10-K

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, 2003

OR

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

For the transition period from                          to                         

Commission file number 1-12675

KILROY REALTY CORPORATION

(Exact name of registrant as specified in its charter)

Maryland	95-4598246
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

12200 W. Olympic Boulevard, Suite 200	90064
Los Angeles, California	(Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code: (310) 481-8400

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

Title of each class	Name of each exchange on which registered
Common Stock, $.01 par value	New York Stock Exchange

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

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

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

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $758,030,323 based on the closing price on the New York Stock Exchange for such shares on June 30, 2003.

As of March 10, 2004, 28,327,872 shares of common stock, par value $.01 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s Proxy Statement with respect to its 2004 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the registrant’s fiscal year are incorporated by reference into Part III hereof.

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Business	1
Item 2.	Properties	17
Item 3.	Legal Proceedings	27
Item 4.	Submission of Matters to a Vote of Security Holders	27
	PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	28
Item 6.	Selected Financial Data	29
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	60
Item 8.	Financial Statements and Supplementary Data	61
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	61
Item 9A.	Controls and Procedures	61
	PART III
Item 10.	Directors and Executive Officers of the Registrant	62
Item 11.	Executive Compensation	62
Item 12.	Security Ownership of Certain Beneficial Owners and Management	62
Item 13.	Certain Relationships and Related Transactions	62
Item 14.	Principal Accountant Fees and Services	62
	PART IV
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	63
	SIGNATURES	69

PART I

ITEM 1. BUSINESS

The Company

Kilroy Realty Corporation (the “Company”) is a real estate investment trust, or REIT, which owns, operates, develops, and acquires Class A suburban office and industrial real estate in key suburban submarkets, primarily in Southern California, that the Company believes have strategic advantages and strong barriers to entry. The Company was incorporated in September 1996 in Maryland and commenced operations upon the completion of its initial public offering in January 1997.

As of December 31, 2003, the Company’s stabilized portfolio of operating properties was comprised of 82 office buildings (the “Office Properties”) and 50 industrial buildings (the “Industrial Properties,” and together with the Office Properties, the “Properties”), which encompassed an aggregate of approximately 7.3 million and 4.9 million rentable square feet, respectively. As of December 31, 2003, the Office Properties were approximately 87.6% leased to 282 tenants and the Industrial Properties were approximately 94.5% leased to 73 tenants. All but five of the Properties are located in Southern California.

The Company’s stabilized portfolio excludes development and redevelopment projects currently under construction, or in pre-development, and “lease-up” properties. The Company defines “lease-up” properties as properties recently developed or redeveloped by the Company that have not yet reached 95% occupancy and are within one year following substantial completion. The Company had one office lease-up property at December 31, 2003, encompassing an aggregate of approximately 209,000 rentable square feet. As of December 31, 2003, the Company had two office redevelopment properties under construction which when completed are expected to encompass an aggregate of approximately 316,100 rentable square feet. In addition, as of December 31, 2003, the Company owned approximately 58.1 acres of undeveloped land upon which the Company currently expects to develop an aggregate of approximately 1.1 million rentable square feet of office space during the next three to five years, depending upon market conditions. All of the Company’s lease-up properties and in-process development and redevelopment projects are located in the Los Angeles and San Diego regions of Southern California. All of the Company’s undeveloped land parcels are located in Southern California in the San Diego region.

The Company owns its interests in all of the Properties through Kilroy Realty, L.P., a Delaware limited partnership (the “Operating Partnership”) and Kilroy Realty Finance Partnership, L.P., a Delaware limited partnership (the “Finance Partnership”). The Company conducts substantially all of its activities through the Operating Partnership in which, as of December 31, 2003, it owned an approximate 87.2% general partnership interest. The remaining 12.8% limited partnership interest in the Operating Partnership was owned by certain of the Company’s executive officers and directors, certain of their affiliates, and other outside investors. As the sole general partner of the Operating Partnership, the Company has control over the management of the Operating Partnership, which owns 114 of the Company’s 132 Properties. The remaining properties are owned by the Finance Partnership. Kilroy Realty Finance, Inc., a wholly-owned subsidiary of the Company, is the sole general partner of the Finance Partnership and owns a 1.0% general partnership interest. The Operating Partnership owns the remaining 99.0% limited partnership interest of the Finance Partnership. The Company conducts substantially all of its development services through Kilroy Services, LLC (“KSLLC”) which, as of December 31, 2003, was owned 99.0% by the Operating Partnership and 1% by the Company. On January 1, 2004, KSLLC became a wholly-owned subsidiary of the Operating Partnership. Unless otherwise indicated, all references to the Company include the Operating Partnership, the Finance Partnership, KSLLC, Kilroy Realty Finance, Inc. and all other wholly-owned subsidiaries, which include Kilroy Realty Partners L.P. (“KRPLP”), Kilroy Realty TRS, Inc., Imperial & Sepulveda, L.P. and Imperial Partners 25, L.P. Imperial & Sepulveda, L.P. and Imperial Partners 25, L.P. were dissolved during the year ended December 31, 2003.

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The following diagram illustrates the structure of Kilroy Realty Corporation and its subsidiaries as of December 31, 2003:

In 1999, the Company, through the Operating Partnership, became a 50% managing member in two limited liability companies (the “Development LLCs”), which were formed to develop two multi-phased office projects in San Diego, California. The Allen Group, a group of affiliated real estate development and investment companies based in San Diego, California, was the other 50% member of the Development LLCs. On March 25, 2002, the Company acquired The Allen Group’s interest in the assets and assumed The Allen Group’s proportionate share of the liabilities of the Development LLCs (see Notes 3 and 12 to the Company’s consolidated financial statements). Subsequent to this transaction, the Development LLCs were liquidated and dissolved. The Development LLCs were consolidated for financial reporting purposes prior to their dissolution on March 25, 2002 because the Company controlled all significant development and operating decisions.

Website Access

The Company makes its periodic and current reports available on its website at www.kilroyrealty.com after these materials are filed with the Securities and Exchange Commission. The Company’s corporate governance guidelines, code of business conduct and ethics, charters of the Audit, Executive Compensation and Nominating/Corporate Governance committees of the Board of Directors are also available on the Company’s website and available in print to any security holder upon request.

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Current Year Highlights

The Company continued to successfully attain its primary business objectives including growth in Funds From Operations, as defined by the National Association of Real Estate Investment Trusts (“FFO”), by accomplishing the following during the year ended December 31, 2003 (see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Supplemental Financial Measure: Funds From Operations” for further discussion of Funds From Operations, including a reconciliation of the Company’s GAAP net income to Funds From Operations):

· Achieved 22.8% growth in net income per common share (diluted), with net income per common share (diluted) at $1.78 for the year ended December 31, 2003 compared to $1.45 for the year ended December 31, 2002.

· Achieved a 52.6% total common annual stockholder return (annual appreciation of the quoted common share price plus dividends paid during the year), the highest since the Company’s IPO in 1997.

· Successfully repositioned and commenced leasing of the five office buildings at Kilroy Centre Del Mar and two office buildings at Del Mar Corporate Center. These properties were previously leased to Peregrine Systems, Inc. and Brobeck, Phleger & Harrison, LLP, two tenants that defaulted on and then terminated their respective leases in 2002 and 2003. As of the date of this report, in aggregate, these seven buildings were 79% occupied and the Company has executed leases for 91% of their space.

· Successfullly reached an agreement with Peregrine Systems, Inc. following its bankruptcy, which ultimately produced a $21.3 million settlement payment, of which the Company received $18.3 million in 2003.

· Executed leases on approximately 1.4 million rentable square feet of office and industrial space in the stabilized portfolio, including both renewals and leases to new tenants. The Company’s average rental rate increase was 7.0% on a GAAP basis and 4.3% on a cash basis for leases that commenced during the year ended December 31, 2003.

· Added to the Company’s stabilized portfolio three office development buildings encompassing approximately 399,100 rentable square feet at a total current estimated investment of $135.3 million. These properties were 62% committed at December 31, 2003.

· Added to the Company’s stabilized portfolio one office redevelopment building and one redevelopment life science building encompassing an aggregate of approximately 156,400 rentable square feet at a total current estimated investment of $33.5 million. These properties were 55% committed at December 31, 2003.

· Increased stockholder value and continued improvement of the quality of the Company’s portfolio through the reinvestment of approximately $34.1 million of capital obtained from the sale of non-strategic assets into assets the Company is developing or redeveloping in Southern California. The weighted average age based on rentable square feet of the Company’s office portfolio is down from 21 years at the time of its IPO to 12 years as of December 31, 2003.

· Completed a public offering of 1,610,000 shares of 7.80% Series E Cumulative Redeemable Preferred Stock.

· Executed new secured debt financing that provided the Company with approximately $80.0 million in available proceeds at an annual fixed interest rate of 3.8%. The Company’s total debt as a percentage of total market capitalization was approximately 38.5% at December 31, 2003. See “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for presentation of the Company’s market capitalization. The Company’s total debt and the liquidation value of its preferred equity as a percentage of total market capitalization was approximately 46.6% at December 31, 2003. The Company’s weighted average interest rate was 5.3% excluding loan fees and 5.9% including loan fees at December 31, 2003.

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Business and Growth Strategies

Growth Strategies.    The Company believes that a number of factors and strategies will enable it to continue to achieve its objectives of long-term sustainable growth in net operating income, defined as operating revenues less property and related expenses (property expenses, real estate taxes, provision for bad debts and ground leases) before depreciation, and FFO as well as maximization of long-term stockholder value including: (i) the quality and location of the Company’s Properties; (ii) the Company’s ability to efficiently manage its assets as a low cost provider of commercial real estate due to its core capabilities in all aspects of real estate ownership including property management, leasing, marketing, financing, accounting, legal administration, construction management and new development; (iii) the Company’s existing substantial development pipeline established over the past several years; (iv) the pursuit of redevelopment opportunities in land-constrained markets; and (v) the Company’s access to development and leasing opportunities as a result of its extensive experience and significant working relationships with major Southern California corporate tenants, municipalities and landowners given the Company’s over 55-year presence in the Southern California market. Management believes that the Company is well positioned to continue to capitalize on existing opportunities because of its extensive experience in its submarkets, its seasoned management team and its proven ability to efficiently develop, acquire, lease and manage office and industrial properties.

Operating Strategies.    The Company focuses on enhancing long-term growth in net operating income and FFO from its Properties by: (i) maintaining higher than average regional occupancy rates; (ii) maximizing cash flow from its Properties through active leasing, early renewals, and effective property management; (iii) structuring leases to maximize returns and internal growth; (iv) managing portfolio credit risk through effective underwriting including the use of credit enhancements and collateral support to mitigate portfolio credit risk; (v) managing operating expenses through the efficient use of internal management, leasing, marketing, financing, accounting and construction management functions; (vi) maintaining and developing long-term relationships with a diverse tenant base; (vii) managing its Properties to offer the maximum degree of utility and operational efficiency to tenants; (viii) continuing to effectively manage capital improvements to enhance its Properties’ competitive advantages in their respective markets and improve the efficiency of building systems; and (ix) attracting and retaining motivated employees by providing financial and other incentives to meet the Company’s operating and financial goals.

Development Strategies.    The Company and its predecessors have developed office and industrial properties, including more recently high technology facilities, primarily located in Southern California, for its own portfolio and for third parties, since 1947. Over the past several years, the Company has established a substantial development pipeline in its target markets. The Company’s future development pipeline includes 58.1 acres of undeveloped land which can support future development of approximately 1.1 million rentable square feet, which the Company expects to develop over the next three to five years, depending on market conditions. The Company’s strategy with respect to development is to: (i) maintain a disciplined approach to development by focusing on pre-leasing, phasing and cost control; (ii) continue to execute the Company’s build-to-suit program where it develops properties leased by specific tenants providing for lower risk development; (iii) evaluate redevelopment opportunities in land-constrained markets since such efforts generally achieve similar returns to new development with reduced entitlement risk and shorter construction periods; (iv) be the premier low-cost provider of two- to four-story campus style office buildings in Southern California; and (v) reinvest capital from dispositions of non-strategic assets into new, state-of-the-market development assets with higher cash flows and rates of return.

The Company may engage in the additional development or redevelopment of office and/or industrial properties, primarily in Southern California, when market conditions support a favorable risk-adjusted return on such development or redevelopment. The Company’s activities with third-party owners in Southern California are expected to give the Company further access to development opportunities. There can be no assurance, however, that the Company will be able to successfully develop or redevelop any of the properties or that it will have access to additional development or redevelopment opportunities.

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Financing Strategies.    The Company’s financing policies and objectives are determined by the Company’s Board of Directors. The Company’s goal is to limit its dependence on leverage and maintain a conservative ratio of debt to total market capitalization. This ratio may be increased or decreased 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. The Company’s funding strategies are to: (i) maintain financial flexibility and the ability to access a variety of capital sources; (ii) maintain a staggered debt maturity schedule to limit risk exposure at any particular point in the capital and credit market cycles; (iii) complete financing in advance of the need for capital; and (iv) manage interest rate exposure.

The Company intends to utilize one or more sources of capital for future growth, which may include borrowings under the Company’s unsecured credit facility, the issuance of debt or equity securities and other bank and/or institutional borrowings and disposition of non-strategic assets. There can be no assurance, however, that the Company will be able to obtain capital on terms favorable to the Company or at all.

Significant Tenants

As of December 31, 2003, the Company’s ten largest office tenants represented approximately 29.7% of total annual base rental revenues, defined as annualized monthly contractual rents from existing tenants at December 31, 2003 determined on a straight-line basis over the term of the related lease in accordance with GAAP, and its ten largest industrial tenants represented approximately 8.1% of total annual base rental revenues. Of this amount, its largest tenant, The Boeing Company, leased an aggregate of approximately 846,800 rentable square feet of office space under eight separate leases, representing approximately 7.5% of the Company’s total annual base rental revenues at December 31, 2003. One of these leases encompassing approximately 293,300 rentable square feet at a building in El Segundo, California is scheduled to expire July 2004. The Boeing Company has also informed the Company that it intends to exercise its option to early terminate another lease in El Segundo, California encompassing approximately 7,800 rentable square feet in November 2004. The base periods for the remaining leases for The Boeing Company expire at various dates between August 2005 and March 2009. See additional discussion under “Item 1: Business Risks—The Company may be unable to renew leases or re-let available space” and under “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Which May Influence Future Results of Operations.”

The Company’s ten largest office tenants, based on annualized base rental revenues at December 31, 2003, are: The Boeing Company, AMN Healthcare, DirecTv, Inc., Diversa Corporation, Epson America, Inc., Fair Isaac & Company, Fish & Richardson, Newgen Results Corporation, SCAN Health Plan and Epicor Software Corporation. The Company’s ten largest industrial tenants, based on annualized base rental revenues, are: Celestica California, Inc., Qwest Communications Corporation, Mattel, Inc., Packard Hughes Interconnect, Targus, Inc., NBTY Manufacturing, LLC, United Plastics Group, Inc., Kraft Foods, Inc., Extron Electronics, Inc. and Ricoh Electronics. See additional discussion of significant tenants and Recent Information Regarding Significant Tenants under “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations.” For further discussion on the composition of the Company’s tenant base, see “Item 2: Properties—Tenant Information.”

Employees

As of December 31, 2003, the Company, through the Operating Partnership and KSLLC employed 112 persons. The Company, the Operating Partnership and KSLLC believe that relations with their employees are good.

