>
- --------
(1) Includes office tenants only. Excludes leases for amenity, retail, parking
and month-to-month office tenants. Some tenants have multiple leases.

(2) Excludes all space vacant as of December 31, 1996 unless a lease for a
replacement tenant had been dated on or before January 1, 1997.

(3) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before January 1, 1997. Certain leases became effective subsequent
to January 1, 1997.

(4) Includes Hughes Space & Communications leases of 96,133 and 11,556 net
rentable square feet at Kilroy Airport Center at El Segundo. These leases
expire in October 2001 and are at a triple net base rental rate of $14.04
per square foot.

20
<PAGE>

The following table sets out a schedule of the lease expirations for the
Industrial Properties for each of the ten years beginning with 1997, assuming
that none of the tenants exercises renewal options or termination rights:

<TABLE>
<CAPTION>
AVERAGE ANNUAL
PERCENTAGE OF RENT PER NET
TOTAL LEASED RENTABLE
NET RENTABLE SQUARE FEET ANNUAL BASE SQUARE FOOT
NUMBER OF AREA SUBJECT TO REPRESENTED RENT UNDER REPRESENTED BY
EXPIRING EXPIRING BY EXPIRING EXPIRING EXPIRING
YEAR OF LEASE EXPIRATION LEASES LEASES (SQ. FT.) LEASES(1) LEASES(000)(2) LEASES
- ------------------------ --------- ---------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
1997.................... 0 -- -- -- --
1998.................... 1 70,000 5.34% $ 476 $6.81
1999.................... 1 22,888 1.75 78 $3.41
2000.................... 3 210,464 16.05 1,670 $7.93
2001.................... 5 252,241 19.24 1,316 $5.22
2002.................... 0 -- -- -- --
2003.................... 4 252,966 19.30 1,204 $4.76
2004.................... 1 76,570 5.84 554 $7.23
2005.................... 3 248,476 18.95 1,486 $5.98
2006 and beyond......... 3 177,311 13.53 831 $4.69
--- --------- ------ ------
Totals................ 21 1,310,916 100.00% $7,615 $5.81
=== ========= ====== ======
</TABLE>
- --------
(1) Excludes all space vacant as of December 31, 1996 unless a lease for a
replacement tenant had been dated on or before January 1, 1997.

(2) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before January 1, 1997.

OCCUPANCY AND RENTAL INFORMATION

The following table sets forth the average percentage leased and average
annual base rent per leased square foot for the Properties for the past four
years:

<TABLE>
<CAPTION>
AVERAGE ANNUAL
AVERAGE BASE RENT
PERCENTAGE PER RENTABLE
YEAR LEASED(1) SQUARE FOOT(2)
---- ---------- --------------
<S> <C> <C>
OFFICE:
1996............................................ 78.3% $20.06
1995............................................ 77.0% $19.42
1994............................................ 70.9%(3) $20.35(3)
1993............................................ 76.1%(3) $21.87(3)
INDUSTRIAL:
1996............................................ 95.3% $ 5.97
1995............................................ 81.5% $ 6.52
1994............................................ 78.7%(3) $ 6.71(3)
1993............................................ 81.8%(3) $ 6.73(3)
</TABLE>
- --------
(1) Average of beginning and end-of-year aggregate percentage leased.

(2) Total base rent for the year, determined in accordance with GAAP, divided
by the average of the beginning and end-of-year aggregate rentable square
feet leased.

(3) Excludes data from the Thousand Oaks Office Property and the La Palma
Business Center which were acquired in connection with the Offering and
the Industrial Property located at 12752-12822 Monarch Street, Garden
Grove, California which was acquired by KI on behalf of the Company prior
to consummation of the Offering.

21
<PAGE>

MORTGAGE INDEBTEDNESS

All of the mortgage indebtedness outstanding as of December 31, 1996 secured
by the Properties was repaid or refinanced by the Company concurrent with the
consummation of the Offering. The following table presents the balances of
mortgage indebtedness secured by Properties of the Kilroy Group owned as of
December 31, 1996. Such mortgages had, at December 31, 1996, a weighted
average interest rate of approximately 8.74% and a weighted average remaining
term to maturity of approximately 3.14 years.

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OUTSTANDING
PROPERTY (IN THOUSANDS)
-------- --------------
............................................................... $ 94,095
<S> <C>
Kilroy Airport Center at El Segundo
2250 E. Imperial Highway
2260 E. Imperial Highway
2240 E. Imperial Highway
El Segundo, California
............................................................... 56,254
Kilroy Airport Center Long Beach
3760 Kilroy Airport Way
3780 Kilroy Airport Way
3750 Kilroy Airport Way
Long Beach, California
............................................................... 20,162
SeaTac Office Center
18000 Pacific Highway
17930 Pacific Highway
17900 Pacific Highway
Seattle, Washington
2031 E. Mariposa Avenue(1)...................................... 12,000
El Segundo, California
2260 E. El Segundo Boulevard
El Segundo, California
2265 E. El Segundo Boulevard
El Segundo, California
185 S. Douglas Street
El Segundo, California
2270 E. El Segundo Boulevard
El Segundo, California
............................................................... 21,525(2)
1000 E. Ball Road(1)
Anaheim, California
1230 S. Lewis Street(1)
Anaheim, California
............................................................... 5,447
12681/12691 Pala Drive.......................................... 3,257
Garden Grove, California
5115 N. 27th Avenue............................................. 3,000
Phoenix, Arizona
3332 E. La Palma Avenue......................................... 7,557
Anaheim, California
--------
$223,297
========
</TABLE>
- --------
(1) This Property was also subject to a second mortgage securing the
indebtedness referenced in note (2) below which was repaid with the net
proceeds of the Offering.

(2) This indebtedness was also secured by a second mortgage on the Properties
located at 1000 E. Ball Road, Anaheim, California, 1230 S. Lewis Street,
Anaheim, California and 2031 E. Mariposa Avenue, El Segundo, California.

Concurrent with the consummation of the Offering on January 31, 1997, the
Company entered into mortgage agreements for an aggregate of $96.0 million of
indebtedness secured by certain of the Company's Properties. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

22
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

Neither the Company nor any of the Properties is subject to any material
litigation nor, to the Company's knowledge, is any material litigation
threatened against any of them, other than routine litigation arising in the
ordinary course of business, which is expected to be covered by liability
insurance.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company was organized in September 1996 and commenced operations on
January 31, 1997. No matters were submitted to a vote of stockholders during
the fourth quarter of the year ended December 31, 1996.

23
<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock began trading on the New York Stock Exchange
("NYSE") on January 28, 1997, under the symbol "KRC." Because the Company's
Common Stock commenced trading on the NYSE on January 28, 1997, no sales
prices for the Company's Common Stock are available for periods prior to that
date. On March 21, 1997, the reported closing sale price on the NYSE was
$26.6250 per share and there were approximately 28 holders of record of Common
Stock.

Concurrently with the consummation of the Offering, the Operating
Partnership issued 2,652,374 Units to the Continuing Investors in
consideration for their contribution to the Operating Partnership of ownership
interests in the Properties. The Continuing Investors may exchange part or all
of their Units for cash, or at the Company's option, shares of Common Stock on
a one-for-one basis. This exchange right may not be exercised prior to January
31, 1999. In connection with the formation of the Company in September 1996,
the Company issued 50 shares of Common Stock to John B. Kilroy, Sr., Chairman
of the Board of Directors, for a cash purchase price of $20.00 per share. Such
issuance was made in reliance upon the exemption from registration available
pursuant to Regulation D under the Act. Such shares were repurchased by the
Company for a cash purchase price of $20.00 per share concurrently with the
consummation of the Offering. There were no other sales of unregistered
securities during the year ended December 31, 1996.

24
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

KILROY GROUP
(IN THOUSANDS, EXCEPT SQUARE FOOTAGE AND OCCUPANCY DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Rental income......... $ 33,269 $ 32,314 $ 31,220 $ 34,329 $ 32,988
Tenant reimbursements. 3,380 3,002 1,643 4,916 5,076
Parking income........ 1,753 1,582 1,357 1,360 1,286
Development and
management fees...... 698 1,156 919 751 882
Sale of air rights.... -- 4,456 -- -- --
Lease termination
fees................. 76 100 300 5,190 48
Other income.......... -- 298 784 188 221
--------- --------- --------- --------- ---------
Total revenues.... 39,176 42,908 36,223 46,644 40,501
--------- --------- --------- --------- ---------
Property expenses..... 6,788 6,834 6,000 6,391 6,384
Real estate taxes
(refunds)............ 1,301 1,416 (448) 2,984 3,781
General and
administrative
expense.............. 2,383 2,152 2,467 1,113 1,115
Ground lease.......... 768 789 913 941 854
Development expenses.. 650 737 468 581 429
Option buy-out cost... 3,150 -- -- -- --
Interest expense...... 21,853 24,159 25,376 25,805 26,293
Depreciation and
amortization......... 9,111 9,474 9,962 10,905 10,325
--------- --------- --------- --------- ---------
Total expenses.... 46,004 45,561 44,738 48,720 49,181
--------- --------- --------- --------- ---------
Income (loss) before
extraordinary item... (6,828) (2,653) (8,515) (2,076) (8,680)
Extinguishment of
debt................. 20,095 15,267 1,847 -- --
--------- --------- --------- --------- ---------
Net income (loss). $ 13,267 $ 12,614 $ (6,668) $ (2,076) $ (8,680)
========= ========= ========= ========= =========
BALANCE SHEET DATA:
Real estate assets,
before accumulated
depreciation and
amortization......... $ 227,337 $ 224,983 $ 223,821 $ 222,056 $ 221,423
Total assets.......... 128,339 132,857 143,251 148,386 161,008
Mortgage and loans.... 223,297 233,857 250,059 248,043 250,792
Total liabilities..... 242,116 254,683 273,585 263,346 263,156
Accumulated deficit... (113,777) (121,826) (130,334) (114,960) (102,148)
OTHER DATA:
Funds from Operations. $ 5,433 $ 2,365 $ 1,447 $ 3,639
Cash flows from:
Operating
activities......... 5,520 10,071 6,607 11,457
Investing
activities......... (2,354) (1,162) (1,765) 2,028
Financing
activities......... (3,166) (8,909) (4,842) (134,858)
Office Properties:
Square footage...... 1,688,383 1,688,383 1,688,383 1,688,383
Occupancy........... 76.0% 72.8% 73.3% 81.0%
Industrial Properties:
Square footage...... 916,570 916,570 916,570 916,570
Occupancy........... 97.6% 98.4% 79.7% 77.6%
</TABLE>

25
<PAGE>

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

The following discussion should be read in conjunction with the "Selected
Financial Data" and the Combined Financial Statements for the Kilroy Group and
notes thereto appearing elsewhere in this report.

RESULTS OF OPERATIONS

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

Total revenues decreased $3.7 million, or 8.7%, for the year ended December
31, 1996 compared to the same period for 1995. Revenues from base rents
increased $1.0 million, or 3.0%, to $33.3 million in 1996 compared to $32.3
million in 1995. Rents from Office Properties increased $0.7 million during
the year ended December 31, 1996 from the comparable period in 1995. Such
increase was due to office space under lease increasing from 1,222,000 net
rentable square feet at December 31, 1995 to 1,284,000 net rentable square
feet at December 31, 1996. The majority of this increase relates to leasing at
Kilroy Airport Center Long Beach. There was no significant change in rent per
net rentable square foot for the year ended 1996 compared to the year ended
1995. Rents from Industrial Properties increased a net $0.3 million during the
year ended December 31, 1996 compared to 1995. The net increase was due to a
lease with a CPI increase and the effect of the 2260 E. El Segundo Boulevard
Building being leased for the entire twelve months ended December 31, 1996.
Tenant reimbursements and parking revenues increased to $3.4 million and $1.8
million, respectively, in 1996 compared to $3.0 million and $1.6 million for
1995. The overall $0.6 million increase is primarily due to increased billable
operating expenses and parking income resulting from new leases. Revenues for
1995 include a gain on the sale of air rights of $4.5 million at Kilroy
Airport Center at El Segundo. See Note 2 to the Combined Financial Statements.

Expenses in the year ended December 31, 1996 increased by $0.4 million, or
1.0%, to $46.0 million compared to $45.6 million in 1995. During the year
ended December 31, 1996, the Company accrued the costs of an option buy-out of
$3.15 million for the cancellation of an option to purchase a 50% equity
interest in Kilroy Airport Center at El Segundo. Interest expense decreased
$2.3 million, or 9.6%, to $21.9 million in 1996 from $24.2 million in 1995,
primarily as a result of the forgiveness and restructuring of certain debt in
1995 and 1996. See Note 4 to the Combined Financial Statements.

Net income was $13.3 million for the year ended December 31, 1996 compared
to $12.6 million for the same period in 1995. The increase of $0.7 million is
due primarily to a decrease in interest expense of $2.3 million, an increase
in extraordinary gains of $4.8 million less the nonrecurring option buy-out
cost of $3.15 million for 1996 and the sale of air rights of $4.5 million in
1995.