Government Regulations

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

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Environmental Matters

Existing conditions at some of our properties.    Independent environmental consultants have conducted Phase I or similar environmental site assessments on all of the Company’s Properties. The Company generally obtains these assessments prior to the acquisition of a property and may later update them as required for subsequent financing of the property or as requested by a tenant. Site assessments generally include a historical review, a public records review, an investigation of the surveyed site and surrounding properties, and the issuance of a written report. These assessments do not generally include soil samplings or subsurface investigations. Through December 31, 2003, Phase I site assessments revealed that 30, or 23%, of its Properties, representing approximately 25% of the aggregate square footage of its Properties, contain asbestos-containing materials. No remedial action is necessary with respect to these Properties in connection with the asbestos-containing materials.

The Company’s site assessments also revealed that historical operations at or near some of the Company’s Properties, including the operation of underground storage tanks, may have caused soil or groundwater contamination. The prior owners of the affected properties conducted clean-up of known contamination in the soils on the properties and management does not believe that further clean-up of the soils is required. The Company is not aware of any such condition, liability or concern by any other means that would give rise to material environmental liability. However, the assessments may have failed to reveal all environmental conditions, liabilities or compliance concerns; there may be material environmental conditions, liabilities or compliance concerns that arose at a property after the review was completed; future laws, ordinances or regulations may impose material additional environmental liability; and current environmental conditions at our properties may be affected in the future by tenants, third parties or the condition of land or operations near our properties, such as the presence of underground storage tanks. The Company cannot give assurance that costs of future environmental compliance will not affect its ability to make distributions to its stockholders.

Use of hazardous materials by some of our tenants.    Some of the Company’s tenants routinely handle hazardous substances and wastes on its Properties as part of their routine operations. Environmental laws and regulations subject these tenants, and potentially the Company, to liability resulting from such activities. The Company requires its tenants, in their leases, to comply with these environmental laws and regulations and to indemnify the Company for any related liabilities. As of December 31, 2003, less than 5% of the Company’s tenants, representing less than 10% of the aggregate square footage of the Company’s Properties, handled hazardous substances and/or wastes on the Company’s Properties as part of their routine operations. These tenants are primarily involved in the life sciences and the light industrial and warehouse business. Management is not aware of any material noncompliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with any of the Company’s Properties, and management does not believe that on-going activities by the Company’s tenants will have a material adverse effect on the Company’s operations.

Costs related to government regulation and private litigation over environmental matters.    Under applicable environmental laws and regulations, the Company is liable for the costs of removal or remediation of certain hazardous or toxic substances present or released on its Properties. These laws could impose liability without regard to whether the Company is responsible for, or even knew of, the presence or release of the hazardous materials. Government investigations and remediation actions may have substantial costs and the presence or release of hazardous substances on a property could result in personal injury or similar claims by private plaintiffs. For instance, if asbestos-containing materials, toxic mold, or other hazardous or toxic substances were found on the Company’s Properties, third parties might seek recovery from the Company for personal injuries associated with those substances. Various laws also impose liability on persons who arrange for the disposal or treatment of hazardous or toxic substances for the cost of removal or remediation of hazardous substances at the disposal or treatment facility. These laws often impose liability whether or not the person arranging for the disposal ever owned or operated the disposal facility. As the owner and operator of its Properties, the Company may be considered to have arranged for the disposal or treatment of hazardous or toxic substances.

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Potential environmental liabilities may exceed the Company’s environmental insurance coverage limits.     The Company carries what management believes to be sufficient environmental insurance to cover any potential liability for soil and groundwater contamination and the presence of asbestos-containing materials at the affected sites identified in the environmental site assessments. However, management cannot provide any assurance that the Company’s insurance coverage will be sufficient or that its liability, if any, will not have a material adverse effect on the Company’s financial condition, results of operations, and cash flows, quoted trading price of the Company’s securities and its ability to satisfy debt service obligations and to pay distributions to stockholders.

Other Governmental Regulations Affecting Properties

Costs of compliance with other governmental regulations.    The Company’s Properties are also subject to regulation under other laws, such as the Americans with Disabilities Act of 1990 (the “ADA”) under which all public accommodations must meet federal requirements related to access and use by disabled persons, and state and local laws addressing earthquake, fire and life safety requirements. Although management believes that its Properties substantially comply with present requirements under applicable governmental regulations, none of the Properties have been audited or investigated for compliance by any regulatory agency. If the Company were not in compliance with material provisions of the ADA or other regulations affecting the Properties, the Company might be required to take remedial action which could include making modifications or renovations to Properties. Federal, state or local governments may also enact future laws and regulations that the could require the Company to make significant modifications or renovations to the Properties. If the Company were to incur substantial costs to comply with the ADA or any other regulations, its financial condition, results of operations, and cash flows, quoted trading prices of the Company’s securities and its ability to satisfy its debt service obligations and make distributions to stockholders could be adversely affected.

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 “1933 Act”), and Section 21E of the Exchange Act of 1934, as amended (the “1934 Act”)) pertaining to, among other things, the Company’s future results of operations, cash available for distribution, property acquisitions, level of future property dispositions, ability to timely lease or re-lease space at current or anticipated rents, ability to complete current and future development projects within budget and on schedule, sources of growth, planned development and expansion of owned or leased property, capital requirements, compliance with contractual obligations and federal, state and local regulations, conditions of properties, environmental findings 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, as well as the factors discussed in “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Which May Influence Future Results of Operations,” and other information contained in this report, should be considered in evaluating the Company and its business.

General economic conditions may adversely affect the Company’s financial condition and results of operations.    Periods of economic slowdown or recession in the United States and in other countries, declining demand for leased office or industrial properties or rising interest rates, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases at the Company’s Properties, either of which could adversely affect the Company’s financial condition, results of operations, cash flow, quoted trading prices of its securities and ability to satisfy its debt service obligations and to pay distributions to its stockholders.

Future terrorist activity or declaration of war by the United States may have an adverse affect on the Company’s financial condition and operating results.    Future terrorist attacks in the United States, such as the

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attacks that occurred in New York and Washington, D.C. on September 11, 2001 and other acts of terrorism or war, may result in declining economic activity, which could harm the demand for and the value of the Company’s Properties. In addition, the public perception that certain locations are at greater risk for attack, such as major airports, ports and rail facilities, may decrease the demand for and the value of the Company’s Properties near these sites. A decrease in demand would make it difficult for the Company to renew or release its Properties at these sites at lease rates equal to or above historical rates. Terrorist activities also could directly impact the value of the Company’s Properties through damage, destruction or loss, and the availability of insurance for these acts may be less, and cost more, which would adversely affect the Company’s financial condition. To the extent that the Company’s tenants are impacted by future attacks, their businesses similarly could be adversely affected, including their ability to continue to honor their existing leases.

Terrorist acts and a declaration of war by the United States also may adversely affect the markets in which the Company’s securities trade, and may cause further erosion of business and consumer confidence and spending and may result in increased volatility in national and international financial markets and economies. Any one of these events may cause a decline in the demand for the Company’s office and industrial leased space, delay the time in which the Company’s new or renovated properties reach stabilized occupancy, increase the Company’s operating expenses, such as those attributable to increased physical security for its Properties, and limit the Company’s access to capital or increase the Company’s cost of raising capital.

The Company depends on significant tenants.    As of December 31, 2003, the Company’s ten largest office tenants represented approximately 29.7% of total annual base rental revenues and its ten largest industrial tenants represented approximately 8.1% of total annual base rental revenues. (See further discussion on the composition of the Company’s tenants by industry under “Item 2—Properties.”) Of this amount, its largest tenant, The Boeing Company, leased approximately 846,800 rentable square feet of office space, representing approximately $14.4 million of the Company’s total annual base rental revenues at December 31, 2003. One of the Boeing leases for a building located in El Segundo, encompassing approximately 293,300 rentable square feet, is scheduled to expire in July 2004. The Boeing Company has also informed the Company that it intends to exercise its option to early terminate another lease in El Segundo, California encompassing approximately 7,800 rentable square feet in November 2004. The other six leases are scheduled to expire at various dates between August 2005 and March 2009. The Boeing Company previously had another lease, at 909 N. Sepulveda Boulevard in El Segundo, California, encompassing approximately 248,150 rentable square feet that expired on February 28, 2003. The Boeing Company vacated this building upon lease expiration. This building was subsequently moved to the Company’s redevelopment portfolio.

As previously reported, Peregrine Systems, Inc. (“Peregrine”), the Company’s second largest tenant at December 31, 2002, filed for bankruptcy in September 2002. Peregrine had leased four office buildings in a five-building complex totaling approximately 424,400 rentable square feet under four separate leases. Peregrine was also committed to lease the fifth building, encompassing approximately 114,800 rentable square feet, which was completed in the third quarter of 2002. Peregrine surrendered this fifth building back to the Company in June 2002. In July 2003, the bankruptcy court approved Peregrine’s plan of reorganization. Under terms of the plan of reorganization and in accordance with a settlement agreement previously approved by the bankruptcy court, the Company received a payment in the third quarter of 2003 of approximately $18.3 million and is scheduled to receive four additional payments of approximately $750,000, each to be paid annually over the next four years.

As previously reported, Brobeck, Phleger & Harrison, LLP (“Brobeck”), the Company’s sixth largest tenant at December 31, 2002, dissolved in February 2003 and as a result the Company terminated the two leases Brobeck had with the Company encompassing 161,500 aggregate rentable square feet. As of December 31, 2003 these buildings were 66% re-leased to new tenants.

Although the Company has been able to mitigate the impact of significant tenant defaults on its financial condition, revenues and results of operations, the Company’s financial condition, results of operations and cash flows would be adversely affected if any of the Company’s other significant tenants fail to renew their leases,

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renew their leases on terms less favorable to the Company or if any of them become bankrupt or insolvent or otherwise unable to satisfy their lease obligations.

Downturn in tenants’ businesses may reduce the Company’s cash flow.    For the year ended December 31, 2003, the Company derived approximately 89.5% of its revenues from continuing operations from rental income and tenant reimbursements. This percentage is significantly lower than in previous years as a result of the net lease termination fee of $18.0 million that the Company recorded in connection with the Peregrine settlement agreement (see note 20 to the Company’s consolidated financial statements.) Excluding this $18.0 million, the Company would have derived 97.1% of its revenues from rental income and tenant reimbursements during the year ended December 31, 2003. A tenant may experience a downturn in its business, which may weaken its financial condition and result in its failure to make timely rental payments. In the event of default by a tenant, the Company may experience delays in enforcing its rights as landlord and may incur substantial costs in protecting its investment. As discussed above under the caption “The Company depends on significant tenants,” the Company’s second largest tenant at December 31, 2002, Peregrine, filed for bankruptcy in September 2002. Prior to filing bankruptcy and rejecting two of the four leases it had with the Company, the leases with Peregrine represented approximately 7.9% of the Company’s annual base rental revenues. In addition, as discussed above, Brobeck dissolved and began winding up its operations in February 2003. See “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors which may Influence Future Results of Operations” for a discussion of the impact the events discussed above.

The bankruptcy or insolvency of a major tenant also may adversely affect the income produced by the Company’s Properties. If any tenant becomes a debtor in a case under the Bankruptcy Code, the Company cannot evict the tenant solely because of the bankruptcy. In addition, the bankruptcy court might permit the tenant to reject and terminate its lease with the Company. The Company’s claim against the tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease. Therefore, the Company’s claim for unpaid rent would likely not be paid in full. Any losses resulting from the bankruptcy of any of the Company’s existing tenants could adversely impact the Company’s financial condition, results from operations, cash flows, the quoted trading prices of the Company’s securities and the Company’s ability to satisfy its debt service obligations and to pay distributions to stockholders.

The Company may be unable to renew leases or re-let available space.    As of December 31, 2003, the Company had office and industrial space available for lease representing approximately 9.7% of the total square footage of the Properties. In addition, leases representing approximately 10.1% and 12.1% of the leased square footage of the Properties are scheduled to expire in 2004 and 2005, respectively. Above market rental rates on some of the Properties may force the Company to renew or re-lease expiring leases at rates below current lease rates. Management believes that the average rental rates for all of its Properties generally are equal to the current average quoted market rate, although individual Properties within any particular submarket presently may be leased above or below the rental rates within that submarket. For the leases scheduled to expire in 2004, management believes the rental rates on average are approximately 10% to 15% above current average quoted market rates, which is primarily related to one lease. The Company cannot give any assurance that leases will be renewed or that available space will be re-leased at rental rates equal to or above the current rental rates. If the average rental rates for the Properties decrease, existing tenants do not renew their leases, or the Company does not re-lease a significant portion of its available space, its financial position, results of operations, cash flows, the quoted trading prices of its securities and its ability to satisfy its debt service obligations and pay distributions to its stockholders would be adversely affected.

Most of the Company’s Properties depend upon the Southern California economy.    As of December 31, 2003, 93.2% of the aggregate square footage of the Company’s stabilized portfolio and 94.5% of the Company’s annualized base rent, excluding expense reimbursements and rental abatements, were attributable to properties located in Southern California. In addition, as of December 31, 2003, all of the Company’s lease-up, in-process and future development and redevelopment projects were located in Southern California. The Company’s ability

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to make expected distributions to stockholders depends on its ability to generate FFO in excess of scheduled principal payments on debt, payments on the preferred limited partnership units issued by the Operating Partnership, distributions to preferred stockholders and capital expenditure requirements. Events and conditions applicable to owners and operators of real property that are beyond the Company’s control may decrease funds available for distribution and the value of the Company’s Properties. These events include: local oversupply or reduction in demand for office, industrial or other commercial space; inability to collect rent from tenants; vacancies or inability to rent spaces on favorable terms; inability to finance property development and acquisitions on favorable terms; increased operating costs, including insurance premiums, utilities, and real estate taxes; costs of complying with changes in governmental regulations; the relative illiquidity of real estate investments; changing submarket demographics; and property damage resulting from seismic activity. The geographical concentration of the Properties may expose the Company to greater economic risks than if it owned properties in several geographic regions. Any adverse economic or real estate developments in the Southern California region could adversely impact the Company’s financial condition, results from operations, cash flows, quoted trading prices of its securities and ability to satisfy its debt service obligations and to pay distributions to its stockholders.

Increasing utility costs and power outages in California may have an adverse effect on the Company’s operating results and occupancy levels.    The State of California continues to address issues related to the supply of electricity and natural gas. Since June 2000, shortages of electricity have resulted in increased costs for consumers and certain interruptions in service. Increased consumer costs and consumer perception that the State is not able to effectively manage its energy needs may reduce demand for leased space in California office and industrial properties. A significant reduction in demand for office and industrial space would adversely affect the Company’s future financial condition, results of operations, cash flows, quoted per share trading price of its common stock and ability to satisfy its debt service obligations and to pay distributions to stockholders.