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994

Total revenues increased $6.7 million, or 18.5%, for the year ended December
31, 1995 compared to the year ended December 31, 1994. Revenues from base
rents increased $1.1 million, or 3.5%, to $32.3 million in 1995 from $31.2
million in 1994. In 1995, rents from Industrial Properties increased $0.8
million from the year ended December 31, 1994, primarily due to the effect of
12-months' rental for the Property located at 2265 E. El Segundo Boulevard
compared to four-months' rental in 1994. Office square footage and average
rent per net rentable square foot remained relatively unchanged for the year
ended December 31, 1995 compared to the year ended December 31, 1994.
Industrial square footage under lease increased to 902,000 at December 31,
1995 as compared to 730,000 a year earlier. The 2265 E. El Segundo Boulevard
building was leased in April 1995 after being vacant during 1994. The Company
also leased the 1230 S. Lewis Street property in February 1995 at a rate of
$6.11 per net rentable square foot, down from the rate of $6.43 in effect for
the prior year. Tenant reimbursements increased to $3.0 million in 1995 from
$1.6 million in 1994 due principally to the 1994 $1.5 million refund to
tenants for property tax refunds. Parking revenues increased to $1.6 million
in 1995 from $1.4 million in 1994 due to recognition of 12-months' parking
income for Kilroy Airport Center Long Beach in

26
<PAGE>

1995 compared to two months in 1994, together with increased tenant parking
revenues at Kilroy Airport Center at El Segundo. Revenues for 1995 include a
gain on the sale of air rights of $4.5 million referred to above. Other income
decreased $0.5 million to $0.3 million during 1995 compared to 1994, primarily
as a result of nonrecurring interest income of $0.4 million on the property
tax refunds referred to below.

Expenses in 1995 increased $0.8 million, or 1.8%, to $45.6 million. Property
operating expenses increased $0.8 million, or 13.9%, primarily due to
increased utility costs, increases in employee wages and benefits and a $0.3
million management fee paid to K1 to cover costs of the loan renegotiation at
Kilroy Airport Center at El Segundo. Real estate taxes increased $1.9 million,
to $1.4 million in 1995 from a credit balance of $0.4 million in 1994,
primarily due to the $2.4 million property tax refund recorded by the KI in
1994 and the effect of a reduction in aggregate assessed property values in
1995. General and administrative expenses decreased $0.3 million, or 12.0%, to
$2.2 million in 1995 from $2.5 million in the 1994 period, primarily due to a
$0.3 million penalty for late payment of property taxes in 1994. Interest
expense decreased $1.2 million to $24.2 million in 1995 from $25.4 million in
1994 due to the September 1995 extension of the mortgage on Kilroy Airport
Center at El Segundo at a lower interest rate and the forgiveness of certain
debt, offset in part by the effect of higher interest rates on the variable
rate mortgage secured by Kilroy Airport Center Long Beach. See Note 4 to the
Combined Financial Statements. Ground lease expense decreased $0.1 million to
$0.8 million in 1995, reflecting the effect of 12 months' reduction of ground
rent for Phase III of Kilroy Airport Center Long Beach compared to six months
in 1994. The $0.5 million decrease in depreciation and amortization to
$9.5 million in 1995 results from certain assets becoming fully amortized.

Net income increased $19.3 million to $12.6 million in 1995 compared to a
net loss of $6.7 million in 1994, primarily due to the sale of air rights
discussed above and a $13.4 million increase in gains on extinguishment of
debt to $15.3 million in 1995 compared to $1.8 million in 1994.

LIQUIDITY AND CAPITAL RESOURCES

Upon consummation of the Offering and the use of the net proceeds of
approximately $302.5 million therefrom, the Company (i) acquired certain
properties for approximately $58.0 million, (ii) reduced its total
indebtedness by approximately $127.3 million and (iii) established working
capital cash reserves of approximately $117.8 million. The Company is
currently negotiating a $100.0 million credit facility (the "Credit
Facility"). The Credit Facility is expected to be used primarily to finance
acquisitions of additional properties. The availability of funds under the
Credit Facility is expected to be subject to, among other things, the value of
the underlying collateral securing it. The Company expects that, initially, it
will have approximately $50.0 million in availability under the Credit
Facility.

The Company anticipates that distributions will be paid from cash available
for distribution, which is expected to exceed cash historically available for
distribution as a result of the reduction in debt service resulting from the
repayment of indebtedness with the net proceeds of the Offering. The Company
presently intends to make distributions quarterly, subject to the discretion
of the Board of Directors. Amounts accumulated for distribution will be
invested by the Company primarily in interest-bearing accounts and short-term
interest-bearing securities, which are consistent with the Company's intention
to qualify for taxation as a REIT. Such investments may include, for example,
U.S. government obligations, obligations of the Government National Mortgage
Association, other governmental agency securities, certificates of deposit and
interest-bearing bank deposits.

The Company believes the Offering and the application of the proceeds
therefrom have improved its financial performance, principally as a result of
the substantial reduction in its overall debt and its debt-to-equity ratio.
With the net proceeds of the Offering, the Company reduced its overall
mortgage indebtedness by $127.3 million, and has debt outstanding as of the
date of this report of $96.0 million comprised of an $84.0 million mortgage
loan and a $12.0 million mortgage loan. The $84.0 million mortgage loan
requires monthly principal and interest payments based on a fixed rate equal
to the sum of the interest rate for U.S. Treasury Securities maturing eight
years from January 31, 1997 plus 1.75%, amortizes over 25 years and matures in
2022, but is subject to increases in the effective interest rate beginning in
2005, giving the Company incentive to refinance or repay the indebtedness at
that time. However, no assurance can be given that the Company will

27
<PAGE>

be able to repay such indebtedness as of such date, or to refinance such
indebtedness as of such date on terms favorable to the Company. The $12.0
million mortgage loan requires monthly payments of interest computed at a
variable rate equal to the 30-day London interbank overnight rate plus 3.0%
and matures in July 1997. The $127.3 million reduction in mortgage
indebtedness will result in a significant reduction in annual mortgage
interest expense as a percentage of total revenue. The market capitalization
of the Company, based on the initial public offering price of $23.00 per share
and the debt outstanding at the completion of the Offering, is approximately
$489.9 million including total debt of approximately $96.0 million (assuming
the exchange into shares of Common Stock, on a one-for-one basis, of all
2,652,374 Units outstanding upon completion of the Offering). As a result, the
Company's debt to total market capitalization ratio is approximately 19.6%.

The Company was adversely impacted in 1993 and 1994 by the decline in market
rental rates, higher vacancies and its higher leverage which prevented it from
meeting certain of its financial obligations. Bank notes relating to
properties, other than the SeaTac Office Center, aggregating $9.7 million were
in default as of December 31, 1995. Past due interest relating to the notes
was $2.9 million as of December 31, 1995. In addition, property taxes of $0.1
million and $0.5 million were past due as of December 31, 1996 and 1995,
respectively. In June 1996, the Company repaid the principal of the bank notes
relating to such properties, and the applicable accrued interest, and all but
$40,000 of the property taxes, with the proceeds of a financing secured by
certain of the Industrial Properties. With respect to the SeaTac Office
Center, a high vacancy rate in 1993 resulted in insufficient cash flow to
service the underlying debt on this Property. The high vacancy rate has
continued and a note payable to an insurance company having a principal
balance of $21.6 million and accrued interest of $2.4 million, as of December
31, 1996, had been in default since October 1995. In October 1996, the Company
successfully negotiated a discounted payoff with the lender and the ground
lessor which provided for a payoff or purchase of the lender's note at a
discount on or before February 10, 1997 which was repaid with the net proceeds
of the Offering and borrowings under the $12.0 million mortgage loan discussed
above. Bank notes relating to the SeaTac Office Center aggregating $6.8
million were in default as of December 31, 1995. Past due interest relating to
these notes was $2.1 million as of December 31, 1995. In June 1996, the
Company repaid the principal of the bank notes and the applicable accrued
interest relating to the SeaTac Office Center with the proceeds of a financing
secured by certain of the Industrial Properties.

The Company expects to meet its short-term liquidity requirements generally
through its initial working capital, net cash provided by operations and
additional debt or equity financings. The Company estimates that for the year
ending December 31, 1997 it will incur approximately $1.1 million of expenses
attributable to non-incremental revenue generating tenant improvements and
leasing commissions and $310,000 of capital expenditures not reimbursed by
tenants. The Company expects that it will incur tenant improvement and leasing
commission costs in connection with the leasing-up of available space at the
SeaTac Office Center. Based upon current market conditions, the Company
estimates that such tenant improvements will be approximately $15.00 to $20.00
per net rentable square foot and leasing commissions will be approximately
6.0% to 7.0% of total lease payments made during the first four years of the
lease term, and approximately 3.0% to 4.0% of total lease payments thereafter.
As of December 31, 1996, approximately 306,000 net rentable square feet were
available for lease at the SeaTac Office Center. In addition, the Company set
aside approximately $2.7 million of the net proceeds of the Offering for
certain nonrecurring capital expenditures. From such $2.7 million capital
expenditure cash reserves, the Company paid to Hughes Space &
Communications,the remaining balance of approximately $1.4 million in
connection with the amendment and/or extension of leases of office space at
the Office Properties located at Kilroy Airport Center at El Segundo,
including $500,000 in connection with a tenant improvement allowance for the
properties located at 2240 and 2250 E. Imperial Highway and the balance in
connection with the cancellation of an option to purchase an equity interest
in the Office Properties located at Kilroy Airport Center at El Segundo. In
November 1996, $2.26 million of the option buy-out liability was paid by KI
and its stockholders. Also from such $2.7 million capital expenditure cash
reserves, pursuant to its obligations under its mortgage loan agreements, the
Company will make earthquake-related improvements to certain of the Properties
in an aggregate amount of approximately $600,000. The Company presently has no
financial commitments in its capacity as a developer of real estate projects
and believes that it will have sufficient capital resources to satisfy its
obligations and to meet both operating requirements and expected distributions
by the Company in accordance with REIT requirements.

28
<PAGE>

The Company expects to meet certain of its long-term liquidity requirements,
including the repayment of long-term debt of $84.0 million (less scheduled
principal repayments) in 2005, the repayment of debt of $12.0 million in July
1997 and possible property acquisitions and development, through long-term
secured and unsecured borrowings, including the Credit Facility, and the
issuance of debt securities or additional equity securities of the Company or,
possibly in connection with acquisitions of land or improved properties, the
issuance of Units of the Operating Partnership.

The Phase I environmental assessments of the Properties have not revealed
any environmental liability that the Company believes would have a material
adverse effect on the Company's financial condition or results of operations
taken as a whole, nor is the Company aware of any such material environmental
liability. See "Item 1. Business--Government Regulations--Environmental
Matters" and "--Business Risks."

HISTORICAL CASH FLOWS

Historically, the Kilroy Group's principal sources of funding for operations
and capital expenditures were cash flow from operating activities and secured
debt financings. The Kilroy Group incurred net losses before extraordinary
items in each of the last five years. However, after adding back depreciation
and amortization, the Properties have generated positive net operating cash
flows for the last four years.

The Company's net cash from operating activities increased $3.5 million from
the year ended December 31, 1994 compared to the same period in 1995, or from
$6.6 million in 1994 to $10.1 million in 1995. The increase was primarily due
to the sale of air rights in 1995 of $4.5 million. The Company's net cash from
operating activities decreased $4.6 million to $5.5 million during the year
ended December 31, 1996 compared with $10.1 million in 1995. The decrease was
a result of the sale of air rights of $4.5 million in 1995 and the option buy-
out cost of $3.15 million in 1996, offset by an increase in total rental
income of $1.0 million in 1996 and a decrease in interest expense of $2.3
million in 1996.

Net cash used in investing activities decreased $0.6 million to $1.2 million
for the year ended December 31, 1995 from $1.8 million for 1994 due to a
decrease in the number of new lease transactions and the resulting decrease in
the level of tenant improvements. Net cash used in investing activities
increased $1.2 million to $2.4 million in the year ended December 31, 1996
from $1.2 million in 1995 primarily due to an increase in the number of new
lease transactions and the resulting increase in the level of tenant
improvements.

Cash flows used in financing activities increased $4.1 million to $8.9
million for the year ended December 31, 1995 compared to net cash used in
financing activities of $4.8 million for 1994 as result of net repayment of
debt in the 1995 period compared to net borrowings in the 1994 period and a
$4.6 million decrease in deemed distributions to partners. Cash flows used in
financing activities was $3.2 million for the year ended December 31, 1996
consisting of net proceeds from issuance of debt of $2.1 million, less $5.2
million in distributions to partners.

FUNDS FROM OPERATIONS

Industry analysts generally consider Funds from Operations, as defined by
NAREIT, an alternative measure of performance of an equity REIT. Funds from
Operations is defined by NAREIT to mean net income (loss) determined in
accordance with GAAP, excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization (other than amortization
of deferred financing costs and depreciation of non-real estate assets), and
after adjustment for unconsolidated partnerships and joint ventures. The
Company believes that in order to facilitate a clear understanding of the
combined historical operating results of the Company, Funds from Operations
should be examined in conjunction with net income (loss) as presented in the
audited Combined Financial Statements and selected financial data included
elsewhere in this report. The Company computes Funds from Operations in
accordance with standards established by the Board of Governors of NAREIT in
its March 1995 White Paper, which may differ from the methodology for
calculating Funds from Operations utilized by other equity REITs and,
accordingly, may not be comparable to such other REITs. Funds from Operations
should not be considered as an alternative to net income (loss), as an
indication of the Company's performance or to cash flows as a measure of
liquidity or the ability to pay dividends or make distributions.