The Company’s debt level reduces cash available for distribution and may expose the Company to the risk of default under its debt obligations.    Payments of principal and interest on borrowings may leave the Company with insufficient cash resources to operate its Properties or to pay the distributions necessary to maintain its REIT qualification. The Company’s level of debt and the limitations imposed by its debt agreements may have important consequences to the Company, including the following: the Company may be unable to refinance its indebtedness at maturity or the refinancing terms may be less favorable than the terms of its original indebtedness; cash flow may be insufficient to meet required principal and interest payments; the Company may be forced to dispose of one or more of its Properties, possibly on disadvantageous terms; the Company may default on its obligations and the lenders or mortgagees may foreclose on the properties that secure the loans and receive an assignment of rents and leases; and the Company’s default under one mortgage loan with cross default provisions could result in a default on other indebtedness. If one or more of these events were to occur, the Company’s financial condition, results of operations, cash flows, quoted trading prices of its securities and ability to satisfy its debt service obligations and to pay distributions to stockholders could be adversely affected. In addition, foreclosures could create taxable income without accompanying cash proceeds, a circumstance which could require the Company to pay income or excise tax notwithstanding the Company’s tax status as a REIT under the Internal Revenue Code of 1986, as amended (“Internal Revenue Code”). As of December 31, 2003, the Company had approximately $761.0 million aggregate principal amount of indebtedness, $73.9 million of which is contractually due prior to December 31, 2004. The Company’s total debt and preferred equity represented 46.6% of its total market capitalization at December 31, 2003; see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for presentation of the Company’s market capitalization.

The Company faces significant competition which may decrease the occupancy and rental rates of its Properties.    The Company competes with several developers, owners and operators of office, industrial and other commercial real estate, many of which own properties similar to the Company’s in the same submarkets in which the Company’s Properties are located, but which have lower occupancy rates than the Company’s

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Properties. For instance, occupancy rates for the Company’s Sorrento Mesa stabilized office property portfolio in San Diego County at December 31, 2003 was 97.9% in comparison to 85.5% for the Sorrento Mesa two-story corporate office submarket in total. The Company believes that its higher occupancy rates mean that, on average, its competitors have more space currently available for lease than the Company. As a result, the Company’s competitors have an incentive to decrease rental rates until their available space is leased. If the Company’s competitors offer space at rental rates below the rates currently charged by the Company for comparable space, the Company may be pressured to reduce its rental rates below those currently charged in order to retain tenants when its tenant leases expire. As a result, the Company’s financial condition, results of operations and cash flows, quoted trading prices of its securities and ability to satisfy its debt service obligations and to pay distributions to stockholders may be adversely affected.

Potential losses may not be covered by insurance.    The Company carries comprehensive liability, fire, extended coverage and rental loss insurance covering all of its Properties. Management believes the policy specifications and insured limits are appropriate given the relative risk of loss, the cost of the coverage and industry practice. The Company does not carry insurance for generally uninsurable losses such as loss from riots or acts of God. Some of the Company’s policies, like those covering losses due to floods, are subject to limitations involving large deductibles or co-payments and policy limits.

Earthquake damage to the Company’s Properties could have an adverse effect on its financial condition and operating results.    The Company carries earthquake insurance on properties located in areas known to be subject to earthquakes in an amount and with deductibles which management believes are commercially reasonable. As of December 31, 2003, 131 of the Company’s 132 Properties representing approximately 98.9% of the Company’s stabilized portfolio based on aggregate square footage and approximately 99.6% based on annualized base rent were located in areas known to be subject to earthquakes. While the Company presently carries earthquake insurance on these properties, the amount of its earthquake insurance coverage may not be sufficient to cover losses from earthquakes. In addition, the Company may discontinue earthquake insurance on some or all of its Properties in the future if the cost of premiums for earthquake insurance exceeds the value of the coverage discounted for the risk of loss. If the Company experiences a loss which is uninsured or which exceeds policy limits, it could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. In addition, if the damaged properties are subject to recourse indebtedness, the Company would continue to be liable for the indebtedness, even if the properties were irreparable.

The Company may be unable to complete acquisitions and successfully operate acquired properties.    The Company continues to evaluate the market of available properties and may acquire office and industrial properties when strategic opportunities exist. The Company’s ability to acquire properties on favorable terms and successfully operate them is subject to the following risks: the potential inability to acquire a desired property because of competition from other real estate investors with significant capital, including both publicly traded REITs and institutional investment funds; even if the Company enters into agreements for the acquisition of office and industrial properties, these agreements are subject to customary conditions to closing, including completion of due diligence investigations to management’s satisfaction and may never close; the Company may be unable to finance the acquisition on favorable terms; the Company may spend more than budgeted amounts to make necessary improvements or renovations to acquired properties; and the Company may lease the acquired properties at below expected rental rates. If the Company cannot finance property acquisitions on favorable terms or operate acquired properties to meet financial expectations, its financial condition, results of operations, cash flows, quoted trading prices of its securities and ability to satisfy its debt service obligations and to pay distributions to stockholders could be adversely affected.

The Company may be unable to successfully complete and operate developed and redeveloped properties.     There are significant risks associated with property development. The Company may be unable to: obtain construction financing on favorable terms or at all; obtain permanent financing at all or on advantageous terms if development projects are financed through construction loans; or lease developed properties at expected rental rates or within projected timeframes. In addition, the Company may not complete development projects on

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schedule or within budgeted amounts; the Company may expend funds on and devote management’s time to projects which the Company may not complete; and the Company may encounter delays or refusals in obtaining all necessary zoning, land use, building, occupancy, and other required governmental permits and authorizations. For example, during the fourth quarter of 1998, the Company withdrew its participation from a master planned commercial development prior to the commencement of construction. Also, during the third quarter of 2000, the Company delayed commencement of construction on one of its projects by four months. The project was an assemblage in an urban infill location that required the relocation of some existing businesses. The Company encountered delays when one of the existing tenants experienced difficulty in relocating as a result of the high leasing demand and tight supply constraints in that submarket.

Lastly, in 2003, the Company added two office development projects to its stabilized portfolio since it had been one year since their substantial completion. As of December 31, 2003, these projects were 27.8% occupied and the Company had executed leases or letters of intent for approximately 46.9% of the aggregate rentable square feet at these projects.

If one or more of these events were to occur in connection with the Company’s projects currently planned for development or redevelopment, the Company’s financial condition, results of operations, cash flows, quoted trading prices of its securities and ability to satisfy its debt service obligations and to pay distributions to its stockholders could be adversely affected.

While the Company primarily develops office and industrial properties in Southern California markets, it may in the future develop properties for retail or other use and expand its business to other geographic regions where it expects the development of property to result in favorable risk-adjusted returns on its investment. Presently, the Company does not possess the same level of familiarity with development of other property types or outside markets, which could adversely affect its ability to develop properties or to achieve expected performance.

The Company could default on leases for land on which some of its Properties are located.    As of December 31, 2003, the Company owned ten office buildings located on various parcels, each of which the Company leases on a long-term basis. If the Company defaults under the terms of any particular lease, it may lose the ownership rights to the property subject to the lease. Upon expiration of a lease and all of its options, the Company may not be able to renegotiate a new lease on favorable terms, if at all. The loss of the ownership rights to these properties or an increase of rental expense would have an adverse effect on the Company’s financial condition, results of operations, cash flows, quoted trading prices of its securities and ability to satisfy its debt service obligations and to pay distributions to stockholders. As of December 31, 2003, the Company had approximately 1.5 million aggregate rentable square feet of rental space located on these leased parcels. The leases for the land under the seven buildings at the Kilroy Airport Center, Long Beach expire in 2084. The leases for the land under the three buildings at the SeaTac Office Center, including renewal options, expire in 2062.

Real estate assets are illiquid and the Company may not be able to sell its Properties when it desires.    The Company’s investments in its Properties are relatively illiquid which limits the Company’s ability to sell its Properties quickly in response to changes in economic or other conditions. In addition, the Internal Revenue Code generally imposes a 100% prohibited transaction tax on profits the Company derives from sales of properties held primarily for sale to customers in the ordinary course of business, which could affect the Company’s ability to sell properties. These restrictions on the Company’ ability to sell its Properties could have an adverse effect on its financial position, results from operations, cash flows, quoted trading prices of its securities and ability to satisfy its debt service obligations and to repay indebtedness and to pay distributions to its stockholders.

Common limited partners of the Operating Partnership have limited approval rights, which may prevent the Company from completing a change of control transaction, which may be in the best interests of stockholders.    The Company may not withdraw from the Operating Partnership or transfer its general

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partnership interest or admit another general partner without the approval of a majority of the common limited partnership unitholders except in the case of a “termination transaction” which requires the approval of 60% of the common unitholders, including the common units held by the Company in its capacity as general partner. The right of common limited partners to vote on these transactions could limit the Company’s ability to complete a change of control transaction that might otherwise be in the best interest of its stockholders.

Limited partners of the Operating Partnership must approve the dissolution of the Operating Partnership and the disposition of properties they contributed.    For as long as limited partners own at least 5% of all of the common units of the Operating Partnership, the Company must obtain the approval of limited partners holding a majority of the common units before it may dissolve the partnership. As of December 31, 2003, limited partners owned approximately 12.8% of the outstanding interests in the Operating Partnership. In addition, the Operating Partnership has agreed to use commercially reasonable efforts to minimize the tax consequences to common limited partners resulting from the repayment, refinancing, replacement or restructuring of debt, or any sale, exchange or other disposition of any of its other assets. The exercise of one or more of these approval rights by the limited partners could delay or prevent the Company from completing a transaction which may be in the best interest of its stockholders.

The Chairman of the Company’s Board of Directors and its President and Chief Executive Officer each have substantial influence over the Company’s affairs.    John B. Kilroy, Sr. is the Chairman of the Board of Directors and John B. Kilroy, Jr. is President and Chief Executive Officer. Each is a member of the Company’s Board of Directors, and together, they beneficially own 606,132 shares of common stock, common limited partnership units exchangeable for an aggregate of 1,748,072 shares of the Company’s common stock and currently vested options to purchase an aggregate of 46,377 shares of common stock, representing a total of approximately 8.0% of the total outstanding shares of common stock as of December 31, 2003, assuming the exchange, at the Company’s option, of the common limited partnership units held by Messrs. Kilroy into shares of the Company’s common stock and the exercise of their currently vested options. Pursuant to the Company’s charter no other stockholder may own, actually or constructively, more than 7.0% of the Company’s common stock without obtaining a waiver from the Board of Directors. The Board of Directors has waived the ownership limits with respect to John B. Kilroy, Sr., John B. Kilroy, Jr., members of their families and some of their affiliated entities. These named individuals and entities may own either actually or constructively, in the aggregate, up to 21% of the Company’s outstanding common stock. Consequently, Messrs. Kilroy have substantial influence on the Company and could exercise their influence in a manner that is not in the best interest of the Company’s stockholders. Also, they may, in the future, have a substantial influence on the outcome of any matters submitted to the Company’s stockholders for approval.

There are limits on the ownership of the Company’s capital stock, which limit the opportunities for a change of control at a premium to existing stockholders.    Provisions of the Maryland General Corporation Law, the Company’s charter, the Company’s bylaws, and the Operating Partnership’s partnership agreement may delay, defer, or prevent a change in control over the Company or the removal of existing management. Any of these actions might prevent the stockholders from receiving a premium for their shares of stock over the then prevailing market prices.

The Internal Revenue Code sets forth stringent ownership limits on the Company as a result of its decision to be taxed as a REIT, including: no more than 50% in value of the Company’s capital stock may be owned, actually or constructively, by five or fewer individuals, including some entities, during the last half of a taxable year; subject to exceptions, the Company’s common stock must be held by a minimum of 100 persons for at least 335 days of a 12-month taxable year, or a proportionate part of a short taxable year; and if the Company, or any entity which owns 10% or more of its capital stock, actually or constructively owns 10% or more of one of the Company’s tenants, or a tenant of any partnership in which the Company is a partner, then any rents that the Company receives from that tenant in question will not be qualifying income for purposes of the Internal Revenue Code’s REIT gross income tests, regardless of whether the Company receives the rents directly or through a partnership.

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The Company’s charter establishes clear ownership limits to protect its REIT status. No single stockholder may own, either actually or constructively, absent a waiver from the Board, more than 7.0% (by value or by number of shares, whichever is more restrictive) of the Company’s common stock outstanding. Similarly, absent a waiver from the Board, no single holder of the Company’s Series A Preferred Stock and Series D Preferred Stock may actually or constructively own any class or series of its preferred stock, so that their total capital stock ownership would exceed 7.0% by value of the Company’s total outstanding shares of capital stock, no single holder of Series B Preferred Stock, if issued, may actually or constructively own more than 7.0% (by value or by number of shares, whichever is more restrictive) of the Company’s Series B Preferred Stock, and no single holder of Series E Preferred Stock may actually or constructively own more than 9.8% (by value or by number of shares, whichever is more restrictive) of the Series E Preferred Stock.

The Board of Directors may waive the ownership limits if it is satisfied that the excess ownership would not jeopardize the Company’s REIT status and if it believes that the waiver would be in the Company’s best interests. The Board of Directors has waived the ownership limits with respect to John B. Kilroy, Sr., John B. Kilroy, Jr., members of their families and some of their affiliated entities. These named individuals and entities may own either actually or constructively, in the aggregate, up to 21% of the Company’s outstanding common stock.

If anyone acquires shares in excess of any ownership limits, the transfer to the transferee will be void with respect to these excess shares, the excess shares will be automatically transferred from the transferee or owner to a trust for the benefit of a qualified charitable organization, the purported transferee or owner will have no right to vote those excess shares, and the purported transferee or owner will have no right to receive dividends or other distributions from these excess shares.

The Company’s charter contains provisions that may delay, defer, or prevent a change of control transaction.

The Company’s Board of Directors is divided into classes that serve staggered terms.    The Company’s Board of Directors is divided into three classes with staggered terms. The staggered terms for directors may reduce the possibility of a tender offer or an attempt to complete a change of control transaction even if a tender offer or a change in control is in the Company’s stockholders’ interest.

The Company could issue preferred stock without stockholder approval.    The Company’s charter authorizes its Board of Directors to issue up to 30,000,000 shares of preferred stock, including convertible preferred stock, without stockholder approval. The Board of Directors may establish the preferences, rights and other terms, including the right to vote and the right to convert into common stock any shares issued. The issuance of preferred stock could delay or prevent a tender offer or a change of control even if a tender offer or a change of control was in the Company’s stockholders’ interest. The Operating Partnership has issued 1,500,000 Series A Cumulative Redeemable Preferred units (the “Series A Preferred units”) which in the future may be exchanged one-for-one into shares of 8.075% Series A Cumulative Redeemable Preferred stock, and 900,000 Series D Cumulative Redeemable Preferred units (the “Series D Preferred units”) which in the future may be exchanged one for one into shares of 9.250% Series D Cumulative Redeemable Preferred stock. In addition, the Company has designated and authorized the issuance of up to 400,000 shares of Series B Preferred Stock. As of December 31, 2003, 1,610,000 shares of the Company’s preferred stock are issued and outstanding, consisting solely of the Company’s Series E Preferred stock (the “Series E Preferred Stock”).

The Company has a shareholders’ rights plan.    Each share of the Company’s common stock includes the right to purchase one-hundredth (1/100) of a share of the Company’s Series B Preferred Stock. The rights have anti-takeover effects and would cause substantial dilution to a person or group that attempts to acquire the Company on terms that the Company’s Board of Directors does not approve. The Company may redeem the shares for $.01 per right, prior to the time that a person or group has acquired beneficial ownership of 15% or more of its common stock. Therefore, the rights should not interfere with any merger or business combination approved by the Company’s Board of Directors.