29
<PAGE>

INFLATION

The Company's leases with the majority of its tenants require the tenants to
pay most operating expenses, including real estate taxes and insurance, and
increases in common area maintenance expenses, which reduce the Company's
exposure to increases in costs and operating expenses resulting from
inflation.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the index included at "Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K."

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

None.

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<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS AND DIRECTORS

The directors and executive officers of the Company are identified below:

<TABLE>
<CAPTION>
NAME AGE POSITION TERM EXPIRES
---- --- -------- ------------
<S> <C> <C> <C>
John B. Kilroy, Sr. .... 74 Chairman of the Board of Directors 1999
John B. Kilroy, Jr. .... 48 President, Chief Executive Officer and Director 2000
Jeffrey C. Hawken....... 38 Executive Vice President and Chief Operating Officer
Richard E. Moran Jr. ... 45 Executive Vice President, Chief Financial Officer and
Secretary
Campbell Hugh Greenup... 43 General Counsel
Tyler H. Rose .......... 36 Senior Vice President and Treasurer
William P. Dickey....... 53 Director 1998
Matthew J. Hart......... 44 Director 1999
Dale F. Kinsella........ 48 Director 2000
</TABLE>

The principal occupations and positions for the past five years and in
certain cases prior years, of the directors and executive officers named above
are as follows:

JOHN B. KILROY, SR., age 74, has served as the Company's Chairman of the
Board of Directors since its incorporation in September 1996, and served in
the same capacity for KI since 1954. In 1947, Mr. Kilroy founded the
businesses which were incorporated in 1952 as the entity today known as KI.
Mr. Kilroy has served as KI's President from its incorporation until 1981. Mr.
Kilroy is a nationally recognized member of the real estate community,
providing the Company with strategic leadership and a broadly-based network of
relationships. Mr. Kilroy is a trustee of the Independent Colleges of Southern
California, serves on the Board of Directors of Pepperdine University, and is
a past trustee of Harvey Mudd College.

JOHN B. KILROY, JR., age 48, has served as the Company's President, Chief
Executive Officer and Director since its incorporation in September 1996.
Prior to joining the Company, Mr. Kilroy served in the same capacity for KI
and was responsible for the overall management of all facets of KI and its
various affiliates since 1981. Mr. Kilroy has been involved in all aspects of
commercial and industrial real estate acquisition, sales, development,
construction, leasing, financing, and entitlement since 1967 and worked for KI
for over 25 years. Mr. Kilroy became President of KI in 1981 and was elected
Chief Executive Officer in 1991. Prior to that time, he held positions as
Executive Vice President and Vice President--Leasing & Marketing. He is a
member of the National Realty Committee and the Urban Land Institute, and is a
trustee of the El Segundo Employers Association, and a past trustee of
Viewpoint School, the Jefferson Center For Character Education and the
National Fitness Foundation.

JEFFREY C. HAWKEN, age 38, has served as the Company's Executive Vice
President and Chief Operating Officer since it commenced operations in January
1997. Prior to that time, Mr. Hawken served in the same capacity for KI and
was responsible for the management and operations of KI's real estate
portfolio. Mr. Hawken's activities included leasing, asset and facility
management, with an emphasis on quality of service, operational cost reduction
and code compliance. He has also served on KI's acquisitions and executive
committees. Mr. Hawken joined KI in 1980, as a Senior Financial Analyst, and
has been involved in property and asset management with the Company since May
1983. Since that time, he attained the designation of Real Property
Administrator (RPA) through the Building Owner's and Manager's Association
(BOMA).

RICHARD E. MORAN JR., age 45, has served as the Company's Executive Vice
President and Chief Financial Officer since December 1996. Prior to that time,
Mr. Moran was Executive Vice President, Chief Financial Officer and Secretary
of Irvine Apartment Communities, Inc. from 1993 to 1996. Mr. Moran was
affiliated with

31
<PAGE>

The Irvine Company from 1977 to 1993. He served as Treasurer of The Irvine
Company from 1983 to 1993, was named Vice President in 1984, Senior Vice
President in 1990, and Executive Vice President, Corporate Finance in 1992.
Previously, he was a certified public accountant with Coopers & Lybrand. He is
a member of the Urban Land Institute. Mr. Moran received his Master of
Business Administration degree from the Harvard University Graduate School of
Business Administration and his undergraduate degree from Boston College.

CAMPBELL HUGH GREENUP, age 43, has served as the Company's General Counsel
since it commenced operations in January 1997. Prior to that time, Mr. Greenup
was employed at KI since 1986 as Assistant General Counsel and had
responsibility for a significant portion of the Company's legal affairs,
including transaction negotiation and documentation. In addition, he was
responsible for all of KI's development activities, including land acquisition
and entitlement, project development, leasing and disposition. In this role,
he was also President of Kilroy Technologies Company, LLC, the Kilroy Group
services entity, and directed all of KI's fee development activities. Mr.
Greenup is a member of the American Bar Association, the Urban Land Institute-
IOPC Gold Committee, the National Association of Corporate Real Estate
Executives and the Los Angeles County Beach Advisory Commission.

TYLER H. ROSE, age 36, was appointed Senior Vice President and Treasurer in
March 1997. Mr. Rose was Senior Vice President, Corporate Finance of Irvine
Apartment Communities, Inc. from March 1995 to March 1997, and was appointed
Treasurer in 1996. Prior to that, Mr. Rose was Vice President, Corporate
Finance of The Irvine Company from January 1994 to March 1995. From 1986 to
1994, Mr. Rose was employed at J.P. Morgan & Co., serving in its Real Estate
Corporate Finance Group until 1992 and as Vice President of its Australia
Mergers and Acquisitions Group from 1992 to 1994. Mr. Rose also served for two
years as a financial analyst for General Electric Company. Mr. Rose holds a
degree of Master of Business Administration from The University of Chicago
Graduate School of Business and a Bachelor of Arts degree in Economics from
the University of California at Berkeley.

WILLIAM P. DICKEY, age 53, has been the president of The Dermot Company,
Inc., a real estate investment and management company, since 1990. From 1986
to 1990, Mr. Dickey was a managing director of real estate for CS First Boston
Corporation. Prior to 1986, Mr. Dickey was a partner at the New York law firm
of Cravath, Swaine & Moore, where he started as an associate beginning in
1974. Mr. Dickey is a member of the board of directors of Horizon Group, Inc.,
a REIT which invests primarily in factory outlet centers, Price Enterprises,
Inc., a REIT which invests primarily in shopping centers, and Mezzanine
Capital Property Investors, Inc., a REIT which invests primarily in the East
Coast office/mixed use space, and is a member of the board of trustees of
Retail Property Trust, a REIT which invests primarily in regional malls. Mr.
Dickey received his undergraduate degree from the United States Air Force
Academy, his Masters Degree from Georgetown University and his Juris Doctor
Degree from Columbia Law School.

MATTHEW J. HART, age 44, joined Hilton Hotels Corporation in 1996 and is its
Executive Vice President and Chief Financial Officer. Mr. Hart is primarily
responsible for Hilton's corporate finance and development activities. Prior
to joining Hilton, Mr. Hart was Senior Vice President and Treasurer of The
Walt Disney Company from 1995 to 1996. From 1981 to 1995, Mr. Hart was
employed by Host Marriott Corporation (formerly known as Marriott
Corporation), most recently as its Executive Vice President and Chief
Financial Officer. He was responsible for the company's corporate and project
financing activities, as well as the corporate control and the corporate tax
functions. Before joining Marriott Corporation, Mr. Hart had been a lending
officer with Bankers Trust Company in New York. Mr. Hart is a member of the
board of directors of First Washington Realty Trust, Inc., a REIT which
invests primarily in retail properties. Mr. Hart received his undergraduate
degree from Vanderbilt University and a Masters of Business Administration
from Columbia University.

DALE F. KINSELLA, age 48. For the past eight years, Mr. Kinsella has been a
partner with the Los Angeles law firm of Kinsella, Boesch, Fujikawa & Towle.
Mr. Kinsella received his undergraduate degree from the University of Santa
Barbara and his Juris Doctor Degree from the University of California at Los
Angeles.

32
<PAGE>

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership (Forms 3, 4 and 5) with the Securities and
Exchange Commission. Officers, directors and greater-than-10% holders are
required to furnish the Company with copies of all such forms which they file.
However, because the Company did not have a class of equity securities
registered under Section 12 of the Securities Exchange Act of 1934, as
amended, during the fiscal year ended December 31, 1996, no reports of
securities ownership and changes in ownership were required for such period.

ITEM 11. EXECUTIVE COMPENSATION

Since the Company had no operating history prior to 1997, meaningful
individual compensation information for executive officers is not available
for prior periods. The compensation table below sets forth the annual base
salary rates and other compensation expected to be paid in 1997 to the Chief
Executive Officer and the Company's other executive officers who are expected
to have a total annual salary and bonus in excess of $100,000. The Company has
entered into employment agreements with each of its executive officers as
described below.

<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
-------------- -----------------------------
RESTRICTED SECURITIES
NAME AND PRINCIPAL STOCK UNDERLYING
POSITION YEAR(1) SALARY BONUS AWARD(S) OPTIONS/SARS(2)
------------------ ------- -------- ----- ---------- ---------------
<S> <C> <C> <C> <C> <C>
John B. Kilroy, Jr. ...... 1997 $200,000 (3) -- 250,000
Director, President and
Chief Executive Officer
Jeffrey C. Hawken......... 1997 175,000 (3) -- 150,000
Executive Vice President
and
Chief Operating Officer
Richard E. Moran Jr. ..... 1997 200,000 (3) $2,299,000(4) 150,000
Executive Vice
President, Chief
Financial Officer and
Secretary
Campbell Hugh Greenup..... 1997 165,000 (3) -- 100,000
General Counsel
Tyler H. Rose............. 1997 160,000 (3) -- 150,000
Senior Vice President
and Treasurer
</TABLE>
- --------
(1) Amounts given are annualized projections for the year ending December 31,
1997.

(2) Options to purchase an aggregate of 895,000 shares of Common Stock have
been granted to directors, executive officers and other employees of the
Company since the consummation of the Offering. Such options will vest pro
rata in annual installments over a three-year-period. An additional
505,000 shares of Common Stock have been reserved for issuance under the
Stock Option and Incentive Plan.

(3) Under the terms of each executive officer's respective employment
agreement, each executive officer is entitled to receive an annual bonus
in an amount up to 100% of such executive officer's base salary. The
amount of any such bonus will be determined by the Executive Compensation
Committee of the Board of Directors. In addition, Mr. Moran was paid a
bonus of $200,000 upon consummation of the Offering. Mr. Moran's bonus was
an obligation of, and was paid by, the principals of KI.

(4) Pursuant to Mr. Moran's employment agreement, concurrent with the
consummation of the Offering he received 100,000 restricted shares of
Common Stock under the Stock Option and Incentive Plan with an aggregate
value at January 28, 1997, the date of issuance, of $2.3 million against
the payment of $1,000 therefor. The restricted stock will vest in equal
annual installments pro rata over a five-year period, subject to certain
acceleration provisions. Mr. Moran will be entitled to receive
distributions in respect of such restricted stock.

33
<PAGE>

EMPLOYMENT AGREEMENTS

Each of John B. Kilroy, Jr., Jeffrey C. Hawken, Richard E. Moran Jr.,
Campbell Hugh Greenup and Tyler H. Rose entered into an employment agreement
with the Company which became effective upon consummation of the Offering or,
in the case of Mr. Rose, the commencement of his employment. The employment
agreements have an initial term of three years and are subject to automatic
one-year extensions following the expiration of the initial term. The
employment agreements provide for annual base compensation in the amounts set
forth in the Executive Compensation table with the amount of any bonus to be
determined by the Executive Compensation Committee of the Board of Directors,
up to 100% of the applicable annual base compensation. Under the terms of his
employment agreement, Mr. Moran was paid a bonus of $200,000 following
completion of the Offering. Mr. Moran's bonus was an obligation of, and was
paid by, the principals of KI.