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The staggered terms for directors, provisions for removal of directors, the future issuance of additional common or preferred stock and the Company’s stockholders’ rights plan may delay or prevent a change of control over the Company, even if a change of control might be beneficial to the Company’s stockholders, deter tender offers that may be beneficial to the Company’s stockholders, or limit stockholders’ opportunity to receive a potential premium for their shares if an investor attempted to gain shares beyond the Company’s ownership limits or otherwise to effect a change of control.

Loss of the Company’s REIT status would have significant adverse consequences to it and the value of the Company’s stock.    The Company currently operates and has operated since 1997 in a manner that is intended to allow it to qualify as a REIT for federal income tax purposes under the Internal Revenue Code. If the Company were to lose its REIT status, it would face serious tax consequences that would substantially reduce the funds available for distribution to stockholders for each of the years involved because: the Company would not be allowed a deduction for distributions to stockholders in computing its taxable income and would be subject to federal income tax at regular corporate rates; the Company also could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and unless entitled to relief under statutory provisions, the Company could not elect to be taxed as a REIT for four taxable years following the year during which it was disqualified. In addition, if the Company fails to qualify as a REIT, it will not be required to make distributions to stockholders and all distributions to stockholders will be subject to tax as regular corporate dividends to the extent of the Company’s current and accumulated earnings and profits. As a result of all these factors, the Company’s failure to qualify as a REIT also could impair its ability to expand its business and raise capital, and would adversely affect the value of the Company’s common stock.

Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial and administrative interpretations. The complexity of these provisions and of the applicable treasury regulations that have been promulgated under the Internal Revenue Code is greater in the case of a REIT that holds its assets through a partnership. The determination of various factual matters and circumstances not entirely within the Company’s control may affect its ability to qualify as a REIT. For example, in order to qualify as a REIT, at least 95% of the Company’s gross income in any year must be derived from qualifying sources. Also, the Company must make distributions to stockholders aggregating annually at least 90% of its net taxable income, excluding capital gains. In addition, legislation, new regulations, administrative interpretations or court decisions may adversely affect the Company’s investors or the Company’s ability to qualify as a REIT for federal income tax purposes or the desirability of an investment in a REIT relative to other investments. Although management believes that the Company is organized and operates in a manner to qualify as a REIT, no assurance can be given that the Company has been or will continue to be organized or be able to operate in a manner to qualify or remain qualified as a REIT for federal income tax purposes.

To maintain its REIT status, the Company may be forced to borrow funds on a short-term basis during unfavorable market conditions.    To qualify as a REIT, the Company generally must distribute to its stockholders at least 90% of its net taxable income each year, excluding capital gains, and the Company will be subject to regular corporate income taxes to the extent that it distributes less than 100% of its net taxable income each year. In addition, the Company will be subject to a 4% non-deductible excise tax on the amount, if any, by which distributions paid by the Company in any calendar year are less than the sum of 85% of its ordinary income, 95% of its capital gain net income and 100% of its undistributed income from prior years. In order to maintain its REIT status and avoid the payment of federal income and excise taxes, the Company may need to borrow funds on a short term basis to meet the REIT distribution requirements even if the then prevailing market conditions are not favorable for these borrowings. These short-term borrowing needs could result from differences in timing between the actual receipt of income and inclusion of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments.

The Company’s growth depends on external sources of capital which are outside of the Company’s control.    The Company is required under the Internal Revenue Code to distribute at least 90% of its taxable

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income, determined without regard to the dividends-paid deduction and excluding any net capital gain. Because of this distribution requirement, it may not be able to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, management relies on third-party sources of capital to fund the Company’s capital needs. The Company may not be able to obtain the financing on favorable terms or at all. Any additional debt the Company incurs will increase its leverage. Access to third-party sources of capital depends, in part, on: general market conditions; the market’s perception of the Company’s growth potential; the Company’s current and expected future earnings; the Company’s cash flow and cash distributions; and the market price per share of the Company’s common stock. If the Company cannot obtain capital from third-party sources, it may not be able to acquire properties when strategic opportunities exist, satisfy its debt service obligations, or make the cash distributions to stockholders necessary to maintain its qualification as a REIT.

The Company’s Board of Directors may change investment and financing policies without stockholder approval and become more highly leveraged which may increase the Company’s risk of default under its debt obligations.

The Company is not limited in its ability to incur debt.    The Company’s financing policies and objectives are determined by the Company’s Board of Directors. The Company’s goal is to limit its dependence on leverage and maintain a conservative ratio of debt to total market capitalization. However, the Company’s organizational documents do not limit the amount or percentage of indebtedness, funded or otherwise, that it may incur. At December 31, 2003, the Company had approximately $761.0 million aggregate principal amount of indebtedness outstanding, which represented 38.5% of the Company’s total market capitalization. The Company’s total debt and the liquidation value of its preferred equity as a percentage of total market capitalization was approximately 46.6% at December 31, 2003. See “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for presentation of the Company’s market capitalization. This ratio may be increased or decreased without the consent of the Company’s stockholders. Therefore, the Company could become more highly leveraged without stockholder approval, which would result in an increase in its debt service and which could adversely affect cash flow and the ability to make distributions to stockholders. Higher leverage also increases the risk of default on the Company’s obligations and limits the Company’s ability to incur additional financing in the future.

The Company may issue additional shares of capital stock without stockholder approval, which may dilute stockholder investment.    The Company may issue shares of its common stock, preferred stock or other equity or debt securities without stockholder approval. Similarly, the Company may cause the Operating Partnership to offer its common or preferred units for contributions of cash or property without approval by the limited partners of the Operating Partnership or the Company’s stockholders. Existing stockholders have no preemptive rights to acquire any of these securities, and any issuance of equity securities under these circumstances may dilute a stockholder’s investment.

The Company may invest in securities related to real estate which could adversely affect its ability to make distributions to stockholders.    The Company may purchase securities issued by entities which own real estate and may, in the future, also invest in mortgages. In general, investments in mortgages are subject to several risks, including: borrowers may fail to make debt service payments or pay the principal when due; the value of the mortgaged property may be less than the principal amount of the mortgage note securing the property; and interest rates payable on the mortgages may be lower than the Company’s cost for the funds used to acquire these mortgages. Owning these securities may not entitle the Company to control the ownership, operation and management of the underlying real estate. In addition, the Company may have no control over the distributions with respect to these securities, which could adversely affect its ability to make distributions to stockholders.

Sales of a substantial number of shares of common stock, or the perception that this could occur, could result in decreasing the market price per share for the Company’s common stock.    Management cannot predict

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whether future issuances of shares of the Company’s common stock or the availability of shares for resale in the open market will result in decreasing the market price per share of its common stock.

As of December 31, 2003, 28,209,213 shares of the Company’s common stock and 1,610,000 shares of the Company’s preferred stock, consisting solely of the Company’s Series E Preferred Stock, were issued and outstanding and the Company had reserved for future issuance the following shares of common stock: 4,154,313 shares issuable upon the exchange, at the Company’s option, of common units issued in connection with the formation of the Operating Partnership and in connection with property acquisitions; 504,941 shares issuable under the Company’s 1997 Stock Option and Incentive Plan; and 1,000,000 shares issuable under the Company’s Dividend Reinvestment and Direct Stock Purchase Plan. In addition, the Company has filed or has agreed to file registration statements covering all of the shares of common stock reserved for future issuance. Consequently, if and when the shares are issued, they may be freely traded in the public markets.

ITEM 2. PROPERTIES

General

As of December 31, 2003, the Company’s portfolio of stabilized operating properties was comprised of 82 Office Properties and 50 Industrial Properties which encompassed an aggregate of approximately 7.3 million and 4.9 million rentable square feet, respectively. The Properties include four properties that the Company developed and stabilized during 2003 encompassing an aggregate of approximately 399,100 rentable square feet and two properties that were redeveloped by the Company and stabilized in 2003 encompassing 156,400 rentable square feet. As of December 31, 2003, the Office Properties were approximately 87.6% leased to 282 tenants and the Industrial Properties were 94.5% leased to 73 tenants. All but five of the Properties are located in Southern California.

The Company’s stabilized portfolio of operating properties consists of all of the Company’s Office and Industrial Properties, excluding properties recently developed by the Company that have not yet reached 95% occupancy and are within one year following substantial completion (“lease-up properties”) and development and redevelopment projects currently under construction or in pre-development. The Company had one office lease-up property at December 31, 2003, encompassing an aggregate of approximately 209,000 rentable square feet and two office redevelopment properties encompassing approximately 316,100 rentable square feet. All of the Company’s development, redevelopment projects and lease-up properties are located in Southern California.

In general, the Office Properties are leased to tenants on a full service gross basis and the Industrial Properties are leased to tenants on a triple net basis. Under a full service lease, the landlord is obligated to pay the tenant’s proportionate share of real estate 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. Under a triple net lease, tenants pay their proportionate share of real estate taxes, operating costs and utility costs.

The Company believes that all of its Properties are well maintained and do not require significant capital improvements. As of December 31, 2003, the Company managed all of its Properties through internal property managers.

17

The Office and Industrial Properties

The following table sets forth certain information relating to each of the stabilized Office and Industrial Properties owned as of December 31, 2003. The Company owns all of its interests in the Office and Industrial Properties through the Operating Partnership and the Finance Partnership. The seven office buildings located at Kilroy Airport Center, Long Beach, and the three office buildings located at the SeaTac Office Center, all are held subject to leases for the land on which the properties are located which expire in 2084 and 2062 (assuming the exercise of the Company’s options to extend such leases), respectively.

Property Location	No. of Buildings	Year Built/ Renovated	Net Rentable Square Feet	Percentage Occupied at 12/31/03(1)		Annual Base Rent ($000’s)(2)		Average Base Rent Per Sq. Ft. ($)(3)
Office Properties:
Los Angeles County
26541 Agoura Road
Calabasas, California	1	1988	90,878	38.4	%	$	858	$	24.60
5151-5155 Camino Ruiz
Camarillo, California(4)	4	1982	265,372	85.1	%		2,667		11.81
Kilroy Airport Center, El Segundo, California
2250 E. Imperial Highway	1	1983	293,261	96.8	%		9,230		32.52
2260 E. Imperial Highway	1	1983	293,261	100.0	%		7,499		25.57
2240 E. Imperial Highway	1	1983	119,780	100.0	%		2,358		19.69
El Segundo, California
185 S. Douglas Street
El Segundo, California	1	1978	61,604	29.5	%		342		18.81
525 N. Brand Blvd.
Glendale, California(5)	1	1990	46,043	100.0	%		932		20.25
Kilroy Airport Center, Long Beach, California
3900 Kilroy Airport Way	1	1987	126,840	72.8	%		2,116		22.93
3880 Kilroy Airport Way(6)	1	1987	98,243	100.0	%		1,325		13.49
3760 Kilroy Airport Way	1	1989	165,278	76.2	%		3,139		24.92
3780 Kilroy Airport Way	1	1989	219,743	80.7	%		4,810		27.13
3750 Kilroy Airport Way(7)	1	1989	10,592	84.1	%		100		11.19
3800 Kilroy Airport Way	1	2000	192,476	98.8	%		5,501		28.93
3840 Kilroy Airport Way	1	1999	136,026	100.0	%		3,535		25.99
Long Beach, California
Westside Media Center, Los Angeles, California
12312 W. Olympic Blvd(6)	1	1950/1998	78,000	100.0	%		1,632		20.92
12200 W. Olympic Blvd.	1	2000	151,019	57.6	%		2,883		33.16
12100 W. Olympic Blvd.	1	2000	151,000	48.3	%		2,437		33.44
2100 Colorado Avenue
Santa Monica, California(6)	3	1992	94,844	100.0	%		2,791		29.43
1633 26th Street
Santa Monica, California	1	1972/1997	44,915	100.0	%		860		19.16
3130 Wilshire Blvd.
Santa Monica, California	1	1969/1998	88,338	90.9	%		2,084		25.96
501 Santa Monica Blvd.
Santa Monica, California	1	1974	70,045	99.9	%		2,180		31.18
2829 Townsgate Road
Thousand Oaks, California	1	1990	81,158	79.2	%		1,753		27.28
Calabasas Park Centre, Calabasas, California
23975 Park Sorrento	1	2001	102,264	100.0	%		3,110		30.41
24025 Park Sorrento	1	2000	100,592	100.0	%		3,065		30.47
23925 Park Sorrento	1	2001	11,789	100.0	%		418		35.45
999 N. Sepulveda Blvd.
El Segundo, California	1	1962/2003	133,339	4.6	%		60		9.80
Subtotal/Weighted Average—
Los Angeles County	31		3,226,700	82.5	%		67,685		25.41

18

Property Location	No. of Buildings	Year Built/ Renovated	Net Rentable Square Feet	Percentage Occupied at 12/31/03(1)		Annual Base Rent ($000’s)(2)		Average Base Rent Per Sq. Ft. ($)(3)
Orange County
La Palma Business Center
4175 E. La Palma Avenue
Anaheim, California	1	1985	43,263	45.8	%	$	399	$	20.15
8101 Kaiser Blvd.
Anaheim, California	1	1988	60,177	90.2	%		1,179		21.71
1700 E. Carnegie
Santa Ana, California(8)	1	2003	76,516	41.0	%		421		13.56
601 Valencia Avenue,
Brea, California	1	1982	60,891	100.0	%		792		13.00
111 Pacifica
Irvine, California	1	1991	67,530	94.4	%		1,796		27.75
9451 Toledo Way
Irvine, California	1	1984	27,200	100.0	%		446		16.39
2501 Pullman
Santa Ana, California(6)	1	1969/1988	51,750	100.0	%		987		19.07
Subtotal/Weighted Average—
Orange County	7		387,327	80.0	%		6,020		19.44
San Diego County
6215/6220 Greenwich Drive
San Diego, California(6)	2	1996	212,214	100.0	%		3,165		14.91
6055 Lusk Avenue
San Diego, California(6)	1	1997	93,000	100.0	%		1,155		12.42
6260 Sequence Drive
San Diego, California(6)	1	1997	130,000	100.0	%		1,206		9.28
6290/6310 Sequence Drive
San Diego, California(6)	2	1997	152,415	100.0	%		901		5.91
6340/6350 Sequence Drive
San Diego, California(6)	2	1998	199,000	100.0	%		2,968		14.92
15378 Avenue of Science
San Diego, California(6)	1	1984	68,910	100.0	%		923		13.39
Pacific Corporate Center
San Diego, California(9)	6	1995	332,542	100.0	%		7,629		22.94
9455 Towne Center Drive
San Diego, California(6)	1	1998	45,195	100.0	%		684		15.13
12225/12235 El Camino Real
San Diego, California(10)	2	1998	115,513	75.5	%		1,748		20.05
4690 Executive Drive
San Diego, California(6)	1	1999	50,929	100.0	%		966		18.97
12348 High Bluff Drive
San Diego, California(8)	1	1999	38,710	100.0	%		1,040		26.87
9785/9791 Towne Center Drive
San Diego, California(6)	2	1999	126,000	100.0	%		2,268		18.00
5005/5010 Wateridge Vista Drive
San Diego, California	2	1999	172,778	100.0	%		3,436		19.89
Kilroy Centre Del Mar, San Diego, California
3579 Valley C entre Drive(8)	1	1999	52,375	100.0	%		1,766		33.72
3611 Valley Centre Drive(8)	1	2000	129,680	60.2	%		2,601		33.33
3661 Valley Centre Drive(8)	1	2001	129,752	100.0	%		3,985		32.71
3721 Valley Centre Drive(8)	1	2002	114,780	79.9	%		2,960		32.25
3811 Valley Centre Drive	1	2000	112,563	57.7	%		2,157		33.21
15434/15445 Innovation Drive
San Diego, California(8)	2	2000	103,000	100.0	%		2,815		27.34
10421 Pacific Center
San Diego, California(8)	1	2002	79,871	60.7	%		2,918		60.17
10243 Genetic Center Drive
San Diego, California(6)	1	2001	102,875	100.0	%		3,465		33.68
15051 Avenue of Science
San Diego, California(6)	1	2001	70,617	100.0	%		2,018		28.58

19

Property Location	No. of Buildings	Year Built/ Renovated	Net Rentable Square Feet	Percentage Occupied at 12/31/03(1)		Annual Base Rent ($000’s)(2)		Average Base Rent Per Sq. Ft. ($)(3)
15073 Avenue of Science
San Diego, California(6)	1	2001	46,759	100.0	%	$	1,040	$	22.25
4939/4955 Directors Place
San Diego, California(6)	2	2002	136,908	100.0	%		5,033		36.76
10390 Pacific Center Court         San Diego, California(6)	1	2002	68,400	100.0	%		2,731		39.93
Del Mar Corporate Center, San Diego, California
12340 El Camino Real(8)	1	2002	87,595	38.5	%		1,099		32.55
12390 El Camino Real	1	2000	72,332	100.0	%		3,014		41.67
Subtotal/Weighted Average—         San Diego County	40		3,044,710	92.3	%		65,691		23.39
Other
3750 University Avenue         Riverside, California(8)	1	1982	125,020	95.0	%		2,860		24.08
SeaTac Office Center
18000 Pacific Highway	1	1974	209,904	98.6	%		3,821		18.46
17930 Pacific Highway(6)	1	1980/1997	211,139	100.0	%		2,232		10.57
17900 Pacific Highway
Seattle, Washington	1	1980	111,387	78.7	%		1,868		21.32
Subtotal/Weighted Average—         Other	4		657,450	95.0	%		10,781		17.26
TOTAL/WEIGHTED AVERAGE OFFICE PROPERTIES	82		7,316,187	87.6	%		150,177		23.44
Industrial Properties:
Los Angeles County
2031 E. Mariposa Avenue         El Segundo, California	1	1954/2000	192,053	100.0	%		2,151		11.20
2260 E. El Segundo Blvd.         El Segundo, California(11)	1	1979/2000	113,820	00.0	%		—		—
2265 E. El Segundo Blvd.         El Segundo, California	1	1978	76,570	100.0	%		564		7.36
2270 E. El Segundo Blvd.         El Segundo, California	1	1975	6,362	100.0	%		100		15.76
Subtotal/Weighted Average—         Los Angeles County	4		388,805	70.7	%		2,815		7.24
Orange County
3340 E. La Palma Avenue         Anaheim, California	1	1966	153,320	100.0	%		820		5.35
1000 E. Ball Road         Anaheim, California	1	1956	100,000	100.0	%		639		6.39
1230 S. Lewis Road         Anaheim, California	1	1982	57,730	100.0	%		320		5.55
4155 E. La Palma Avenue         Anaheim, California	1	1985	74,618	100.0	%		824		11.04
4123 E. La Palma Avenue         Anaheim, California	1	1985	70,862	36.3	%		309		12.00
5325 East Hunter Avenue         Anaheim, California	1	1983	109,449	0.0	%		—		—
3130-3150 Miraloma         Anaheim, California(12)	1	1970	144,000	100.0	%		711		4.94
3125 E. Coronado Street         Anaheim, California	1	1970	144,000	100.0	%		1,031		7.16
5115 E. La Palma Avenue         Anaheim, California	1	1967/1998	286,139	100.0	%		1,488		5.20
1250 N. Tustin Avenue         Anaheim, California	1	1984	84,185	100.0	%		760		9.03

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Property Location	No. of Buildings	Year Built/ Renovated	Net Rentable Square Feet	Percentage Occupied at 12/31/03(1)		Annual Base Rent ($000’s)(2)		Average Base Rent Per Sq. Ft. ($)(3)
Anaheim Tech Center         Anaheim, California	5	1999	593,992	100.0	%	$	3,558	$	5.99
3250 East Carpenter         Anaheim, California	1	1998	41,225	100.0	%		260		6.31
Brea Industrial Complex         Brea, California(13)	7	1981	276,278	100.0	%		1,936		7.01
Brea Industrial—Lambert Road         Brea, California(14)	2	1999	178,811	100.0	%		1,280		7.16
1675 MacArthur         Costa Mesa, California	1	1986	50,842	100.0	%		620		12.20
25202 Towne Center Drive         Foothill Ranch, California	1	1998	303,533	100.0	%		2,595		8.55
12681/12691 Pala Drive         Garden Grove, California(9)	1	1970	84,700	100.0	%		594		7.02
Garden Grove Industrial Complex         Garden Grove, California(15)	6	1971	275,971	100.0	%		1,822		6.60
12752/12822 Monarch Street         Garden Grove, California(8)	1	1970	277,037	100.0	%		1,220		4.41
7421 Orangewood Avenue         Garden Grove, California	1	1981	82,602	100.0	%		630		7.63
12400 Industry Street         Garden Grove, California	1	1972	64,200	100.0	%		424		6.61
17150 Von Karman         Irvine, California	1	1977	157,458	100.0	%		1,705		10.83
9401 Toledo Way         Irvine, California	1	1984	244,800	100.0	%		2,434		9.94
2055 S.E. Main Street         Irvine, California	1	1973	47,583	100.0	%		393		8.27
2525 Pullman         Santa Ana, California	1	2002	103,380	100.0	%		527		5.10
1951 E. Carnegie         Santa Ana, California	1	1981	100,000	100.0	%		809		8.09
14831 Franklin Avenue         Tustin, California	1	1978	36,256	100.0	%		253		6.98
2911 Dow Avenue         Tustin, California	1	1998	51,410	100.0	%		280		5.45
Subtotal/Weighted Average—         Orange County	44		4,194,381	96.3	%		28,242		7.00
Other
5115 N. 27th Avenue         Phoenix, Arizona(16)	1	1962	130,877	100.0	%		789		6.03
3735 Imperial Highway         Stockton, California	1	1996	164,540	100.0	%		1,184		7.20
Subtotal/Weighted Average—         Other	2		295,417	100.0	%		1,973		6.68
TOTAL/WEIGHTED AVERAGE         INDUSTRIAL PROPERTIES	50		4,878,603	94.5	%		33,030		6.78
TOTAL/WEIGHTED AVERAGE         ALL PROPERTIES	132		12,194,790	90.3	%	$	183,207	$	16.63

  (1) Based on all leases at the respective properties in effect as of December 31, 2003.

  (2) Calculated as base rent for the year ended December 31, 2003, determined in accordance with GAAP, and annualized to reflect a twelve-month period. Unless otherwise indicated, leases at the Industrial Properties are written on a triple net basis and 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 of Expense Stop.

21

  (3) Calculated as Annual Base Rent divided by net rentable square feet leased at December 31, 2003.

  (4) The four properties at 5151-5155 Camino Ruiz were built between 1982 and 1985 and the leases are written on a triple net basis.

  (5) For this property, leases of 11,000 rentable square feet are written on a triple net basis.

  (6) For this property, the lease is written on a triple net basis.

  (7) For this property, leases of 7,000 rentable square feet are written on a modified gross basis and leases of 2,000 rentable square feet are written on a full service basis.

  (8) For this property, the leases are written on a modified gross basis.

  (9) The leases for this property are written on a modified net basis, with the tenants responsible for their pro rata share of common area expenses and real estate taxes.

(10) For this property, leases of 26,000 rentable square feet are written on a modified gross basis and leases of 61,000 rentable square feet are written on a triple net basis.

(11) This property was renovated into a data center in 2000.

(12) For this property, a lease of 100,000 rentable square feet is written on a modified net basis and another 44,000 rentable square foot lease is written on a triple net basis.

(13) The seven properties at the Brea Industrial Complex were built between 1981 and 1988. For these properties, leases of 210,000 rentable square feet are written on a triple net basis, 60,000 rentable square feet are on a modified gross basis, and 6,000 rentable square feet are written on a gross basis.

(14) For this property, leases of 109,000 rentable square feet are written on a modified net basis, leases of 33,000 rentable square feet are written on a triple net basis, and leases of 37,000 rentable square feet are written on a modified gross basis.

(15) The six properties at the Garden Grove Industrial Complex were built between 1971 and 1985. For these properties, leases of 191,000 rentable square feet are written on a triple net basis, 45,000 rentable square feet are written on a modified gross basis, and 40,000 rentable square feet are written on a gross basis.

(16) 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.

22

Development and Redevelopment

The following tables set forth certain information regarding the Company’s lease-up and in-process office development and redevelopment projects as of December 31, 2003. See further discussion regarding the Company’s projected development and redevelopment trends under “Item 7: Management’s Discussion of Financial Condition and Results of Operations—Factors Which May Influence Future Results of Operations—Development and redevelopment programs.”

Development Projects

Project Name/ Submarket	Completion Date	Estimated Stabilization Date (1)	Rentable Square Feet	Total Estimated Investment		Total Costs as of December 31, 2003		Percent Leased as of December 31, 2003
				(dollars in thousands)
Projects in Lease-Up:
12400 High Bluff     Del Mar, CA	3rd Qtr 2003	3rd Qtr 2004	208,961	$	61,615	$	58,596	84	%

(1) Based on management’s estimation of the earlier of stabilized occupancy (95.0%) or one year following the date of substantial completion.

Redevelopment Projects

Project Name/ Submarket	Pre and Post Redevelop- ment Type	Estimated Completion Date	Estimated Stabilization Date (1)	Rentable Square Feet	Existing Invest- ment (2)		Estimated Redevel- opment Costs		Total Estimated Investment		Total Costs as of December 31, 2003		Percent Leased as of December 31, 2003
					(dollars in thousands)
Projects Under Construction:
5717 Pacific Centre Blvd.     Sorrento Mesa, CA	Office to Life Science	1st Qtr 2004	1st Qtr 2005	67,995	$	8,790	$	10,109	$	18,897	$	9,898	—
909 Sepulveda Blvd.     El Segundo, CA	Office	2nd Qtr 2004	2nd Qtr 2005	248,148		37,799		26,553		64,344		45,172	—
Total     Redevelopment     Projects				316,143	$	46,589	$	36,662	$	83,241	$	55,070	—

(1) Based on management’s estimation of the earlier of stabilized occupancy (95.0%) or one year following the date of substantial completion.

(2) Represents total capitalized costs at the commencement of redevelopment.

23

Tenant Information

The following table sets forth information as to the Company’s ten largest office and industrial tenants as of December 31, 2003, based upon annualized rental revenues at December 31, 2003.

Tenant Name	Annual Base Rental Revenues(1)		Percentage of Total Base Rental Revenues		Initial Lease Date(2)	Lease Expiration Date
	(in thousands)
Office Properties:
The Boeing Company (3)	$	14,390	7.5	%	August 1984	Various	(3)
AMN Healthcare		8,179	4.3		August 2003	July 2018
DirecTV, Inc.		6,708	3.5		November 1996	November 2008
Diversa Corporation		5,033	2.6		November 2000	Various	(4)
Epson America, Inc.		4,157	2.2		October 1999	Various	(5)
Fair Isaac & Company		3,985	2.1		August 2003	July 2010
Fish & Richardson		3,941	2.1		October 2003	October 2018
Newgen Results Corporation		3,465	1.8		April 2001	March 2016
Epicor Software Corporation		3,457	1.8		September 1999	August 2009
SCAN Health Plan		3,430	1.8		February 1996	June 2015
Total Office Properties	$	56,745	29.7	%
Industrial Properties:
Celestica California, Inc.	$	2,506	1.3	%	May 1998	May 2008
Qwest Communications Corporation		2,434	1.3		November 2000	October 2015
Mattel, Inc.		2,151	1.1		May 1990	October 2005
Packard Hughes Interconnect		1,705	0.9		January 1996	January 2006
NBTY Manufacturing, LLC		1,488	0.8		August 1998	July 2008
United Plastics Group, Inc.		1,223	0.6		September 1997	Various	(6)
Kraft Foods, Inc.		1,185	0.6		February 1996	February 2006
Targus, Inc.		1,051	0.6		December 1998	March 2009
Extron Electronics, Inc.		960	0.5		February 1995	Various	(7)
Ricoh Electronics		809	0.4		February 1998	February 2008
Total Industrial Properties	$	15,512	8.1	%

(1) Determined on a straight-line basis over the term of the related lease in accordance with GAAP.

(2) Represents date of first relationship between tenant and the Company or the Company’s predecessor.

(3) The Boeing Satellite Systems, Inc. leases of 65,447, 293,261, 113,242, 101,564 and 7,791 net rentable square feet expire October 2005, July 2004, March 2009, January 2006 and November 2004, respectively. The Boeing Commercial Airplane Group lease of 211,139 net rentable square feet at SeaTac Office Center expires in December 2007. The Boeing Capital Corporation and Boeing Realty Corporation leases at Kilroy Airport Center, Long Beach of 43,636 and 10,725 net rentable square feet expire in September 2005 and August 2005, respectively. See additional discussion on The Boeing Company under “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Which May Influence Future Results of Operations.”

(4) The Diversa Corporation leases of 76,246 and 60,662 net rentable square feet expire in November 2015 and March 2017, respectively.

(5) The Epson America, Inc. leases of 136,026 and 26,826 net rentable square feet expire in October 2009.

(6) The United Plastics Group, Inc. leases of 144,000 and 44,000 rentable square feet expire in December 2006 and January 2005, respectively.

(7) The Extron Electronics leases of 100,000 and 57,730 net rentable square feet expire in April 2005 and February 2005, respectively.

24

At December 31, 2003, the Company’s tenant base was comprised of the following industries, based on Standard Industrial Classifications, broken down by percentage of total portfolio base rent: services, 41.0%; manufacturing, 28.2%; finance, insurance and real estate, 15.0%; transportation, communications and public utilities, 8.3%; wholesale trade, 3.9%; government, 1.3%; retail trade, 1.2%; construction, 0.9%; and agriculture, forestry and fishing, 0.2%. Following is a list comprised of a representative sample of 25 of the Company’s tenants whose annual base rental revenues were less than 1.0% of the Company’s total annual base revenue at December 31, 2003:

A & J Manufacturing Co.	Kaiser Foundation Health Plan	Snap-On Tools Company
Anheuser Busch Properties	Kraft Foods, Inc.	Southland Office Interiors
Blue Cross of California	Mercury Technology Group, Inc.	StarMed Staffing Group
Bullet Distribution, Inc.	Merrill Lynch & Co.	Twentieth Century Fox Film
Chagal Communications, Inc.	Motivation Realty Corp.	Wells Fargo Bank
Clifford Chance	New Mode Sports Wear	Wells Fargo Home Mortgage, Inc.
Det Norske Veritas	Pickford Real Estate, Inc.	Winstar Wireless, Inc.
Eva Airways	Plastic Industries Company, Inc.
Fandango, Inc.	Pleasant Holidays, LLC

25

Lease Expirations

The following table sets forth a summary of the Company’s lease expirations for the Office and Industrial Properties for each of the ten years beginning with 2004, assuming that none of the tenants exercise renewal options or termination rights. See further discussion of the Company’s lease expirations under “Item 1: Business—Business Risks.”