The employment agreements entitle the executives to participate in the
Company's Stock Option and Incentive Plan (each executive was initially
allocated the number of stock options and/or restricted stock set forth in the
Executive Compensation table) and to receive certain other insurance benefits.
The employment agreements also provide that in the event of death, the
executive's estate will receive monthly payments of the executive's annual
salary, plus one-twelfth of any bonus to be received, for a period equal to
the lesser of the term remaining under the employment agreement or one year.
In addition, in the event of a termination by the Company without "cause," a
termination of employment resulting from "disability," a termination by the
executive for "good reason," or, in the case of Mr. Kilroy and Mr. Moran, a
termination pursuant to a "change of control" of the Company (as such terms
are defined in the respective employment agreements), the terminated executive
will be entitled to (i) severance (the "Severance Amount") and (ii) continued
receipt of certain benefits including medical insurance, life and disability
insurance and the receipt of other customary benefits established by the
Company for its executive employees for two years following the date of
termination (collectively, the "Severance Benefits"). The Severance Amount is
equal to the sum of two times the executive's average annual base compensation
and two times the highest annual bonus received during the preceding 36-month
period. "Disability" means a physical or mental disability or infirmity which,
in the opinion of a physician selected by the Board of Directors, renders the
executive unable to perform his duties for six consecutive months or for
shorter periods aggregating 180 business days in any 12-month period (but only
to the extent that such definition does not violate the Americans with
Disabilities Act). "Cause," as defined under the terms of the respective
employment agreements, means (a) the executive's conviction for commission of
a felony or a crime involving moral turpitude, (b) the executive's willful
commission of any act of theft, embezzlement or misappropriation against the
Company, or (c) the executive's willful and continued failure to substantially
perform the executive's duties (other than such failure resulting from the
executive's incapacity due to physical or mental illness), which is not
remedied within a reasonable time. "Good reason" means (a) the Company's
material breach of any of its obligations under the employment agreement
(subject to certain notice and cure provisions) or (b) any removal of the
executive from one or more of the appointed offices or any material alteration
or diminution in the executive's authority, duties or responsibilities without
"cause" and without the executive's prior written consent. "Change in Control"
means (a) the event by which the individuals constituting the board of
directors as of the date of the Offering cease for any reason to constitute at
least a majority of the Company's board of directors; provided, however, that
if the election, or nomination for election by the Company's stockholders of
any new director was approved by a vote of at least a majority of the members
of the original board of directors, such new director shall be considered a
member of the original board of directors, (b) an acquisition of any voting
securities of the Company by any "person" (as the term "person" is used for
purposed of Section 13(d) or Section 14(d) of the Securities Exchange Act of
1934, as amended) immediately after which such person has "beneficial
ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange
Act) of 20% or more of the combined voting power of the Company's then
outstanding voting securities unless such acquisition was approved by a vote
of at least one more than a majority of the original board of directors, or
(c) approval by the stockholders of the Company or (i) a merger,
consolidation, share exchange or reorganization involving the Company, unless
the stockholders of the Company, immediately before such merger,
consolidation, share exchange or reorganization, own, directly or indirectly
immediately following such merger, consolidation, share exchange or
reorganization, at least 80% of the combined voting power of the outstanding
voting securities of the corporation that is the successor in such merger,
consolidation, share exchange or reorganization in

34
<PAGE>

substantially the same proportion as their ownership of the voting securities
immediately before such merger, consolidation, share exchange or
reorganization; (ii) a complete liquidation or dissolution of the Company; or
(iii) an agreement for the sale or other disposition of all or substantially
all of the assets of the Company.

DIRECTORS

The Company currently pays its Independent Directors (as herein defined) an
annual compensation of $12,000 for their services. In addition, Independent
Directors receive $1,000 for each committee meeting chaired by such director.
An "Independent Director" is a director who is not an employee, officer or
affiliate of the Company or a subsidiary or a division thereof, or a relative
of a principal executive officer, or who is not an individual member of an
organization acting as advisor, consultant or legal counsel, receiving
compensation on a continuing basis from the Company in addition to director's
fees. Independent Directors also are reimbursed for reasonable expenses
incurred to attend director and committee meetings. Officers of the Company
who are directors will not be paid any director's fees. Each Independent
Director receives, upon initial election to the Board of Directors, an option
to purchase 10,000 shares of Common Stock which vests pro rata in annual
installments over a three-year period. In addition, upon consummation of the
Offering, John B. Kilroy, Sr., who is not an Independent Director, received an
option to purchase 15,000 shares of Common Stock which vests over a three-year
period. Each Independent Director also receives an option to purchase 1,000
shares of Common Stock on each anniversary of his election to the Board of
Directors, which options also vests pro rata in annual installments over a
three-year period. All stock options are issued pursuant to the Stock Option
and Incentive Plan at an exercise price equal to or greater than the fair
market value of the Common Stock at the date of grant.

REPORT ON EXECUTIVE COMPENSATION

General. The Company's executive compensation program will be administered
by the Executive Compensation Committee of the Board of Directors (the
"Committee") which will consist solely of independent non-employee directors
of the Company. Compensation for executives for 1997 was determined through
discussions among the entire Board of Directors of the Company. In the future,
it is the intention of the Board of Directors that the Committee shall accept
recommendations regarding executive compensation from the Chief Executive
Officer and independently make determinations in accordance with the
philosophy outlined in this report.

Compensation Philosophy. The Company's executive compensation program is
designed to (i) attract and retain qualified executives and to reward them for
superior performance in achieving the Company's business goals and enhancing
stockholder value and (ii) provide incentives for creation of long-term
stockholder value and align management's interests with those of the
stockholders. The key elements of executive compensation are base salary,
annual performance bonus and stock options. The Committee reviews and approves
policies and practices relating to executive compensation including (i) base
salary levels, (ii) incentive compensation plans and related performance
objectives and awards and (iii) long-term incentives, principally stock option
awards.

Base Salaries. Base salaries for executive officers are set at levels which
reflect base salaries for positions of similar responsibility at other public
companies and also take into account the unique talents and skills which may
be required in particular positions. Base salaries are adjusted annually to
account for such factors as individual past performance, changes in
responsibilities, changes in competitive pay levels and inflation. In
addition, the Committee will from time-to-time, as it deems appropriate, refer
to outside survey data. Aspects of the compensation payable to certain
executive officers of the Company are also governed by employment contracts
with such persons.

Long-Term Incentives. The Company uses stock option grants to provide
additional incentives for creation of, and increase in, long-term stockholder
value and to link management and stockholder interests.

The Board and/or the Committee administers the Company's Stock Option and
Incentive Plan and is responsible for determining, among other things,
eligibility to participate, the terms of the options and the number

35
<PAGE>

of shares subject to option grants. Option grants to executives are based
primarily on the assessment by the Board and/or the Committee of the
contribution by each executive to the Company's success, as well as such
executive's prospects for the future and value to the Company, and also take
into account the amount of options or stock already owned by the executive.

Upon consummation of the Offering, the Company issued to certain officers,
directors and key employees of the Company, the Operating Partnership and the
Services Company options to purchase 900,000 shares of Common Stock pursuant
to the Stock Option and Incentive Plan. An additional 500,000 shares of Common
Stock have been reserved for issuance under the Stock Option and Incentive
Plan. The term of each of such option is ten years from the date of grant.
Each such option vests 33 1/3% per year over three years and is exercisable at
a price per share equal to the fair market value per share of Common Stock at
the time of issuance. The table below sets forth the allocation of the options
that had been issued as of March 21, 1997.

<TABLE>
<CAPTION>
NAME OPTIONS
---- -------
<S> <C>
John B. Kilroy, Sr. ............................................... 15,000
John B. Kilroy, Jr. ............................................... 250,000
Jeffrey C. Hawken.................................................. 150,000
Richard E. Moran Jr. .............................................. 150,000
Campbell Hugh Greenup.............................................. 100,000
Tyler H. Rose...................................................... 150,000
Independent Directors (as a group)................................. 30,000
Other Employees.................................................... 50,000
</TABLE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the beneficial ownership of shares of Common
Stock as of March 21, 1997 for (i) each person who was the beneficial owner of
5% or more of the outstanding Common Stock, (ii) directors and executive
officers of the Company and (iii) directors and executive officers of the
Company as a group. Except for the shares of Common Stock owned by Mr. Moran,
the shares owned by Mr. Dickey and Mr. Hart and 600 shares of Common Stock
owned by Mr. Kilroy, Jr., none of the persons or entities listed below
currently owns any shares of Common Stock, but rather owns Units exchangeable
for shares of Common Stock.

<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
SHARES OF
NUMBER OF SHARES COMMON STOCK
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) (1)(2)
------------------------ --------------------- -------------
<S> <C> <C>
John B. Kilroy, Sr. .................... 1,253,926(3) 8.22%
John B. Kilroy, Jr. .................... 1,253,926(3) 8.22%
Jeffrey C. Hawken....................... -- --
Richard E. Moran Jr. ................... 100,000(4) 0.66%
Campbell Hugh Greenup................... -- --
Tyler H. Rose........................... -- --
William P. Dickey....................... 2,000(5) 0.01%
Matthew J. Hart......................... 5,000(5) 0.03%
Dale F. Kinsella........................ -- --
All directors and executive officers as
a group (9 persons).................... 2,614,852 17.14%
</TABLE>
- --------
(1) Includes the Units beneficially owned by KI which are allocated to John B.
Kilroy, Sr. and John B. Kilroy, Jr., the only shareholders of KI, in
accordance with their respective percentage ownership of KI. Excludes
options to purchase 845,000 shares of Common Stock which were granted to
executive officers and directors at the consummation of the Offering.

(2) Assuming exchange of the 2,652,374 Units outstanding as of March 21, 1997.

(3) One-half of these Units have been pledged to secure certain
indemnification obligations to the Company arising in connection with the
formation of the Company.

36
<PAGE>

(4) Represents 100,000 restricted shares of Common Stock granted under the
Stock Option and Incentive Plan to Richard E. Moran Jr. pursuant to the
terms of his employment agreement, which shares vest in five equal annual
installments over a five-year period.

(5) Represents shares purchased by the director in the Offering at the
offering price.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The members of the Kilroy Group, including John B. Kilroy, Sr. and John B.
Kilroy, Jr., the Company's Chairman of the Board of Directors and its
President and Chief Executive Officer, respectively, have direct or indirect
interests in transactions which have been consummated by the Company, the
Operating Partnership or the Services Company in connection with the Offering,
including the transfer of certain properties to the Operating Partnership by
the Continuing Investors, the grant of options with respect to certain other
properties from the respective members of the Kilroy Group, the repayment of
certain indebtedness encumbering the Properties and the performance of
management and leasing activities by the Operating Partnership and certain
development and other activities by the Services Company at such certain other
properties. In addition, John B. Kilroy, Sr. contributed $1,000 to the Company
in exchange for an aggregate of 50 shares of Common Stock, which shares were
subsequently repurchased by the Company, and upon consummation of the
Offering, John B. Kilroy, Sr. and John B. Kilroy, Jr. each contributed cash to
the Services Company in exchange for shares of the Services Company, which in
the aggregate represents a 5.0% economic interest in the Services Company. See
the Combined Financial Statements and the notes thereto contained elsewhere in
this report.

PARTNERSHIP AGREEMENT

Concurrently with the completion of the Offering, the Company entered into
the partnership agreement of the Operating Partnership with various limited
partners of the Operating Partnership. John B. Kilroy, Sr. and John B. Kilroy,
Jr., who are limited partners of the Operating Partnership, are directors
and/or officers of the Company.

ASSIGNMENT OF LEASE; VARIOUS SERVICES PROVIDED BY THE SERVICES COMPANY TO THE
KILROY GROUP

In connection with the Offering, KI assigned to the Operating Partnership
all of its interest as a tenant in a lease with a partnership affiliated with
the other members of the Kilroy Group covering the space that was serving as
the headquarters of KI at Kilroy Airport Center at El Segundo. The Company,
the Operating Partnership and the Services Company occupy such space, with the
Company and the Services Company subleasing some of such space from the
Operating Partnership and paying rent to the Operating Partnership therefor,
at rates which the Company believes are equal to the fair rental value of the
space.

Pursuant to management agreements, the Operating Partnership is providing
management and leasing services, and the Services Company is providing
development services, with respect to certain properties, each of which is
beneficially owned and controlled by John B. Kilroy, Sr. and John B. Kilroy,
Jr., for fees equivalent to the fair market value of such services.

OPTIONS TO PURCHASE CERTAIN PROPERTIES

In connection with the formation of the Company, the Company entered into
certain option agreements with partnerships controlled by John B. Kilroy, Sr.
and John B. Kilroy, Jr., the Company's Chairman of the Board of Directors, and
President, Chief Executive Officer and Director, respectively, granting to the
Operating Partnership options to acquire (i) parcels comprising an aggregate
of approximately 18 acres located at Calabasas Park Centre, in Calabasas,
California and (ii) a three-building office complex located on North Sepulveda
Boulevard in El Segundo, California at the respective purchase price for each
of the properties as discussed below. The option for Calabasas Park Centre is
exercisable on or before January 31, 1998. The option for the office complex
located on North Sepulveda Boulevard in El Segundo is exercisable on or before
January 31, 2004. The purchase price for each of the properties will be
payable in cash, provided, however, that if the option for the office complex
in El Segundo is exercised after January 31, 1998, the purchase price will be
payable in cash or Units at the election of the seller.

37
<PAGE>

Pursuant to the terms of the applicable option agreement, the purchase price
for the parcels located at Calabasas Park Centre will be equal to the lower of
(i) a third party offer or (ii) the total accumulated costs, as of the date
such option is exercised, in connection with the acquisition of rights with
respect to, and the entitlement and development of such property, including,
without limitation, property taxes, predevelopment and entitlement costs and
fees, and related bond financing costs.

Pursuant to the terms of the applicable option agreement, the purchase price
for the North Sepulveda Boulevard properties is equal to the lower of (i) a
third party offer or (ii) the sum of (1) the then outstanding mortgage
indebtedness secured by the respective properties, plus (2) $1, plus (3) the
aggregate amount of capital contributed by the beneficial owners of the
property, net of actual cash distributions distributed in respect of such
beneficial owners, during the period beginning on January 31, 1997 and ending
on the date of exercise of the option, plus (4) an annualized return of 8.0%
on the amount in excess of $5.0 million, if any, as determined pursuant to
clause (3) preceding.