Year of Lease Expiration	Number of Expiring Leases(1)	Net Rentable Area Subject to Expiring Leases(Sq. Ft.)		Percentage of Total Leased Square Feet Represented by Expiring Leases(2)		Annual Base Rent Under Expiring Leases (000’s)(3)		Average Annual Rent Per Net Rentable Square Foot Represented by Expiring Leases
Office Properties:
2004	55	593,911		9.4		$	14,168	$	23.86
2005	58	627,208		9.9			13,077		20.85
2006	57	718,868		11.4			16,642		23.15
2007	50	854,809		13.5			15,275		17.87
2008	44	1,029,074		16.2			22,701		22.06
2009	19	788,525		12.5			17,163		21.77
2010	12	319,233		5.0			8,818		27.62
2011	9	309,468		4.9			4,652		15.03
2012	3	161,172		2.5			5,001		31.03
2013 and beyond	16	931,214		14.7			28,894		31.03
	323	6,333,482		100.0	%	$	146,391	$	23.11
Industrial Properties:
2004	17	524,504		11.4			3,752		7.15
2005	15	697,060		15.1			5,287		7.58
2006	11	502,353		10.9			3,997		7.96
2007	10	502,391		10.9			3,453		6.87
2008	9	1,021,388		22.2			6,911		6.77
2009	8	609,356		13.2			3,776		6.20
2010	2	39,130		0.8			340		8.69
2011	4	386,606		8.4			2,684		6.94
2012	—	—		—			—		—
2013 and beyond	2	327,402		7.1			3,101		9.47
	78	4,610,190		100.0	%	$	33,301	$	7.22
Total Portfolio	401	10,943,672	(4)	100.0	%	$	179,692	$	16.42

(1) Includes tenants only. Excludes leases for amenity, retail, parking and month-to-month tenants. Some tenants have multiple leases.

(2) Based on total leased square footage for the respective portfolios as of December 31, 2003.

(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 executed on or before January 1, 2004.

(4) Excludes space leased under month-to-month leases and vacant space at December 31, 2003.

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Secured Debt

At December 31, 2003, the Operating Partnership had 15 secured mortgage and construction loans outstanding, representing aggregate indebtedness of approximately $526 million, which were secured by certain of the Properties and development projects (the “Secured Obligations”). See “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and note 10 to the Company’s consolidated financial statements included with this report. Management believes that, as of December 31, 2003, the value of the properties securing the respective Secured Obligations in each case exceeded the principal amount of the outstanding obligation.

ITEM 3. LEGAL PROCEEDINGS

As previously reported, in March 2003, one of the Company’s former tenants, EBC I, formerly known as eToys, Inc. (“eToys”) filed a lawsuit in the Superior Court of the State of California against the Company seeking return of the proceeds from two letters of credit previously drawn down by the Company. The tenant originally caused its lenders to deliver an aggregate of $15 million in letters of credit to secure its obligations under its lease with the Company and also to secure its obligations to repay the Company for certain leasing and tenant improvement costs. EToys defaulted on its lease and other obligations to the Company in January 2001 and subsequently filed for bankruptcy in March 2001. Management strongly disagrees with the points outlined in the suit and is vigorously defending itself against the claim. However, if eToys were to prevail in this action, it could have a material adverse effect upon the financial condition, results of operations and cash flows of the Company.

Other than routine litigation incidental to the business, the Company is not a party to, and its properties are not subject to, any other legal proceedings which if determined adversely to the Company, would have a material adverse effect upon the financial condition, results of operations and cash flows of the Company.

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

No matters were submitted to a vote of stockholders during the fourth quarter of the year ended December 31, 2003.

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PART II

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

The Company’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “KRC.” The following table illustrates the high, low and closing prices by quarter during 2003 and 2002 as reported on the NYSE. On December 31, 2003, there were approximately 217 registered holders of the Company’s common stock.

2003	High		Low		Close		Per Share Common Stock Dividends Declared
First quarter	$	23.76	$	20.74	$	22.10	$	0.4950
Second quarter		28.19		22.70		27.50		0.4950
Third quarter		29.38		27.14		28.55		0.4950
Fourth quarter		33.55		27.83		32.75		0.4950
2002	High		Low		Close		Per Share Common Stock Dividends Declared
First quarter	$	28.30	$	25.01	$	28.21	$	0.4950
Second quarter		29.64		26.30		26.75		0.4950
Third quarter		26.65		22.05		23.71		0.4950
Fourth quarter		23.64		20.25		23.05		0.4950

The Company pays distributions to common stockholders quarterly each January, April, July and October at the discretion of the Board of Directors. Distribution amounts depend on the Company’s FFO (as defined on page 30), financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended, and such other factors as the Board of Directors deems relevant.

During 2003, the Company issued 82,439 shares of common stock in redemption of 82,439 common limited partnership units of the Operating Partnership by limited partners. The issuance was not dilutive to capitalization or distributions as the common shares were issued on a one-for-one basis pursuant to the terms set forth in the partnership agreement of the Operating Partnership, and the partnership units share in distributions with the common stock.

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ITEM 6. SELECTED FINANCIAL DATA

Kilroy Realty Corporation Consolidated

(in thousands, except per share, square footage and occupancy data)

	Year Ended December 31,
	2003			2002			2001			2000			1999
Statements of Operations Data:(1)
Rental income		183,339		$	180,024		$	175,136		$	154,583		$	134,563
Tenant reimbursements		20,433			21,475			20,646			18,018			15,306
Other property income		24,014			2,672			6,570			1,625			2,026
Total revenues		227,786			204,171			202,352			174,226			151,895
Property expenses		33,855			30,133			28,453			21,648			19,079
Real estate taxes		15,797			15,164			14,588			13,677			11,479
Provision for bad debts		1,583			6,815			3,755			1,799			2,185
Ground leases		1,296			1,354			1,507			1,643			1,397
General and administrative expenses		19,140			12,557			11,692			10,535			8,686
Interest expense		33,385			35,380			41,024			38,205			26,149
Depreciation and amortization		56,237			58,797			50,429			39,708			32,459
Total expenses		161,293			160,200			151,448			127,215			101,434
Interest income		196			513			1,030			1,878			1,175
Interest income from related party											2,724
Equity in earnings from unconsolidated real estate											191
Total other income		196			513			1,030			4,793			1,175
Income from continuing operations before net gain on dispositions and minority interests		66,689			44,484			51,934			51,804			51,636
Net gain on dispositions of operating properties					896			4,714			11,256			46
Income from continuing operations before minority interests		66,689			45,380			56,648			63,060			51,682
Minority interests:
Distributions on Cumulative Redeemable Preferred units		(13,163	)		(13,500	)		(13,500	)		(13,500	)		(9,560	)
Original issuance costs of redeemed preferred units		(945	)
Minority interest in earnings of Operating Partnership attributable to continuing operations		(6,908	)		(4,392	)		(3,991	)		(6,135	)		(5,858	)
Recognition of previously reserved Development LLC preferred return					3,908
Minority interest in earnings of Development LLCs					(1,024	)		(3,701	)		(421	)		(199	)
Total minority interests		(21,016	)		(15,008	)		(21,192	)		(20,056	)		(15,617	)
Income from continuing operations		45,673			30,372			35,456			43,004			36,065
Discontinued operations:
Revenues from discontinued operations		1,937			9,713			10,533			9,984			8,857
Expenses from discontinued operations		(1,036	)		(4,906	)		(5,655	)		(5,594	)		(4,405	)
Net gain on dispositions of discontinued operations		3,642			6,570
Minority interest in earnings of Operating Partnership attributable to discontinued operations		(604	)		(1,437	)		(511	)		(548	)		(622	)
Total income from discontinued operations		3,939			9,940			4,367			3,842			3,830
Net income before cumulative effect of change in accounting principle		49,612			40,312			39,823			46,846			39,895
Cumulative effect of change in accounting principle								(1,392	)
Net income		49,612			40,312			38,431			46,846			39,895
Preferred dividends		(349	)
Net income available for common shareholders	$	49,263		$	40,312		$	38,431		$	46,846		$	39,895
Share Data:
Weighted average shares outstanding—basic		27,527			27,450			27,167			26,599			27,701
Weighted average shares outstanding—diluted		27,738			27,722			27,373			26,755			27,727
Income from continuing operations per common share—basic	$	1.66		$	1.11		$	1.30		$	1.62		$	1.30
Income from continuing operations per common share—diluted	$	1.65		$	1.10		$	1.30		$	1.61		$	1.30
Net income per common share—basic	$	1.79		$	1.47		$	1.41		$	1.76		$	1.44
Net income per common share—diluted	$	1.78		$	1.45		$	1.40		$	1.75		$	1.44
Dividends declared per common share	$	1.98		$	1.98		$	1.92		$	1.80		$	1.68

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	Kilroy Realty Corporation Consolidated
	December 31,
	2003			2002			2001			2000			1999
Balance Sheet Data:
Investment in real estate, before accumulated depreciation and amortization	$	1,726,286		$	1,686,218		$	1,600,994		$	1,496,477		$	1,410,238
Total assets		1,512,635			1,506,602			1,457,229			1,455,368			1,320,501
Total debt		761,048			762,037			714,587			723,688			553,516
Total liabilities		838,226			845,934			799,055			787,209			613,519
Total minority interests		184,539			220,697			217,546			226,734			234,053
Total stockholders’ equity		489,870			439,971			440,628			441,425			472,929
Other Data:
Funds From Operations(2)	$	108,881		$	97,940		$	91,558		$	83,471		$	80,631
Cash flows from:
Operating activities		95,946			100,262			111,523			74,009			84,635
Investing activities		(50,839	)		(68,439	)		(78,847	)		(117,731	)		(192,795	)
Financing activities		(50,992	)		(32,533	)		(33,789	)		35,206			127,833
Office Properties:
Rentable square footage		7,316,187			7,447,605			7,225,448			6,624,423			6,147,985
Occupancy		87.6	%		91.1	%		93.9	%		96.2	%		96.4	%
Industrial Properties:
Rentable square footage		4,878,603			4,880,963			5,085,945			5,807,555			6,477,132
Occupancy		94.5	%		97.7	%		98.5	%		97.8	%		96.9	%

(1) Certain line items within the Statements of Operations Data do not equal the amounts reported on the Company’s annual reports filed in previous years on Form 10-K. The variance is a result of the reclassification of the net income and net gain on the disposition of operating properties sold subsequent to December 31, 2001 to discontinued operations in accordance with SFAS 144 “Accounting for the Impairment of Disposal of Long-Lived Assets” (see Note 22 in the Company’s consolidated financial statements). In addition, certain prior year amounts have been reclassified to conform to the current year’s presentation.

(2) Management believes that Funds From Operations (“FFO”) is a useful supplemental measure of the Company’s operating performance. The Company computes FFO in accordance with the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). The White Paper defines FFO as net income or loss computed in accordance with generally accepted accounting principles (“GAAP”), excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships and joint ventures. Other REITs may use different methodologies for calculating FFO, and accordingly, the Company’s FFO may not be comparable to other REITs.

Because FFO excludes depreciation and amortization, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses and interest costs, providing a perspective not immediately apparent from net income. In addition, management believes that FFO provides useful information to the investment community about the Company’s financial performance when compared to other REITs since FFO is generally recognized as the industry standard for reporting the operations of REITs.

However, FFO should not be viewed as an alternative measure of the Company’s operating performance since it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of the Company’s properties, which are significant economic costs and could materially impact the Company’s results of operations.

Non-cash adjustments to arrive at FFO were as follows: in all periods, depreciation and amortization and net gain (loss) from dispositions of operating properties; in all periods except 2003 and 2002, non-cash amortization of restricted stock grants; and in 2001, cumulative effect of change in accounting principle. For additional information, see “Non-GAAP Supplemental Financial Measure: Funds From Operations” including a reconciliation of the Company’s GAAP net income available to common stockholders to FFO for the years ended December 31, 2003, 2002, 2001, 2000 and 1999.

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

The following discussion relates to the consolidated financial statements of the Company and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. Statements contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are not historical facts may be forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected. Some of the enclosed information presented is forward-looking in nature, including information concerning development timing and investment amounts. Although the information is based on the Company’s current expectations, actual results could vary from expectations stated here. Numerous factors will affect the Company’s actual results, some of which are beyond its control. These include the timing and strength of regional economic growth, the strength of commercial and industrial real estate markets, competitive market conditions, future interest rate levels and capital market conditions. You are cautioned not to place undue reliance on this information, which speaks only as of the date of this report. The Company assumes no obligation to update publicly any forward-looking information, whether as a result of new information, future events or otherwise except to the extent the Company is required to do so in connection with its ongoing requirements under Federal securities laws to disclose material information. For a discussion of important risks related to the Company’s business, and an investment in its securities, including risks that could cause actual results and events to differ materially from results and events referred to in the forward-looking information, see the discussion under the caption “Business Risks” in “Item 1—Business” and under the caption “Factors Which May Influence Future Results of Operations” below. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.

Overview and Background

Kilroy Realty Corporation (the “Company”) owns, operates, and develops office and industrial real estate, primarily in Southern California. The Company operates as a self-administered real estate investment trust (“REIT”). The Company owns its interests in all of its properties through Kilroy Realty, L.P. (the “Operating Partnership”) and Kilroy Realty Finance Partnership, L.P. (the “Finance Partnership”) and conducts substantially all of its operations through the Operating Partnership. The Company owned an 87.2% and 86.6% general partnership interest in the Operating Partnership as of December 31, 2003 and 2002, respectively.

Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting periods. Certain accounting policies are considered to be critical accounting estimates, as they require management to make assumptions about matters that are highly uncertain at the time the estimate is made and changes in the accounting estimate are reasonably likely to occur from period to period. Management believes the following critical accounting policies reflect the Company’s more significant judgments and estimates used in the preparation of the consolidated financial statements. For a summary of all the Company’s significant accounting policies see note 2 to the Company’s consolidated financial statements.

Evaluation of asset impairment.    The Company evaluates a property for potential impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. In the event that these periodic assessments reflect that the carrying amount of a property exceeds the sum of the undiscounted cash flows (excluding interest) that are expected to result from the use and eventual disposition of the property, the Company would recognize an impairment loss to the extent the carrying amount exceeded the estimated fair value of the property. The estimation of expected future net cash flows is inherently uncertain and relies on subjective assumptions dependent upon future and current market conditions and events that affect the ultimate

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value of the property. It requires management to make assumptions related to future rental rates, tenant allowances, operating expenditures, property taxes, capital improvements, occupancy levels, and the estimated proceeds generated from the future sale of the property.

The Company had not recorded any such impairment losses at December 31, 2003, 2002 and 2001. However the Company’s estimate of future cash flows are subject to revision as management’s assessment of market conditions changes. If the Company determines it is necessary to recognize a material impairment loss the Company’s financial position, and results of operations may be adversely affected.

Allowances for uncollectible current tenant receivables and unbilled deferred rents receivable.    Tenant receivables and unbilled deferred rent receivables are carried net of the allowances for uncollectible tenant receivables and unbilled deferred rent. Management’s determination of the adequacy of these allowances requires significant judgments and estimates.

Current tenant receivables consist primarily of amounts due for contractual lease payments, reimbursements of common area maintenance expenses, property taxes and other expenses recoverable from tenants. Management’s determination of the adequacy of the allowance for uncollectible current tenant receivables is performed using a methodology that incorporates both a specific identification and aging analysis and includes an overall evaluation of the Company’s historical loss trends and the current economic and business environment. The specific identification methodology relies on factors such as the age and nature of the receivables, the payment history and financial condition of the tenant, the Company’s assessment of the tenant’s ability to meet its lease obligations, and the status of negotiations of any disputes with the tenant. The Company’s allowance also includes a reserve based on historical loss trends not associated with any specific tenant. This reserve as well as the Company’s specific identification reserve is reevaluated quarterly based on economic conditions and the current business environment.

Unbilled deferred rents receivable represents the amount that the cumulative straight-line rental income recorded to date exceeds cash rents billed to date under the lease agreement. Given the longer-term nature of these types of receivables, management’s determination of the adequacy of the allowance for unbilled deferred rents receivables is based primarily on historical loss experience. Management evaluates the allowance for unbilled deferred rents receivable using a specific identification methodology for the Company’s significant tenants assessing the tenants’ financial condition and its ability to meet its lease obligations. In addition, the allowance includes a reserve based upon the Company’s historical experience and current and anticipated future economic conditions that is not associated with any specific tenant.

Management’s estimate for the required allowances is reevaluated quarterly as economic and market conditions and the creditworthiness of the Company’s tenants change. During the fourth quarter of 2003, the Company’s accounts receivable aging and collection of outstanding tenant receivables improved, and as a result, the Company did not increase its provision for bad debts. This is the first quarter in approximately three years that the Company did not record a provision for bad debts, and management cannot yet determine if this will be a trend in 2004. For the years ended December 31, 2003, 2002 and 2001 the Company recorded a provision for bad debts and unbilled deferred rents of approximately 0.8%, 3.4%, and 1.9% of recurring revenue. Of the provision of 3.4% recorded for the year ended December 31, 2002, approximately 1.8% related specifically to reserves recorded for receivables from Peregrine Systems, Inc. (“Peregrine”) the Company’s second largest tenant at December 31, 2002. The Company’s reserve levels will fluctuate based on the economy and/or if the Company experiences an increased or decreased incidence of bad debts. If the Company experiences increased levels of bad debt expense or if the Company experiences write-offs in excess of its allowances, the Company’s financial position, revenues and results of operations would be adversely affected.

Depreciable lives of leasing costs.    The Company incurs certain capital costs in connection with leasing its properties. These leasing costs primarily include lease commissions and tenant improvements. Leasing costs are amortized on the straight-line method over the shorter of the estimated useful life of the asset or the estimated

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remaining term of the associated lease, ranging from one to 15 years. Management reevaluates the remaining useful life of these costs as the creditworthiness of the Company’s tenants change. If management determines that the estimated remaining life of the respective lease has changed, the Company adjusts the amortization period and, therefore, the depreciation expense recorded each period may fluctuate. If the Company experiences increased levels of amortization or depreciation expense due to changes in the estimated useful lives of leasing costs, the Company’s financial position, and results of operations may be adversely affected.

Factors Which May Influence Future Results of Operations

Rental income.    The amount of net rental income generated by the Company’s Properties depends principally on its ability to maintain the occupancy rates of currently leased space and to lease currently available space, newly developed or redeveloped properties and space available from unscheduled lease terminations. The amount of rental income generated by the Company also depends on its ability to maintain or increase rental rates in its submarkets. Negative trends in one or more of these factors could adversely affect the Company’s rental income in future periods.

Rental rates.    The Company’s average rental rate increase was 7.0% on a GAAP basis and 4.3% on a cash basis for leases executed during the year ended December 31, 2003. The change in rents on a cash basis is calculated as the change between the stated rent for a new or renewed lease and the stated rent for the expiring lease for the same space, whereas change in rents on a GAAP basis compares the average rents over the term of the lease for each lease. For the leases scheduled to expire in 2004, management believes the rental rates on average are approximately 10% to 15% above current average quoted market rates, primarily related to one lease. Management believes that the average rental rates for all of its Properties generally are equal to the current average quoted market rate, although individual Properties within any particular submarket presently may be leased above or below the rental rates within that submarket. The Company cannot give any assurance that leases will be renewed or that available space will be re-leased at rental rates equal to or above the current rental rates.

Scheduled lease expirations.    In addition to the 1,177,952 square feet of currently available space in the Company’s stabilized portfolio, leases representing approximately 10.1% and 12.1% of the square footage of the Company’s stabilized portfolio are scheduled to expire during 2004 and in 2005, respectively. The leases scheduled to expire in 2004 and the leases scheduled to expire in 2005 represent approximately 1.2 million square feet of office space, or 15.2% of the Company’s total annualized base rent, and 1.2 million square feet of industrial space, or 5.0% of the Company’s total annualized base rent, respectively. The Company’s ability to release available space depends upon the market conditions in the specific submarkets in which the Properties are located.

Los Angeles County submarket information.    There have been modest signs of improvement in market conditions in the Los Angeles County submarket in the third and fourth quarters of 2003 based on reports of positive absorption and decreased levels of direct vacancy as well as an increased level of interest in leasing opportunities at the Company’s properties. At December 31, 2003, the Company’s Los Angeles stabilized office portfolio was 82.5% occupied with approximately 563,200 rentable square feet available for lease. Further, leases representing an aggregate of approximately 485,500 and 199,500 rentable square feet are scheduled to expire during 2004 and 2005, respectively, in this submarket as of December 31, 2003.

The Los Angeles stabilized portfolio includes two office development projects, encompassing approximately 284,300 rentable square feet, that were previously in the lease-up phase and added to the stabilized portfolio during 2003, since one year had passed following substantial completion. One of the projects is located in West Los Angeles. This project encompasses approximately 151,000 rentable square feet and was 48% occupied as of December 31, 2003. As of December 31, 2003, the Company had executed leases or letters of intent for 61% of the rentable square feet at this project. While leasing activity in the West Los Angeles submarket continues to be irregular, management has seen increased interest at the Company’s projects and continues to make progress leasing the buildings. Overall the Company’s West Los Angeles stabilized office properties were 78% occupied as of December 31, 2003, with approximately 150,300 rentable square feet available for lease.

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The other Los Angeles County office project is located in El Segundo. This project encompasses approximately 133,300 rentable square feet and was approximately 5% occupied as of December 31, 2003. As of December 31, 2003, the Company had executed leases or letters of intent for 31% of the rentable square feet at this project. The El Segundo submarket remains the Company’s most significant leasing challenge, although management has recently seen modest signs of improvement. In February 2004, the Company executed a seven-year lease for approximately 29,000 rentable square feet at this development project, commencing in the second quarter of 2004. Overall the Company’s stabilized El Segundo office properties were 84% occupied as of December 31, 2003, with approximately 136,700 rentable square feet available for lease. In addition, in 2003, the Company began the redevelopment of an office building in El Segundo, encompassing approximately 248,100 rentable square feet which was not pre-leased as of December 31, 2003. The building is located in the same complex as one of the stabilized development projects discussed above. The Company expects to complete the redevelopment of this building in the second quarter of 2004. In addition, of the 485,500 rentable square feet scheduled to expire in 2004 in the Los Angeles submarket, one lease encompassing approximately 293,300 rentable square feet is located in El Segundo.

San Diego County submarket information.    As of December 31, 2003, the Company’s San Diego office portfolio was 92.3% occupied with approximately 235,800 rentable square feet available for lease. At December 31, 2003, the Company had one office development project in lease-up encompassing an aggregate of approximately 209,000 rentable square feet. This project was 84.1% leased at December 31, 2003. As of December 31, 2003, leases representing an aggregate of approximately 50,900 and 277,200 rentable square feet were scheduled to expire during 2004 and 2005, respectively, in this submarket. In addition, in 2003, the Company began the redevelopment of one office building in the San Diego region, which was not pre-leased as of December 31, 2003. The Company completed this project, which encompasses approximately 68,000 rentable square feet, in January 2004.

Orange County submarket information.    As of December 31, 2003, the Company’s Orange County properties were 94.9% occupied with approximately 232,200 rentable square feet available for lease. As of December 31, 2003, leases representing an aggregate of approximately 478,400 and 556,100 rentable square feet were scheduled to expire during 2004 and 2005, respectively, in this submarket.

Sublease space.    Of the Company’s leased space at December 31, 2003, approximately 760,200 rentable square feet, or 6.2% of the square footage in the Company’s stabilized portfolio was available for sublease, of which approximately 5.1% was vacant space and the remaining 1.1% was occupied. Of the approximately 760,200 rentable square feet available for sublease, approximately 69,000 rentable square feet represents leases scheduled to expire in 2004 and 2005. As of December 31, 2002, approximately 1,090,600 rentable square feet, or 8.8% of the square footage in the Company’s stabilized portfolio was available for sublease, of which 4.7% was vacant and 4.1% was occupied. Of the total 6.2% of rentable square feet available for sublease at December 31, 2003, approximately 4.5% is located in Orange County, of which 3.9% represents space available in two Orange County industrial buildings, and approximately 1.2% is in San Diego County.

Negative trends or other events that impair the Company’s ability to renew or release space and its ability to maintain or increase rental rates in its submarkets could have an adverse effect on the Company’s future financial condition, results of operations and cash flows.

Recent information regarding significant tenants

The Boeing Company.    As of December 31, 2003, the Company’s largest tenant, The Boeing Company, leased an aggregate of approximately 847,000 rentable square feet of office space under eight separate leases, representing approximately 7.5% of the Company’s total annual base rental revenues. One of the leases for a building located in El Segundo, encompassing approximately 293,300 rentable square feet, is scheduled to expire in July 2004. The Boeing Company has also informed the Company that it intends to exercise its option to early terminate another lease in El Segundo, California encompassing approximately 7,800 rentable square feet in November 2004. The other six leases are scheduled to expire at

34

various dates between August 2005 and March 2009. The Boeing Company previously had another lease, at 909 N. Sepulveda Boulevard in El Segundo, California, encompassing approximately 248,150 rentable square feet that expired on February 28, 2003. The Boeing Company vacated this building upon lease expiration. This building was subsequently moved to the Company’s redevelopment portfolio.

Peregrine Systems, Inc.    As previously reported, Peregrine, the Company’s second largest tenant at December 31, 2002, filed for bankruptcy in September 2002. Peregrine had leased four office buildings in a five-building complex totaling approximately 424,400 rentable square feet under four separate leases. Peregrine was also committed to lease the fifth building, encompassing approximately 114,800 rentable square feet, which was completed in the third quarter of 2002. Peregrine surrendered this fifth building back to the Company in June 2002. In July 2003, the bankruptcy court approved Peregrine’s plan of reorganization. Under terms of the plan of reorganization and in accordance with a settlement agreement previously approved by the bankruptcy court, the Company received a payment in the third quarter of 2003 of approximately $18.3 million and is scheduled to receive four additional payments of approximately $750,000, each to be paid annually over the next four years.

As part of the bankruptcy court’s approval of Peregrine’s reorganization plan, the court approved Peregrine’s rejection of three of its leases with the Company. The bankruptcy court also approved Peregrine’s continuation, in part, of the fourth lease. Under the revised terms of this lease, Peregrine continues to lease approximately 104,500 square feet of this 129,680 square foot building. Including the 104,500 rentable square feet leased to Peregrine, occupancy in this complex was 82.3% as of the date of this report, and the Company has executed leases for 99% of the space in this complex which encompasses an aggregate of approximately 539,200 rentable square feet.

Brobeck, Phleger & Harrison, LLP.    Brobeck, Phleger & Harrison, LLP (“Brobeck”) dissolved in February 2003 and as a result the Company terminated the two leases Brobeck had with the Company encompassing 161,500 aggregate rentable square feet. The Company is currently pursuing legal action against Brobeck. As of the date of this report, the Company has executed leases for 66% of the space in these buildings.

Although the Company has been able to mitigate the impact of tenant defaults on its financial condition, revenues and results of operations, the Company’s financial condition, results of operations and cash flows would be adversely affected if any of the Company’s other significant tenants fail to renew their leases, renew their leases on terms less favorable to the Company or if any of them become bankrupt or insolvent or otherwise unable to satisfy their lease obligations.

Development and redevelopment programs.    Management believes that a portion of the Company’s potential growth over the next several years will continue to come from its development pipeline. However, during 2003 and 2002, the Company scaled back its development activity as result of the economic environment and its impact on the Company’s ability to lease projects within budgeted timeframes. As a result, the Company will most likely not be able to sustain historical levels of growth from development in the near future.

As of December 31, 2003, the Company had one office development property in lease-up encompassing an aggregate of approximately 209,000 rentable square feet which was 84% leased and is expected to stabilize in the third quarter of 2004. The Company did not have any development projects under construction at December 31, 2003. See additional information regarding the Company’s development portfolio under the caption “Development and Redevelopment” in this report. At December 31, 2003, the Company owned approximately 58.1 acres of undeveloped land upon which the Company currently expects to develop an aggregate of approximately 1.1 million rentable square feet of office space within the next three to five years.

Management believes that another source of the Company’s potential growth over the next several years will come from redevelopment opportunities within its existing portfolio. Redevelopment efforts can achieve

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similar returns to new development with reduced entitlement risk and shorter construction periods. The Company’s in-process redevelopment portfolio included two office projects, encompassing approximately 316,100 rentable square feet, which are expected to stabilize in the first and second quarters of 2005 and were not pre-leased as of December 31, 2003. This redevelopment portfolio included one life science conversion project in North San Diego County and another project in which the Company is performing extensive interior refurbishments at an office building in El Segundo that had been occupied by a single tenant for approximately 30 years. See additional information regarding the Company’s in-process redevelopment portfolio under the caption “Development and Redevelopment” in this report. Depending on market conditions, the Company will continue to pursue future redevelopment opportunities in its strategic submarkets where no land available for development exists.

The Company has a proactive planning process by which it continually evaluates the size, timing and scope of its development and redevelopment programs and, as necessary, scales activity to reflect the economic conditions and the real estate fundamentals that exist in the Company’s strategic submarkets. However, the Company may not be able to lease committed development or redevelopment properties at expected rental rates or within projected timeframes or complete projects on schedule or within budgeted amounts, which could adversely affect the Company’s financial condition, results of operations and cash flows.

Other Factors.    The Company’s operating results are and may continue to be affected by uncertainties and problems associated with the deregulation of the utility industry in California since 94.6% of the total rentable square footage of the Company’s stabilized portfolio is located in California. Energy deregulation has resulted in higher utility costs in some areas of the state and intermittent service interruptions. In addition, primarily as a result of the events of September 11, 2001, the Company’s annual insurance costs increased across its portfolio by approximately 14% during 2002 and approximately 11% during 2003. As of the date of this report, the Company had not experienced any material negative effects arising from either of these issues because approximately 66% (based on net rentable square footage) of the Company’s current leases require tenants to pay utility costs and property insurance premiums directly, thereby limiting the Company’s exposure. The remaining 34% of the Company’s leases provide that the tenants reimburse the Company for these costs in excess of a base year amount.

In addition, the California State legislature is currently evaluating split tax roll legislation, which if enacted, would have a material effect on the Company’s operating results. If the current initiative is passed, the tax rate on commercial property in California would be increased by 55%, which would result in significant increases in real estate taxes for the Company’s properties located in California.