38
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) and (2) Financial Statements and Schedules

The following consolidated financial information is included as a separate
section of this annual report on Form 10-K:

<TABLE>
<S> <C>
Independent Auditors' Report........................................... F-2
Combined Balance Sheets as of December 31, 1996 and 1995............... F-3
Combined Statements of Operations for the Three Years Ended December
31, 1996.............................................................. F-4
Combined Statements of Accumulated Deficit for the Three Years Ended
December 31, 1996..................................................... F-5
Combined Statements of Cash Flows for the Three Years Ended December
31, 1996.............................................................. F-6
Notes to Combined Financial Statements................................. F-7
Schedule of Valuation and Qualifying Accounts.......................... F-20
</TABLE>

All other schedules are omitted since the required information is not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the financial statements and notes
thereto.

(3) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1* Articles of Amendment and Restatement of the Registrant.
3.2* Amended and Restated Bylaws of the Registrant.
3.3* Form of Certificate for Common Stock of the Registrant.
10.1* Amended and Restated Agreement of Limited Partnership of Kilroy
Realty, L.P.
10.2* Form of Registration Rights Agreement among the Registrant and the
persons named therein.
10.3* Omnibus Agreement, dated as of October 30, 1996, by and among Kilroy
Realty, L.P. and the parties named therein.
10.4* Supplemental Representations, Warranties and Indemnity Agreement by
and among Kilroy Realty, L.P. and the parties named therein.
10.5* Pledge Agreement by and among Kilroy Realty, L.P., John B. Kilroy,
Sr., John B. Kilroy, Jr. and Kilroy Industries.
10.6* 1997 Stock Option and Incentive Plan of the Registrant and Kilroy
Realty, L.P.
10.7* Form of Indemnity Agreement of the Registrant and Kilroy Realty, L.P.
with certain officers and directors.
10.8* Lease Agreement, dated January 24, 1989, by and between Kilroy Long
Beach Associates and the City of Long Beach for Kilroy Long Beach
Phase I.
10.9* First Amendment to Lease Agreement, dated December 28, 1990, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase I.
10.10* Lease Agreement, dated July 17, 1985, by and between Kilroy Long Beach
Associates and the City of Long Beach for Kilroy Long Beach Phase
III.
</TABLE>

39
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.11* Lease Agreement, dated April 21, 1988, by and between Kilroy Long
Beach Associates and the Board of Water Commissioners of the City of
Long Beach, acting for and on behalf of the City of Long Beach, for
Long Beach Phase IV.
10.12* Lease Agreement, dated December 30, 1988, by and between Kilroy Long
Beach Associates and City of Long Beach for Kilroy Long Beach Phase
II.
10.13* First Amendment to Lease, dated January 24, 1989, by and between
Kilroy Long Beach Associates and the City of Long Beach for Kilroy
Long Beach Phase III.
10.14* Second Amendment to Lease Agreement, dated December 28, 1990, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase III.
10.15* First Amendment to Lease Agreement, dated December 28, 1990, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase II.
10.16* Third Amendment to Lease Agreement, dated October 10, 1994, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase III.
10.17* Development Agreement by and between Kilroy Long Beach Associates and
the City of Long Beach.
10.18* Amendment No. 1 to Development Agreement by and between Kilroy Long
Beach Associates and the City of Long Beach.
10.19* Ground Lease by and between Frederick Boysen and Ted Boysen and Kilroy
Industries, dated May 15, 1969, for SeaTac Office Center.
10.20* Amendment No. 1 to Ground Lease and Grant of Easement, dated April 27,
1973, among Frederick Boysen and Dorothy Boysen, Ted Boysen and Rose
Boysen and Sea/Tac Properties.
10.21* Amendment No. 2 to Ground Lease and Grant of Easement, dated May 17,
1977, among Frederick Boysen and Dorothy Boysen, Ted Boysen and Rose
Boysen and Sea/Tac Properties.
10.22* Airspace Lease, dated July 10, 1980, by and among the Washington State
Department of Transportation, as lessor, and Sea Tac Properties, Ltd.
and Kilroy Industries, as lessee.
10.23* Lease, dated April 1, 1980, by and among Bow Lake, Inc., as lessor,
and Kilroy Industries and SeaTac Properties, Ltd., as lessees for
Sea/Tac Office Center.
10.24* Amendment No. 1 to Ground Lease, dated September 17, 1990, between Bow
Lake, Inc., as lessor, and Kilroy Industries and Sea/Tac Properties,
Ltd., as lessee.
10.25* Amendment No. 2 to Ground Lease, dated March 21, 1991, between Bow
Lake, Inc., as lessor, and Kilroy Industries and Sea/Tac Properties,
Ltd., as lessee.
10.26* Property Management Agreement between Kilroy Realty Finance
Partnership, L.P. and Kilroy Realty, L.P.
10.27* Form of Environmental Indemnity Agreement.
10.28* Option Agreement by and between Kilroy Realty, L.P. and Kilroy Airport
Imperial Co.
10.29* Option Agreement by and between Kilroy Realty, L.P. and Kilroy
Calabasas Associates.
10.30* Employment Agreement between the Registrant and John B. Kilroy, Jr.
10.31* Employment Agreement between the Registrant and Richard E. Moran Jr.
10.32* Employment Agreement between the Registrant and Jeffrey C. Hawken.
10.33* Employment Agreement between the Registrant and C. Hugh Greenup.
10.34* Noncompetition Agreement by and between the Registrant and John B.
Kilroy, Sr.
10.35* Noncompetition Agreement by and between the Registrant and John B.
Kilroy, Jr.
10.36* License Agreement by and among the Registrant and the other persons
named therein.
</TABLE>

40
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.37* Form of Indenture of Mortgage, Deed of Trust, Security Agreement,
Financing Statement, Fixture Filing and Assignment of Leases, Rents
and Security Deposits.
10.38* Form of Mortgage Note.
10.39* Form of Indemnity Agreement.
10.40* Form of Assignment of Leases, Rents and Security Deposits.
10.41* Form of Credit Agreement.
10.42* Form of Variable Interest Rate Indenture of Mortgage, Deed of Trust,
Security Agreement, Financing Statement, Fixture Filing and
Assignment of Leases and Rents.
10.43* Form of Environmental Indemnity Agreement.
10.44* Form of Assignment, Rents and Security Deposits.
10.45* Form of Revolving Credit Agreement.
10.46* Form of Mortgage, Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing and Assignment of Leases and Rents.
10.47* Assignment of Leases, Rents and Security Deposits.
21.1* List of Subsidiaries of the Registrant.
24.1** Powers of Attorney (included in Part IV of this Form 10-K).
27.1** Financial Data Schedule.
</TABLE>
- --------
* Previously filed as an exhibit to Registration Statement on Form S-11
(No. 333-15553) and incorporated herein by reference.

**Filed herewith.

(b) Reports on Form 8-K

None.

41
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 27, 1997.

Kilroy Realty Corporation

/s/ John B. Kilroy, Jr.
By:
-------------------------------------
John B. Kilroy, Jr.
President and Chief Executive
Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
directors of Kilroy Realty Corporation, hereby severally constitute John B.
Kilroy, Sr., John B. Kilroy, Jr., Jeffrey C. Hawken and Richard E. Moran Jr.,
and each of them singly, our true and lawful attorneys with full power to
them, and each of them singly, to sign for us and in our names in the
capacities indicated below, the Form 10-K filed herewith and any and all
amendments to said Form 10-K, and generally to do all such things in our names
and in our capacities as officers and directors to enable Kilroy Realty
Corporation to comply with the provisions of the Securities Exchange Act of
1934, and all requirements of the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorneys, or any of them, to said Form 10-K and any and all amendments
thereto.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ John B. Kilroy, Sr.
_________________________________ Chairman of the Board March 27, 1997
John B. Kilroy, Sr.
/s/ John B. Kilroy, Jr. President, Chief Executive
_________________________________ Officer and Director March 27, 1997
John B. Kilroy, Jr. (Principal Executive
Officer)
/s/ Jeffrey C. Hawken Executive Vice President
_________________________________ and Chief Operating March 27, 1997
Jeffrey C. Hawken Officer
Executive Vice President
/s/ Richard E. Moran Jr. and Chief Financial
_________________________________ Officer (Principal March 27, 1997
Richard E. Moran Jr. Financial Officer and
Principal Accounting
Officer)

_________________________________ Director March , 1997
William P. Dickey
/s/ Matthew J. Hart
_________________________________ Director March 27, 1997
Matthew J. Hart
/s/ Dale F. Kinsella
_________________________________ Director March 27, 1997
Dale F. Kinsella
</TABLE>

42
<PAGE>

KILROY GROUP

FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995 AND
COMBINED STATEMENTS OF OPERATIONS FOR THE THREE YEARS THEN ENDED

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Combined Balance Sheets as of December 31, 1996 and 1995.................. F-3
Combined Statements of Operations for the Three Years Ended December 31,
1996..................................................................... F-4
Combined Statements of Accumulated Deficit for the Three Years Ended
December 31, 1996........................................................ F-5
Combined Statements of Cash Flows for the Three Years Ended December 31,
1996..................................................................... F-6
Notes to Combined Financial Statements.................................... F-7
Schedule of Valuation and Qualifying Accounts............................. F-20
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Partners of Kilroy Group:

We have audited the accompanying combined balance sheets of Kilroy Group
(described in Note 1) as of December 31, 1996 and 1995, and the related
combined statements of operations, accumulated deficit, and cash flows for
each of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the index at Item 8. These
financial statements and the financial statement schedule are the
responsibility of the management of Kilroy Group. Our responsibility is to
express an opinion on these financial statements and the financial statement
schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of Kilroy Group as of December 31, 1996 and
1995, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic combined financial
statements taken as a whole, presents fairly in all material respects, the
information set forth therein.

DELOITTE & TOUCHE LLP
March 21, 1997

F-2
<PAGE>

KILROY GROUP

COMBINED BALANCE SHEETS

DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
1996 1995
--------- ---------
ASSETS
------
<S> <C> <C>
RENTAL PROPERTIES (Notes 1, 2, 4, 5, 6 and 9):
Land...................................................... $ 12,490 $ 12,490
Buildings and improvements................................ 214,847 212,493
--------- ---------
Total rental properties................................. 227,337 224,983
Accumulated depreciation and amortization................. (109,668) (101,774)
--------- ---------
Rental properties, net.................................. 117,669 123,209
TENANT RECEIVABLES, NET (Note 2)............................ 3,042 3,973
DEFERRED CHARGES AND OTHER ASSETS, NET (Notes 2, 3 and 7)... 7,628 5,675
--------- ---------
TOTAL..................................................... $ 128,339 $ 132,857
========= =========
<CAPTION>
LIABILITIES AND ACCUMULATED DEFICIT
-----------------------------------
<S> <C> <C>
LIABILITIES:
Debt (Notes 4, 8 and 9)................................... $ 223,297 $ 233,857
Accounts payable and accrued expenses..................... 2,712 2,590
Accrued construction costs (Note 2)....................... 100 874
Accrued property taxes (Note 2)........................... 873 1,399
Accrued interest payable (Note 4)......................... 3,929 7,251
Accrued cost of option buy-out and tenant improvement
(Note 5)................................................. 1,390
Rents received in advance and tenant security deposits
(Note 2)................................................. 9,815 8,712
--------- ---------
Total liabilities....................................... 242,116 254,683
COMMITMENTS AND CONTINGENCIES (Note 6)......................
ACCUMULATED DEFICIT (Note 1)................................ (113,777) (121,826)
--------- ---------
TOTAL..................................................... $ 128,339 $ 132,857
========= =========
</TABLE>

See notes to combined financial statements.

F-3
<PAGE>

KILROY GROUP

COMBINED STATEMENTS OF OPERATIONS

THREE YEARS ENDED DECEMBER 31, 1996 (IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
REVENUES (Notes 2 and 5):
Rental income (Note 7)............................ $33,269 $32,314 $31,220
Tenant reimbursements (Note 3).................... 3,380 3,002 1,643
Parking........................................... 1,753 1,582 1,357
Development services.............................. 698 1,156 919
Sale of air rights (Note 2)....................... 4,456 300
Lease termination fees............................ 100
Other income (Note 3)............................. 76 298 784
------- ------- -------
Total revenues.................................. 39,176 42,908 36,223
------- ------- -------
EXPENSES:
Property expenses (Notes 2 and 7)................. 6,788 6,834 6,000
Real estate taxes (Note 2)........................ 1,301 1,416 (448)
General and administrative........................ 2,383 2,152 2,467
Ground lease (Note 6)............................. 768 789 913
Development expenses.............................. 650 737 468
Option buy-out cost (Note 5)...................... 3,150
Interest expense.................................. 21,853 24,159 25,376
Depreciation and amortization..................... 9,111 9,474 9,962
------- ------- -------
Total expenses.................................. 46,004 45,561 44,738
------- ------- -------
LOSS BEFORE EXTRAORDINARY GAINS..................... (6,828) (2,653) (8,515)
EXTRAORDINARY GAINS (Note 4)........................ 20,095 15,267 1,847
------- ------- -------
NET INCOME (LOSS)................................... $13,267 $12,614 $(6,668)
======= ======= =======
</TABLE>

See notes to combined financial statements.

F-4
<PAGE>

KILROY GROUP

COMBINED STATEMENTS OF ACCUMULATED DEFICIT

THREE YEARS ENDED DECEMBER 31, 1996

<TABLE>
<S> <C>
BALANCE, JANUARY
1, 1994........ $(114,960)
Deemed and
actual
distributions
to partners,
net of
contributions. (8,706)
Net loss...... (6,668)
---------
BALANCE,
DECEMBER 31,
1994........... (130,334)
Deemed and
actual
distributions
to partners,
net of
contributions. (4,106)
Net income.... 12,614
---------
BALANCE,
DECEMBER 31,
1995........... (121,826)
Deemed and
actual
distributions
to partners,
net of
contributions. (5,218)
Net income.... 13,267
---------
BALANCE,
DECEMBER 31,
1996........... $(113,777)
=========
</TABLE>

See notes to combined financial statements.

F-5
<PAGE>

KILROY GROUP

COMBINED STATEMENTS OF CASH FLOWS

THREE YEARS ENDED DECEMBER 31, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ 13,267 $ 12,614 $(6,668)
Adjustment to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization................. 9,111 9,474 9,962
Net (increase) decrease:
Provision for bad debts..................... 1,266 1,000 909
Extraordinary gain.......................... (20,095) (15,267) (1,847)
Changes in assets and liabilities:
Tenant receivables.......................... (335) (1,012) (760)
Other assets................................ (1,349) 2,095 (3,212)
Accounts payable............................ 122 (892) 2,274
Accrued construction costs.................. (774) 874
Accrued property taxes...................... (526) (164) (2,411)
Property tax refund payable................. (1,500) 1,500
Accrued interest payable.................... 2,340 3,061 1,846
Accrued cost of option buy-out and tenant
improvements............................... 1,390
Rents received in advance and tenant
security deposits.......................... 1,103 (212) 5,014
-------- -------- -------
Net cash provided by (used in) operating
activities............................... 5,520 10,071 6,607
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for rental properties.............. (2,354) (1,162) (1,765)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds received from debt..................... 21,143 625 11,127
Principal payments on debt...................... (19,091) (5,428) (7,263)
Deemed and actual distributions to partners, net
of contributions............................... (5,218) (4,106) (8,706)
-------- -------- -------
Net cash used in financing activities..... (3,166) (8,909) (4,842)
-------- -------- -------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest.......................... $ 25,175 $ 21,098 $23,530
======== ======== =======
</TABLE>

See notes to combined financial statements.

F-6
<PAGE>

KILROY GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS

THREE YEARS ENDED DECEMBER 31, 1996

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization--Kilroy Group (not a legal entity) consists of the combination
of Kilroy Industries ("KI") and general and limited partnerships, a limited
liability company and trusts, the properties of which are under common control
of KI and/or its stockholders, John B. Kilroy, Sr. and John B. Kilroy, Jr. The
entities referred to collective as Kilroy Group ("KG") are engaged in the
acquisition, development, ownership and operation of 19 office and industrial
properties (the "Kilroy Properties") located in California, Washington and
Arizona. KI has historically provided acquisition, financing, construction and
leasing services with respect to the Kilroy Properties. KI has also provided
development services to the third-party owners of properties for a fee. The
accompanying combined financial statements of KG have been presented on a
combined basis because of the common ownership and management and because the
entities were the subject of a business combination in 1997 with Kilroy Realty
Corporation, Inc. (the "Company").

The Company was incorporated in Maryland in September 1996 and is the
successor to the operations of KG. On January 31, 1997, the Company completed
an initial public offering of 12,500,000 shares of $.01 par value common stock
("the Offering"). The Offering price was $23.00 per share resulting in gross
proceeds of $287,500,000. On February 7, 1997, the underwriters exercised
their over-allotment option and, accordingly, the Company issued an additional
1,875,000 shares of common stock and received gross proceeds of $43,125,000.
The aggregate proceeds to the Company, net of underwriters' discount, advisory
fee and offering costs were approximately $302,500,000.

The following transactions occurred simultaneously with the completion of
the Offering:

. The Company consummated various purchase agreements to acquire four
properties for approximately $58,000,000 in cash. The four properties
had aggregate operating revenues of approximately $9,100,000 and net
operating income (before depreciation, amortization and interest of
approximately $6,300,000 during the year ended December 31, 1996).

. The Company became the sole general partner of Kilroy Realty L.P. (the
"Operating Partnership") by contributing substantially all of the net
proceeds of the Offering, in exchange for an approximate 84.6% interest
in the Operating Partnership. All properties acquired by the Company are
held by or through the Operating Partnership. The Operating Partnership
executed various option and purchase agreements whereby it issued
2,652,374 units in the Operating Partnership ("Units") to the continuing
investors in exchange for fee simple and leasehold interest in
properties.

. The Operating Partnership used a portion of the Offering proceeds and
the proceeds of new mortgage borrowings of $96,000,000 to repay
approximately $223,000,000 of indebtedness. In conjunction with such
repayment, the Operating Partnership realized an extraordinary gain of
approximately $3,217,000 (before minority interest) consisting of
approximately $1,270,000 of unamortized deferred financing fees written
off and net of a gain on partial forgiveness of a mortgage obligation of
approximately $4,487,000.

F-7
<PAGE>

KILROY GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

. The Operating Partnership borrowed $96,000,000 under two mortgage loans.
The names of the corporation, partnerships and trusts which directly own
the Kilroy Properties are as follows:

<TABLE>
<CAPTION>
PERCENTAGE
OWNERSHIP OF
PROPERTY BY KI,
JOHN B. KILROY, SR.,
AND/OR
ENTITY NAME JOHN B KILROY, JR. PROPERTY LOCATION
----------- -------------------- -------- --------
<S> <C> <C> <C>
OFFICE:
Kilroy Airport
Associates............. 100% Kilroy Airport Center at El Segundo:
2240 E. Imperial Highway El Segundo, California
2250 E. Imperial Highway El Segundo, California
2260 E. Imperial Highway El Segundo, California
Kilroy Long Beach
Partner II............. 99% Kilroy Airport Center Long Beach:
3750 Kilroy Airport Way Long Beach, California
3760 Kilroy Airport Way Long Beach, California
3780 Kilory Airport Way Long Beach, California
Kilroy Freehold
Industrial Development
Organization
("K-FIDO")............. 83%(1) 185/181 S. Douglas Street El Segundo, California
Sea Tac Properties,
Ltd.................... 99% SeaTac Office Center:
17900 Pacific Highway Seattle, Washington
17930 Pacific Highway Seattle, Washington
18000 Pacific Highway Seattle, Washington
INDUSTRIAL:
Kilroy Industries....... 100% 2031 E. Mariposa Avenue El Segundo, California
Kilroy Building 73
Partnership............ 100% 3332 E. La Palma Avenue Anaheim, California
K-FIDO.................. 83%(1) 2260 E. El Segundo Boulevard El Segundo, California
K-FIDO.................. 83%(1) 2265 E. El Segundo Boulevard El Segundo, California
K-FIDO.................. 83%(1) 2270 E. El Segundo Boulevard El Segundo, California
A-102 Trust............. 20%(1) 5115 N. 27th Avenue Phoenix, Arizona
KI 1979 Trust........... 85%(1) 1000 E. Ball Road Anaheim, California
KI 1979 Trust........... 85%(1) 1230 S. Lewis Street Anaheim, California
Kilroy Garden Grove
Assoc.................. 100% 12681/12691 Pala Drive Garden Grove, California
</TABLE>
- --------
(1) The balance of the ownership interest are held by the four adult daughters
of John B. Kilroy, Sr.

Certain other properties and operations affiliated with KI have been
excluded as they are not compatible with the investment purposes of the
Company. Deemed and actual cash distributions to partners, net of
contributions, included in the combined statements of accumulated deficit
generally represent distributions of the cash flows generated by KG, and
advances to partners and KI, as well as related-party transactions (see Note
7).

F-8
<PAGE>

KILROY GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES

Rental Properties--Rental properties are stated at historical cost less
accumulated depreciation, which, in the opinion of KG's management does not
require a provision for impairment. Net realizable value does not purport to
represent fair market value. Costs incurred for the acquisition, renovation
and betterment of the properties are capitalized. Maintenance and repairs are
charged to expense as incurred.

During 1995, KG adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of." Under this standard, if impairment conditions
exist, the Company makes an assessment of the recoverability of the carrying
amounts of individual properties by estimating the future undiscounted cash
flows, excluding interest charges, on a property-by-property basis. If the
carrying amount exceeds the aggregate future cash flows, the Company would
recognize an impairment loss to the extent the carrying amount exceeds the
fair value of the property. Any long-lived assets to be disposed of are to be
valued at estimated fair value less costs to sell. Based on such periodic
assessments, no impairments have been determined and, therefore, no real
estate carrying amounts have been adjusted.

Depreciation and Amortization--The cost of buildings and improvements are
depreciated on the straight-line method over estimated useful lives, as
follows:

Buildings--25 to 40 years.

Tenant improvements--The shorter of lease term or useful lives range from 5
to 20 years.

Deferred Charges--Deferred charges include deferred leasing costs and loan
fees. Leasing costs include leasing commissions that are amortized on the
straight-line basis over the initial lives of the leases, which range from 5
to 10 years. Deferred loan fees are amortized on a straight-line basis over
the terms of the respective loans, which approximates the effective interest
method.

Accrued Property Taxes--As of December 31, 1996 and 1995, $147,000 and
$696,000, respectively, of accrued property taxes were delinquent.

Revenue Recognition and Tenant Receivables--Leases with tenants are
accounted for as operating leases. Minimum annual rentals are recognized on a
straight-line basis over the lease term. Unbilled deferred rent represents the
amount that expected straight-line rental income exceeds rents currently due
under the lease agreement. Total tenant receivables consists of the following
amounts:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Tenant rent and reimbursements receivable.................. $ 2,577 $ 3,171
Allowance for uncollectible rent........................... (1,628) (1,837)
Unbilled deferred rent..................................... 2,093 2,639
------- -------
Tenants receivables, net................................. $ 3,042 $ 3,973
======= =======
</TABLE>

Included in tenant rent and reimbursements receivable are additional rentals
based on common area maintenance expenses and certain other expenses that are
accrued in the period in which the related expenses are incurred.

F-9
<PAGE>

KILROY GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

Rents Received in Advance and Tenant Security Deposits--The balances as of
December 31, 1996 and 1995 include a $4,000,000 payment received from a tenant
in connection with the tenant's obligation to remove tenant improvements upon
termination of the lease. Such payment is nonrefundable and will be recognized
as income, net of the costs of removal of improvements, upon termination of
the lease. The related lease expires in 1999, subject to a five-year option to
renew.

Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Parking--The Kilroy Airport Center at El Segundo includes parking
facilities. KG records as revenue the gross parking receipts. KG contracts
with parking management companies to operate the parking facilities, and such
contract costs are included in property expenses.

Development Services--Development services revenues represent fees earned by
KG for supervision services provided for building development of nonowned
properties. Fees are typically a percentage of total development costs plus
reimbursement for certain expenses. Unreimbursed expenses are recorded as
development expenses and include items such as wages, equipment rental,
supplies, etc.

Sale of Air Rights--In 1995, based on an agreement between KG and the
California Transportation Commission, KG received $4,456,000, net of related
expenses, for granting temporary construction and permanent air right
easements over a portion of its Property for the construction of a freeway on-
ramp. In connection with this transaction, KG accrued $874,000 for the costs
of restoration of the property after construction of the on-ramp.

Property Tax Refunds--Property tax refunds of $2,379,000 were collected in
1995 and relate to appeals filed by KG in 1994 for refunds of property taxes
paid in 1990 through 1994. During the year ended December 31, 1994, such
amount was recorded as a reduction of property taxes, as well as related
interest income of $441,000, which was recorded as other income. Of these
property tax recoveries, approximately $1,500,000 was refunded to tenants of
the related properties and has been recorded as a reduction to tenant
reimbursements income during the year ended December 31, 1994.

3. DEFERRED CHARGES AND OTHER ASSETS

Deferred charges and other assets are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred assets:
Deferred financing costs................................ $ 2,968 $ 3,436
Deferred leasing costs (Note 7)......................... 11,563 11,327
------- --------
Total deferred assets................................... 14,531 14,763
Accumulated amortization.................................. (7,728) (10,142)
------- --------
Deferred assets, net...................................... 6,803 4,621
Prepaid expenses.......................................... 825 1,054
------- --------
Total deferred charges and other assets................... $ 7,628 $ 5,675
======= ========
</TABLE>

F-10
<PAGE>

KILROY GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

4. DEBT

Debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Bank notes payable, due in December 1994, bearing interest at
prime (8.5%
at December 31, 1995)(a)(b)................................. $ 16,536
Bank notes payable, due in January 1999, bearing interest at
LIBOR + 1.15% (6.81% at December 31, 1996 and 6.9% at
December 31, 1995).......................................... $ 56,254 54,811
Notes payable to finance company and related pension funds,
maturing in 1997 and 1998, bearing interest at rates from
8.5% to 12.7%(b)............................................ 28,447 33,447
Note payable to insurance company, maturing April 2001,
bearing interest at
9.75%(c).................................................... 20,162 20,162
Notes payable to insurance company, maturing March 2006,
bearing interest at 9.5%(b)................................. 1,957 10,722
Note payable to insurance company, due April 2002, bearing
interest at 9.25%........................................... 94,095 97,283
Notes payable to underwriter, due in June 1997, bearing
interest at LIBOR + 3% (8.66% at December 31, 1996)(b)...... 21,525
Bank notes payable, due in July 2008, bearing interest at
10%......................................................... 857 896
-------- --------
$223,297 $233,857
======== ========
</TABLE>
- --------
All of the debt was repaid on January 31, 1997 from the proceeds of the
Offering and new mortgage financing described in Note 1.

(a) In September 1995, a note payable to a bank of $14,000,000 due in December
1994 and accrued interest payable of $3,867,000 was retired by a cash
payment of $2,600,000. KG recorded an extraordinary gain of $15,267,000 as
a result of this transaction. The remaining notes payable of $16,536,000
were in default as of December 31, 1995. Past due interest on the
remaining notes, approximately $5,003,000 at December 31, 1995, is
included in accrued interest. See discussion below under (b) regarding
settlement of this loan and accrued interest.

(b) On June 20, 1996, KG obtained a mortgage loan of $21,525,000 from one of
the underwriters of the Offering referred to in Note 1. Such loan bears
interest at 3% above LIBOR. Fees of $2,616,500 were incurred in connection
with obtaining this loan. The proceeds were used to pay: $2,100,000 as
settlement of bank notes with an aggregate principal balance of
$16,536,000 and $5,659,000 of unpaid interest, a note payable to an
insurance company with a principal balance of $8,549,000 and a note
payable to a finance company with a principal balance of $4,600,000. The
forgiveness of $20,095,000 has been recorded as an extraordinary gain.

(c) KG was not, as of December 31, 1996, making the required monthly principal
installments of $239,000 on this note and accrued interest of $2,385,000
was unpaid as of December 31, 1996. The SeaTac Office Center was pledged
as collateral for the note payable. On October 25, 1996, KG and the
insurance company entered into a forbearance agreement which provided KG
with the exclusive right to purchase the note payable for $16,100,000 on
or before January 31, 1997. A portion of the proceeds from the Offering
referred to in Note 1 were used to purchase this note resulting in an
extraordinary gain of $3,217,000 including the write-off of deferred
financing fees of $1,270,000 in 1997.

F-11
<PAGE>

KILROY GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

In 1994, two notes payable to insurance companies, with an aggregate unpaid
balance of $6,782,000 were paid after forgiveness of $1,847,000 of principal
by the lenders, which has been recorded as an extraordinary gain.

The notes payable are secured by deeds of trust on all KG's properties and
the assignment of certain rents and leases associated with the related
Properties. The notes are generally due in monthly installments of principal
and interest or interest only. As of December 31, 1996, approximately $37.2
million of notes payable are guaranteed by certain members of KG.

5. FUTURE MINIMUM RENT

KG has operating leases with tenants that expire at various dates through
2006 and are either subject to scheduled fixed increases or adjustments based
on the Consumer Price Index. Generally, the leases grant tenants renewal
options. Leases also provide for additional rents based on certain operating
expenses as well as sales volume of certain retail space within the office
buildings. Future minimum rent under operating leases, excluding tenant
reimbursements of certain costs, as of December 31, 1996, are summarized as
follows:

<TABLE>
<CAPTION>
YEAR ENDING
----------- (IN THOUSANDS)
<S> <C>
1997....................................................... $ 32,676
1998....................................................... 31,085
1999....................................................... 27,513
2000....................................................... 23,818
2001....................................................... 17,745
Thereafter................................................. 41,185
--------
Total.................................................... $174,022
========
</TABLE>

Rental income from one tenant, Hughes Electronics Corporation's Space &
Communications Company ("Hughes"), was $10,783,000, $10,817,000 and
$11,395,000 in 1996, 1995 and 1994, respectively. Future minimum rents from
this tenant are $74,098,000 at December 31, 1996.

The majority of KG's properties are located in Southern California. The
ability of the tenants to honor the terms of their respective leases is
dependent upon the economic, regulatory and social factors affecting the
communities and industries in which the tenants operate.

In September 1996, KG and Hughes amended the terms of certain of their lease
agreements. Such amendments included the extension of one lease through
October 31, 2001 and a $500,000 allowance for tenant improvements. In
addition, KG agreed to pay Hughes $3,150,000 in consideration for the
cancellation of an option to purchase a 50% equity interest in Kilroy Airport
Center at El Segundo which has been reflected in the statement of operations
as of December 31, 1996. In November 1996, $2,260,000 of the total liability
of $3,650,000 was paid by KI and its stockholders. The remaining balance is
payable in monthly installments of $100,000 commencing in January 1997.

F-12
<PAGE>

KILROY GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

6. COMMITMENTS AND CONTINGENCIES

Operating Leases--KG has a noncancelable ground lease obligation on Kilroy
Airport Center Long Beach with an initial lease period expiring on July 31,
2035, classified as an operating lease. Further, KG has noncancelable ground
lease obligations on the SeaTac Office Center expiring on December 31, 2032
with an option to extend the leases for an additional 30 years. Rentals are
subject to adjustments every five years based on the variation of the Consumer
Price Index. The minimum commitment under these leases at December 31, 1996 is
as follows:

<TABLE>
<CAPTION>
YEAR ENDING
----------- (IN THOUSANDS)
<S> <C>
1997....................................................... $ 743
1998....................................................... 761
1999....................................................... 923
2000....................................................... 1,056
2001....................................................... 1,056
Thereafter................................................. 34,681
-------
Total.................................................... $39,220
=======
</TABLE>

Litigation--KG is subject to various legal proceedings and claims that arise
in the ordinary course of business. These matters are generally covered by
insurance. While the resolution of these matters cannot be predicted with
certainty, management believes that the final outcome of such matters will not
have a material adverse effect on the financial position or results of
operations of KG.

7. RELATED-PARTY TRANSACTIONS

KI provides management, legal, accounting and general administrative
services pursuant to agreements that provide for management fees based upon a
percentage of gross revenues from the Properties and reimbursement of other
costs incurred by KI in connection with providing the aforementioned services.
Kilroy Company ("KC"), an affiliated entity, provides marketing and leasing
services. Charges by KC include leasing commissions paid to employees and
outside leasing brokers as well as fees to cover its general administrative
costs. Management fees are expensed as incurred and are included in property
expenses. Leasing fees are capitalized and amortized over the life of the
related leases. In the opinion of KG management, the fees paid to KI and KC
for management and leasing services are comparable to the rates which KG would
have paid an independent company to provide similar services. In addition, KI
is a tenant at the Kilroy Airport Center at El Segundo and Kilroy Airport
Center Long Beach, under month-to-month basis leases. Charges for services
provided by KI and KC and rental income from KI are summarized as follows:

<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Management fees....................................... $1,220 $1,343 $1,026
Leasing fees.......................................... $1,878 $ 804 $1,456
Rental income......................................... $ 524 $ 528 $ 528
</TABLE>

Management fees in 1995 include a fourth quarter charge of $321,000 relating
to management time incurred for the renegotiation of loans.

8. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS

The following disclosure of estimated fair value was determined by KG using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessary to interpret market data

F-13
<PAGE>

KILROY GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

and develop the related estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that could be
realized upon disposition of the financial instruments. The use of different
market assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts.

Receivables, accounts payable and other liabilities are carried at amounts
that reasonably approximate their fair value.

The fixed rate mortgage notes payable totaling $145,518,000 and $162,510,000
as of December 31, 1996 and 1995 have fair values of $151,472,000 and
$165,300,000, respectively (excluding prepayment penalties), as estimated
based upon interest rates available for the issuance of debt with similar
terms and remaining maturities. The carrying values of floating rate mortgages
totaling $77,779 and $71,347,000 at December 31, 1996 and 1995, respectively,
reasonably approximate their fair values.

The fair value estimates presented herein are based on information available
to KG management as of December 31, 1996 and 1995. Although KG management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for
purposes of these financial statements since that date, and current estimates
of fair value may differ significantly from the amounts presented herein.

F-14
<PAGE>

KILROY GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

9. SCHEDULE OF RENTAL PROPERTY

<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------------------------------------------------
GROSS AMOUNTS AT WHICH
INITIAL COST COSTS CARRIED AT CLOSE OF PERIOD
-------------------- CAPITALIZED -----------------------------
BUILDINGS SUBSEQUENT TO DATE OF
AND ACQUISITION/ BUILDING AND ACCUMULATED ACQUIS.(A)/
PROPERTY ENCUMBRANCE LAND IMPROVEMENTS IMPROVEMENT LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTR.(C)
-------- ----------- ------- ------------ ------------- ------- ------------ -------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Kilroy Airport
Center
El Segundo,
California...... $ 94,095 $ 6,141 $ 69,195 $19,701 $ 6,141 $ 88,897 $ 95,038 $ 45,546 1983(C)
Kilroy Airport
Center
Long Beach,
California...... 56,254 47,387 12,531 59,918 59,918 18,034 1989(C)
185/181 S.
Douglas Street
El Segundo,
California(1)... 21,525 525 4,687 1,845 628 6,429 7,057 3,676 1978(C)
SeaTac Office
Center
Seattle,
Washington...... 20,162 25,993 7,284 33,276 33,276 23,378 1977(C)
2270 E. El
Segundo
Boulevard
El Segundo,
California(1)... 361 100 77 419 119 538 74 1977(C)
2260 E. El
Segundo
Boulevard,
El Segundo,
California(1)... 1,423 4,194 1,236 1,703 5,150 6,853 3,082 1979(C)
2031 E. Mariposa
Avenue,
El Segundo,
California...... 12,000 132 867 2,669 132 3,535 3,667 2,587 1954(C)
3332 E. La Palma
Avenue,
Anaheim,
California...... 7,557 67 1,521 2,869 67 4,390 4,457 3,297 1966(C)
2265 E. El
Segundo
Boulevard,
El Segundo,
California(1)... 1,352 2,028 645 1,571 2,454 4,025 1,610 1978(C)
5115 N. 27th
Avenue,
Phoenix,
Arizona......... 3,000 125 1,206 (38) 125 1,168 1,293 1,163 1962(C)
1000 E. Ball
Road,
Anaheim,
California(2)... 5,447 838 1,984 719 838 2,703 3,541 1,737 1979(A)(3)
1956(C)
1230 S. Lewis
Street,
Anaheim,
California(2)... 395 1,489 1,994 395 3,483 3,878 2,521 1982(C)
12681/12691 Pala
Drive,
Garden Grove,
California...... 3,257 471 2,115 1,210 471 3,325 3,796 2,963 1980(A)
1970(C)
-------- ------- -------- ------- ------- -------- -------- --------
Total........... $223,297 $11,830 $162,766 $52,742 $12,490 $214,847 $227,337 $109,668
======== ======= ======== ======= ======= ======== ======== ========
</TABLE>
- -------
(1) A note payable of $21,525 is secured by the buildings located at 185/181
S. Douglas Street, El Segundo, California, and 2260 and 2270 E. El Segundo
Boulevard, El Segundo, California.
(2) A note payable of $5,447,000 is secured by the buildings located at 1000
E. Ball Road, Anaheim, California and 1230 S. Lewis, Anaheim, California.
(3) The property located at 1000 E. Ball Road, Anaheim, California, was
developed for a third party by the Company in 1956, and acquired by the
Company in 1979.

F-15
<PAGE>

KILROY GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

The aggregate gross cost of property included above for federal income tax
purposes, approximated $227,337,436 as of December 31, 1996.

The following table reconciles the historical cost of the Properties from
January 1, 1994 to December 31, 1996:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year........................ $224,983 $223,821 $222,056
Additions during period--
Acquisition, improvements, etc................ 2,354 1,162 1,765
-------- -------- --------
Balance, end of year.............................. $227,337 $224,983 $223,821
======== ======== ========

The following table reconciles the accumulated depreciation from January 1,
1994 to December 31, 1996:

<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year........................ $101,774 $ 93,475 $ 84,759
Additions during period--
Depreciation and amortization for the year.... 7,894 8,299 8,716
-------- -------- --------
Balance, end of year.............................. $109,668 $101,774 $ 93,475
======== ======== ========
</TABLE>

10. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited pro forma condensed consolidated balance sheet as
of December 31, 1996 and the statement of operations for the year than ended
are presented as if the Reorganization Transactions described in Note 1 to the
financial statements had occurred on January 1, 1996. Such pro forma
information is based upon the historical consolidated financial statements of
the Company and should be read in conjunction with the consolidated financial
statements and the noted thereto.

This unaudited pro forma condensed consolidated statement of operations does
not purport to represent what the actual results of operations of the Company
would have been assuming such Reorganization Transactions had been completed
as set forth above, nor do they purport to represent the results of operations
for future periods.

F-16
<PAGE>

KILROY GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

PRO FORMA BALANCE SHEET DECEMBER 31, 1996
<TABLE>
<CAPTION>
KILROY
REALTY
CORPORATION
KILROY GROUP PRO FORMA PRO FORMA
(HISTORICAL) ADJUSTMENTS CONSOLIDATED
------------ ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Assets:
Rental properties, net of
accumulated depreciation and
amortization....................... $ 117,669 $ 58,100 (a) $175,769
Cash and cash equivalents........... 0 117,836 (b) 117,836
Tenant receivables, net............. 3,042 3,042
Deferred charges and other assets,
net of accumulated amortization.... 7,628 1,115 (c) 8,743
--------- --------- --------
Total............................. $ 128,339 $ 177,051 $305,390
========= ========= ========
Liabilities:
Debt............................... $ 223,297 $(127,297)(d) $ 96,000
Accounts payable and accrued
expenses.......................... 3,685 (100)(e) 3,585
Accrued interest payable........... 3,929 (3,929)(f) 0
Accrued cost of option but-out and
tenant improvements............... 1,390 1,390
Rent received in advance and tenant
security deposits................. 9,815 9,815
--------- --------- --------
Total Liabilities................. 242,116 (131,326) 110,790
Minority Interest................... 33,860 (g) 33,860
Stockholder's equity (deficit):
Common Stock....................... 146 (h) 146
Additional paid-in capital......... 160,594 (g,h) 160,594
Accumulated deficit................ (113,777) 113,777 0
--------- --------- --------
Total stockholders' equity
(deficit)........................ (113,777) 274,517 160,740
--------- --------- --------
Total............................. $ 128,339 $ 177,051 $305,390
========= ========= ========
</TABLE>

F-17
<PAGE>

KILROY GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

PRO FORMA INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
KILROY
REALTY
KILROY CORPORATION
GROUP PRO FORMA PRO FORMA
(HISTORICAL) ADJUSTMENTS CONSOLIDATED
------------ ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Total revenues..................... $39,176 $ 7,884 (i,j,k) $ 47,060
------- -------- ----------
Expenses:
Property expenses.................. $ 6,788 $ 1,817 (i,l) $ 8,605
Real estate taxes.................. 1,301 593 (i,m) 1,894
General and administrative......... 2,383 1,992 (i,n) 4,375
Ground lease....................... 768 338 (i) 1,106
Option buy-out cost................ 3,150 0 3,150
Development and management
expenses.......................... 650 (650)(k) 0
Interest expense................... 21,853 (13,482)(o) 8,371
Depreciation and amortization...... 9,111 1,272 (i) 10,383
------- -------- ----------
Total expenses..................... 46,004 (8,120) 37,884
Income (loss) from operations
before equity in income of
subsidiary and minority interest.. (6,828) 16,004 9,176
Equity in income of subsidiary..... 0 (6)(k) (6)
Minority interest.................. 0 (1,596)(p) (1,596)
------- -------- ----------
Net income (loss).................. $(6,828) $ 14,402 $ 7,574
======= ======== ==========
Income per share of common stock... 0.52
==========
Weighted average number of shares
of common stock outstanding(q).... 14,475,000
==========
</TABLE>

F-18
<PAGE>

KILROY GROUP

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

NOTES:

(a) Reflects the cost of the Properties acquired concurrent with the Offering:
Westlake Plaza Centre, Long Beach Phase I, La Palma Business Center, and
Monarch Building (collectively, the "Acquisition Properties"). The
Acquisition Properties will be accounted for as purchase transactions.

(b) Reflects the adjustment to pro forma cash and cash equivalents and
includes the net proceeds from the offering of 14,375,000 shares of common
stock after underwriting discount and estimated issuance costs as well as
net proceeds from mortgage loans, less repayment of mortgage debt (net of
forgiveness), purchase of acquisition properties, and payment of accrued
interest and debt issuance costs.

(c) Reflects the net increase from the issuance costs of the mortgage loans of
$96 million and the $100.0 million Credit Facility, less the write-off of
loan costs relating to repayment of mortgage debt.

(d) Reflects the net decrease from the repayment of mortgage debt from net
proceeds of the Offering less issuance of the $84.0 million loan payable
monthly until maturity in 2005 and the $12.0 million SeaTac Loan.

(e) Amount represents a liability for construction costs which will not be
assumed by the Company.

(f) Amount represents accrued interest which will not be assumed by the
Company ($727) and accrued interest forgiven ($2,385) and paid ($817) in
connection with the repayment of mortgage debt.

(g) Reflects the estimated minority interest of the Continuing Investors in
the Operating Partnership at 17.4%.

(h) Reflects the issuance of 14,375,000 shares of Common Stock, par value $.01
per share, at an initial offering price of $23.00 per share. Adjustments
to additional paid-in capital include net proceeds from the Offering of
Common Stock after underwriting discounts and issuance costs, less the par
value of Common Stock, as well as accrued interest not assumed by the
Company, write-off of loan costs relating to repayment of mortgage debt,
net gain on repayment of mortgage debt and accrued interest, and liability
for construction costs which will not be assumed by the Company.

(i) Reflects the historical revenues, certain expense and depreciation for the
Acquisition Properties.

(j) Reflects the elimination of rental income received from KI.

(k) Reflects the elimination of the Services Company's gross revenues and
expenses and the recording of the equity in income of the Services Company
net of income taxes.

(l) Reflects the elimination of management fees charged to the KG by KI and
the reclassification of expenses which previously had not been allocated
to individual properties.

(m) Reflects the incremental property taxes on the Acquisition Properties due
to change of ownership.

(n) Reflects the estimated incremental increases in other general and
administrative expenses, including, without limitation, the incremental
general and administrative expenses to be incurred as a public company and
increases in other G&A expenses.

(o) Reflects reduction of interest expenses associated with the mortgage debt
repaid using net proceeds from the Offering.

(p) Represents the income allocated to the 17.4% minority interest (Units) in
the Operating Partnership owned by Continuing Investors.

(q) Pro forma net income per share of Common Stock is based upon 14,375,000
shares of Common Stock assumed to be outstanding in connection with the
Offering and 100,000 restricted shares of Common Stock granted to an
executive officer of the Company.

F-19
<PAGE>

KILROY GROUP

SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)

<TABLE>
<CAPTION>
CHARGED
TO
BALANCE COSTS AND
AT EXPENSES BALANCE
BEGINNING OR RENTAL AT END
OF YEAR REVENUE DEDUCTIONS OF YEAR
--------- --------- ---------- -------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996--
Allowance for uncollectible rent... $1,837 $1,266 $(1,475) $1,628
====== ====== ======= ======
Year Ended December 31, 1995--
Allowance for uncollectible rent... $ 837 $1,000 $ -- $1,837
====== ====== ======= ======
Year Ended December 31, 1994--
Allowance for uncollectible rent... $ 428 $ 909 $ (500) $ 837
====== ====== ======= ======
</TABLE>

F-20
<PAGE>

EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
3.1* Articles of Amendment and Restatement of the
Registrant.
3.2* Amended and Restated Bylaws of the Registrant.
3.3* Form of Certificate for Common Stock of the Registrant.
10.1* Amended and Restated Agreement of Limited Partnership
of Kilroy Realty, L.P.
10.2* Form of Registration Rights Agreement among the
Registrant and the persons named therein.
10.3* Omnibus Agreement, dated as of October 30, 1996, by and
among Kilroy Realty, L.P. and the parties named
therein.
10.4* Supplemental Representations, Warranties and Indemnity
Agreement by and among Kilroy Realty, L.P. and the
parties named therein.
10.5* Pledge Agreement by and among Kilroy Realty, L.P., John
B. Kilroy, Sr., John B. Kilroy, Jr. and Kilroy
Industries.
10.6* 1997 Stock Option and Incentive Plan of the Registrant
and Kilroy Realty, L.P.
10.7* Form of Indemnity Agreement of the Registrant and
Kilroy Realty, L.P. with certain officers and
directors.
10.8* Lease Agreement, dated January 24, 1989, by and between
Kilroy Long Beach Associates and the City of Long
Beach for Kilroy Long Beach Phase I.
10.9* First Amendment to Lease Agreement, dated December 28,
1990, by and between Kilroy Long Beach Associates and
the City of Long Beach for Kilroy Long Beach Phase I.
10.10* Lease Agreement, dated July 17, 1985, by and between
Kilroy Long Beach Associates and the City of Long
Beach for Kilroy Long Beach Phase III.
10.11* Lease Agreement, dated April 21, 1988, by and between
Kilroy Long Beach Associates and the Board of Water
Commissioners of the City of Long Beach, acting for
and on behalf of the City of Long Beach, for Long
Beach Phase IV.
10.12* Lease Agreement, dated December 30, 1988, by and
between Kilroy Long Beach Associates and City of Long
Beach for Kilroy Long Beach Phase II.
10.13* First Amendment to Lease, dated January 24, 1989, by
and between Kilroy Long Beach Associates and the City
of Long Beach for Kilroy Long Beach Phase III.
10.14* Second Amendment to Lease Agreement, dated December 28,
1990, by and between Kilroy Long Beach Associates and
the City of Long Beach for Kilroy Long Beach Phase
III.
10.15* First Amendment to Lease Agreement, dated December 28,
1990, by and between Kilroy Long Beach Associates and
the City of Long Beach for Kilroy Long Beach Phase II.
10.16* Third Amendment to Lease Agreement, dated October 10,
1994, by and between Kilroy Long Beach Associates and
the City of Long Beach for Kilroy Long Beach Phase
III.
10.17* Development Agreement by and between Kilroy Long Beach
Associates and the City of Long Beach.
10.18* Amendment No. 1 to Development Agreement by and between
Kilroy Long Beach Associates and the City of Long
Beach.
10.19* Ground Lease by and between Frederick Boysen and Ted
Boysen and Kilroy Industries, dated May 15, 1969, for
SeaTac Office Center.
10.20* Amendment No. 1 to Ground Lease and Grant of Easement,
dated April 27, 1973, among Frederick Boysen and
Dorothy Boysen, Ted Boysen and Rose Boysen and Sea/Tac
Properties.
</TABLE>
<PAGE>

EXHIBIT INDEX--(CONTINUED)
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
10.21* Amendment No. 2 to Ground Lease and Grant of Easement,
dated May 17, 1977, among Frederick Boysen and Dorothy
Boysen, Ted Boysen and Rose Boysen and Sea/Tac
Properties.
10.22* Airspace Lease, dated July 10, 1980, by and among the
Washington State Department of Transportation, as
lessor, and Sea Tac Properties, Ltd. and Kilroy
Industries, as lessee.
10.23* Lease, dated April 1, 1980, by and among Bow Lake,
Inc., as lessor, and Kilroy Industries and SeaTac
Properties, Ltd., as lessees for Sea/Tac Office
Center.
10.24* Amendment No. 1 to Ground Lease, dated September 17,
1990, between Bow Lake, Inc., as lessor, and Kilroy
Industries and Sea/Tac Properties, Ltd., as lessee.
10.25* Amendment No. 2 to Ground Lease, dated March 21, 1991,
between Bow Lake, Inc., as lessor, and Kilroy
Industries and Sea/Tac Properties, Ltd., as lessee.
10.26* Property Management Agreement between Kilroy Realty
Finance Partnership, L.P. and Kilroy Realty, L.P.
10.27* Form of Environmental Indemnity Agreement.
10.28* Option Agreement by and between Kilroy Realty, L.P. and
Kilroy Airport Imperial Co.
10.29* Option Agreement by and between Kilroy Realty, L.P. and
Kilroy Calabasas Associates.
10.30* Employment Agreement between the Registrant and John B.
Kilroy, Jr.
10.31* Employment Agreement between the Registrant and Richard
E. Moran Jr.
10.32* Employment Agreement between the Registrant and Jeffrey
C. Hawken.
10.33* Employment Agreement between the Registrant and C. Hugh
Greenup.
10.34* Noncompetition Agreement by and between the Registrant
and John B. Kilroy, Sr.
10.35* Noncompetition Agreement by and between the Registrant
and John B. Kilroy, Jr.
10.36* License Agreement by and among the Registrant and the
other persons named therein.
10.37* Form of Indenture of Mortgage, Deed of Trust, Security
Agreement, Financing Statement, Fixture Filing and
Assignment of Leases, Rents and Security Deposits.
10.38* Form of Mortgage Note.
10.39* Form of Indemnity Agreement.
10.40* Form of Assignment of Leases, Rents and Security
Deposits.
10.41* Form of Credit Agreement.
10.42* Form of Variable Interest Rate Indenture of Mortgage,
Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing and Assignment of Leases and
Rents.
10.43* Form of Environmental Indemnity Agreement.
10.44* Form of Assignment, Rents and Security Deposits.
10.45* Form of Revolving Credit Agreement.
10.46* Form of Mortgage, Deed of Trust, Security Agreement,
Financing Statement, Fixture Filing and Assignment of
Leases and Rents.
10.47* Assignment of Leases, Rents and Security Deposits.
21.1* List of Subsidiaries of the Registrant.
24.1** Powers of Attorney (included in Part IV of this Form
10-K).
27.1** Financial Data Schedule.
</TABLE>
- --------
* Previously filed as an exhibit to Registration Statement on Form S-11
(No. 333-15553) and incorporated herein by reference.
**Filed herewith.

<PAGE>

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 4,670 5,810
<ALLOWANCES> (1,628) (1,837)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 227,337 224,983
<DEPRECIATION> (109,668) (101,774)
<TOTAL-ASSETS> 128,339 132,857
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 128,339 132,857
<TOTAL-LIABILITY-AND-EQUITY> 128,339 132,857
<SALES> 0 0
<TOTAL-REVENUES> 39,176 42,908
<CGS> 0 0
<TOTAL-COSTS> 24,151 21,402
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 21,853 24,159
<INCOME-PRETAX> (6,828) (2,653)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 20,095 15,267
<CHANGES> 0 0
<NET-INCOME> 13,267 12,614
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0

</TABLE>