Incentive Compensation.    The Company has long-term incentive compensation programs that provide for cash and stock compensation to be earned by the Company’s executive officers if the Company attains certain performance measures that are based on annualized shareholder returns on an absolute and a relative basis as well as certain other financial, operating and development targets. As a result, accrued incentive compensation in future periods is affected by the closing price per share of the Company’s common stock at the end of each quarter. Potential future increases in the price per share of the Company’s common stock and the resultant cumulative annualized shareholder return calculations will cause an increase to general and administrative expenses and a corresponding decrease to net income available to common shareholders. Management cannot predict the amounts that will be ultimately recorded in future periods related to these plans since they are significantly influenced by the Company’s stock price and market conditions.

Results of Operations

As of December 31, 2003, the Company’s stabilized portfolio was comprised of 82 office properties (the “Office Properties”) encompassing an aggregate of approximately 7.3 million rentable square feet, and 50 industrial properties (the “Industrial Properties,” and together with the Office Properties, the “Properties”), encompassing an aggregate of approximately 4.9 million rentable square feet. The Company’s stabilized

36

portfolio of operating properties consists of all the Company’s Properties, and excludes properties recently developed or redeveloped by the Company that have not yet reached 95.0% occupancy and are within one year following substantial completion (“lease-up” properties) and projects currently under construction.

As of December 31, 2003, the Office and Industrial Properties represented 81.7% and 18.3%, respectively, of the Company’s annualized base rent. For the year ended December 31, 2003, average occupancy in the Company’s stabilized portfolio was 91.2%. As of December 31, 2003, the Company had approximately 1,177,458 square feet of space in its stabilized portfolio available for lease.

The following table reconciles the changes in the rentable square feet in the Company’s stabilized portfolio of operating properties from December 31, 2002 to December 31, 2003. Rentable square footage in the Company’s portfolio of stabilized properties decreased by an aggregate of approximately 0.1 million rentable square feet, or 1.1%, to 12.2 million rentable square feet at December 31, 2003, as a result of the activity noted below.

	Office Properties				Industrial Properties			Total
	Number of Buildings		Rentable Square Feet		Number of Buildings	Rentable Square Feet		Number of Buildings		Rentable Square Feet
Total at December 31, 2002	87		7,447,605		50	4,880,963		137		12,328,568
Properties added from the Development and Redevelopment Portfolio	4		475,637					4		475,637
Properties transferred to the Redevelopment Portfolio	(2	)	(322,360	)				(2	)	(322,360	)
Dispositions(1)	(7	)	(291,408	)				(7	)	(291,408	)
Remeasurement			6,713			(2,360	)			4,353
Total at December 31, 2003	82		7,316,187		50	4,878,603		132		12,194,790

(1) The Company adopted Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) on January 1, 2002. In accordance with the implementation provisions of SFAS 144, the operating results and gains or (losses) on property sales of real estate assets sold subsequent to December 31, 2001 are included in discontinued operations in the consolidated statement of operations. The Rental Operations discussion for the year ended December 31, 2003 and 2002 does not include operating results for properties disposed of subsequent to December 31, 2001.

Management internally evaluates the operating performance and financial results of its portfolio based on Net Operating Income for the following segments of commercial real estate property: Office Properties and Industrial Properties. The Company defines Net Operating Income as operating revenues from continuing operations (rental income, tenant reimbursements and other property income) less property and related expenses from continuing operations (property expenses, real estate taxes, provision for bad debts and ground leases). The Net Operating Income segment information presented within this Management’s Discussion and Analysis consists of the same Net Operating Income segment information disclosed in note 21 of the Company’s consolidated financial statements in accordance with Statement of Financial Accounting Standards No. 131 “Disclosures about Segments of an Enterprise and Related Information.”

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Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

The following table reconciles the Company’s Net Operating Income by segment to the Company’s net income available to common shareholders for the years ended December 31, 2003 and 2002.

	Year Ended December 31,						Dollar Change			Percentage Change
	2003			2002
	(dollars in thousands)
Net Operating Income, as defined
Office Properties	$	143,112		$	118,929		$	24,183		20.3	%
Industrial Properties		32,143			31,776			367		0.1
Total portfolio		175,255			150,705			24,550		16.3
Reconciliation to Consolidated Net Income:
Net Operating Income, as defined for reportable segments		175,255			150,705			24,550		16.3
Other expenses:
General and administrative expenses		19,140			12,557			6,583		52.4
Interest expense		33,385			35,380			(1,995	)	(5.6	)
Depreciation and amortization		56,237			58,797			(2,560	)	(4.4	)
Other income		196			513			317		(61.8	)
Income from continuing operations before net gain on dispositions and minority interests		66,689			44,484			22,205		49.9
Net gain on disposition of operating properties(1)		—			896			(896	)	(100.0	)
Income from continuing operations before minority interest		66,689			45,380			21,309		47.0	%
Minority interests		(21,016	)		(15,008	)		(6,008	)	40.0
Income from discontinued operations		3,939			9,940			(6,001	)	(60.4	)
Net income		49,612			40,312			9,300		(23.1	)
Preferred dividends		(349	)					(349	)	100.0
Net Income available to common shareholders	$	49,263		$	40,312		$	8,951		22.2	%

(1) In accordance with SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” the net income and the net gain on disposition of properties sold subsequent to January 1, 2002 are reflected in the consolidated statement of operations as discontinued operations for all periods presented. The net gain on dispositions of operating properties for the year ended December 31, 2002 relates to the disposition of an office property the Company sold in the fourth quarter of 2001. This additional gain had previously been reserved for financial reporting purposes until certain litigation associated was resolved in the second quarter of 2002.

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Rental Operations

Management evaluates the operations of its portfolio based on operating property type. The following tables compare the Net Operating Income from continuing operations, for the Office Properties and for the Industrial Properties for the years ended December 31, 2003 and 2002.

Office Properties

	Total Office Portfolio									Core Office Portfolio(1)
	2003		2002		Dollar Change			Percentage Change		2003		2002		Dollar Change			Percentage Change
	(dollars in thousands)
Operating revenues:
Rental income	$	149,249	$	145,113	$	4,136		2.9	%	$	127,893	$	130,417	$	(2,524	)	(1.9	)%
Tenant reimbursements		16,580		17,671		(1,091	)	(6.2	)		15,002		14,914		88		0.6
Other property income		23,866		2,583		21,283		824.0			19,597		2,477		17,120		691.2
Total		189,695		165,367		24,328		14.7			162,492		147,808		14,684		9.9
Property and related expenses:
Property expenses		31,107		27,148		3,959		14.6			28,649		24,632		4,017		16.3
Real estate taxes		12,873		12,143		730		6.0			10,962		10,890		72		0.1
Provision for bad debts		1,307		5,793		(4,486	)	(77.4	)		201		5,533		(5,332	)	(96.4	)
Ground leases		1,296		1,354		(58	)	(4.3	)		1,282		1,334		(52	)	(3.9	)
Total		46,583		46,438		145		0.3			41,094		42,389		(1,295	)	(3.1	)
Net operating income, as defined	$	143,112	$	118,929	$	24,183		20.3	%	$	121,398	$	105,419	$	15,978		15.2	%

(1) Stabilized office properties owned at January 1, 2002 and still owned at December 31, 2003.

Total revenues from Office Properties increased $24.3 million, or 14.7% to $189.7 million for the year ended December 31, 2003 compared to $165.4 million for the year ended December 31, 2002. Rental income from Office Properties increased $4.1 million, or 2.9% to $149.2 million for the year ended December 31, 2003 compared to $145.1 million for the year ended December 31, 2002. This increase was primarily attributable to an increase of $10.9 million in rental income generated by the office properties developed and redeveloped by the Company in 2003 and 2002 (the “Office Development Properties”), offset by a decrease of $2.5 million, or 1.9% related to the Core Office Portfolio, and a decrease of $4.3 million in rental income attributable to the office properties that were taken out of service and moved from the Company’s stabilized portfolio to the redevelopment portfolio during 2003 (“Office Redevelopment Properties”). The decrease in the Core Office Portfolio was primarily attributable to a decline in occupancy in this portfolio. Average occupancy in the Core Office Portfolio declined 1.3% to 89.4% for the year ended December 31, 2003 as compared to 90.7% for the year ended December 31, 2002.

Tenant reimbursements from Office Properties decreased $1.1 million, or 6.2% to $16.6 million for the year ended December 31, 2003 compared to $17.7 million for the year ended December 31, 2002. A decrease of $1.4 million attributable to the Office Redevelopment Properties was partially offset by a increase of $0.2 million attributable to the Office Development Properties and an increase of $0.1 million, or 0.6% in tenant reimbursements generated by the Core Office Portfolio. Other property income from Office Properties increased $21.3 million or 824.0% to $23.9 million for the year ended December 31, 2003 compared to $2.6 million for the year ended December 31, 2002. Other property income for the year ended December 31, 2003, included an $18.0 million lease termination fee related to a settlement with Peregrine Systems, Inc. In accordance with the settlement agreement approved by the bankruptcy court, the Company received a payment of $18.3 million in 2003 and is scheduled to receive four additional payments of approximately $750,000 each to be paid annually over the next four years. The future payments were recorded at their net present value which was approximately $2.6 million. The lease termination fee of $18.0 represents the $18.3 million payment plus the $2.6 million net present value of the future payments, offset by $2.9 million in receivables and other costs and obligations associated with the leases. The future payments were reserved for financial reporting purposes at December 31,

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2003 through the provision for bad debts. After the impact of the reserve, the Company recognized a net lease termination fee of $15.4 million. Also during the year ended December 31, 2003, the Company recognized a $4.3 million net lease termination fee resulting from the early termination of leases at a building in San Diego. The remaining amounts in other property income from Office Properties for both periods consisted primarily of lease termination fees, management fees and tenant late charges.

Total expenses for Office Properties increased $0.2 million, or 0.3% to $46.6 million for the year ended December 31, 2003 compared to $46.4 million for the year ended December 31, 2002. Property expenses from Office Properties increased $4.0 million, or 14.6% to $31.1 million for the year ended December 31, 2003 compared to $27.1 million for the year ended December 31, 2002. This increase was primarily attributable to higher repairs and maintenance in the Core Office Portfolio, which was due to non-recurring expenditures at one complex of buildings. Real estate taxes increased $0.7 million, or 6.0% to $12.8 million for the year ended December 31, 2003 as compared to $12.1 million for the year ended December 31, 2002. Real estate taxes for the Core Office Portfolio increased $0.1 million, or 0.1% for the year ended December 31, 2003 compared to the same period in 2002. Of the remaining increase of $0.6 million in real estate taxes, an increase of $1.2 million attributable to the Office Development Properties was partially offset by a decrease of $0.6 million attributable to the Office Redevelopment Properties. The provision for bad debts decreased $4.5 million, or 77.4% for the year ended December 31, 2003 as compared to the year ended December 31, 2002. The decrease was primarily due to a change in the provision related to the Company’s leases with Peregrine. For the year ended December 31, 2003, the Company recorded a provision of approximately $2.6 million related to the future settlement payments to be received from Peregrine, and reversed a provision for bad debts and unbilled deferred rents receivable of approximately $3.1 million related to the Company’s leases with Peregrine as a result of the settlement with Peregrine in July 2003. During 2002, the Company recorded a provision for bad debts and unbilled deferred rents receivable of approximately $3.8 million specifically related to receivables from Peregrine. The remaining decrease is due to an improvement in the Company’s accounts receivable aging and collections of outstanding tenant receivables during 2003. Management cannot yet determine if this is a trend. The Company evaluates its reserve for unbilled deferred rent on a quarterly basis. Ground lease expense remained consistent for the year ended December 31, 2003 compared to the same period in 2002.

Net Operating Income, as defined, from Office Properties increased $24.1 million, or 20.3% to $143.1 million for the year ended December 31, 2003 compared to $118.9 million for the year ended December 31, 2002. An increase of $16.0 million was attributable to the Core Office Portfolio which was primarily due to the Peregrine lease termination fee. The remaining increase of $7.1 million was primarily attributable to the Office Development Properties that were added to the Stabilized Portfolio.

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Industrial Properties

	Total Industrial Portfolio									Core Industrial Portfolio(1)
	2003		2002		Dollar Change			Percentage Change		2003		2002		Dollar Change			Percentage Change
	(dollars in thousands)
Operating revenues:
Rental income	$	34,090	$	34,911	$	(821	)	(2.4	)%	$	33,458	$	34,616	$	(1,158	)	(3.3	)%
Tenant reimbursements		3,853		3,804		49		1.3			3,822		3,774		48		1.3
Other property income		148		89		59		66.3			149		89		60		67.4
Total		38,091		38,804		(713	)	(1.8	)		37,429		38,479		(1,050	)	(2.7	)
Property and related expenses:
Property expenses		2,748		2,985		(237	)	(7.9	)		2,724		2,985		(261	)	(8.7	)
Real estate taxes		2,924		3,021		(97	)	(3.2	)		2,844		2,985		(141	)	(4.7	)
Provision for bad debts		276		1,022		(746	)	(73.0	)		253		1,019		(766	)	(75.2	)
Total		5,948		7,028		(1,080	)	(15.4	)		5,821		6,989		(1,168	)	(16.7	)
Net operating income, as defined	$	32,143	$	31,776	$	367		1.2	%	$	31,608	$	31,490	$	118		(0.4	)%

(1) Stabilized industrial properties owned at January 1, 2002 and still owned at December 31, 2003.

Total revenues from Industrial Properties decreased $0.7 million, or 1.8% to $38.1 million for the year ended December 31, 2003 compared to $38.8 million for the year ended December 31, 2002. Rental income from Industrial Properties decreased $0.8 million, or 2.4% to $34.1 million for the year ended December 31, 2003 compared to $34.9 million for the year ended December 31, 2002. Rental income generated by the Core Industrial Portfolio decreased $1.2 million, or 3.3% for the year ended December 31, 2003 as compared to the year ended December 31, 2002. This decrease was primarily attributable to a decrease in occupancy in this portfolio. Average occupancy decreased 1.3% to 96.2% for the year ended December 31, 2003 compared to 97.5% for the year ended December 31, 2002. The net decrease in rental income from the Core Industrial Portfolio was partially offset by an increase of 0.4 million from the one property acquired during 2002 (“Industrial Acquisition”).

Tenant reimbursements from Industrial Properties remained consistent for the year ended December 31, 2003 compared to the year ended December 31, 2002. Other property income from Industrial Properties increased $0.1 million for the year ended December 31, 2003 which was attributable to lease terminations fees in the Core Industrial Portfolio. Other income for both periods is primarily comprised of miscellaneous lease termination fees and tenant late charges.

Total expenses from Industrial Properties decreased $1.1 million, or 15.4% to $5.9 million for the year ended December 31, 2003 compared to $7.0 million for the year ended December 31, 2002. Property expenses from Industrial Properties decreased $0.2 million, or 7.9% for the year ended December 31, 2003 compared to the year ended December 31, 2002. This decrease was primarily attributable to lower repairs and maintenance costs in the Core Industrial Portfolio for the year ended December 31, 2003 compared to the same period in 2002. Real estate taxes decreased $0.1 million or 3.2% for the year ended December 31, 2003 compared to the year ended December 31, 2002. This decrease was attributable to the refunds received for real estate taxes successfully appealed by the Company in 2003 at buildings in the Core Industrial Portfolio. The provision for bad debts decreased $0.7 million, or 73.0% for the year ended December 31, 2003 compared to the same period in 2002. During the year ended December 31, 2003, the Company decreased its reserve for bad debts and unbilled deferred rent specifically related to the Company’s watchlist tenants due to improvement in the collection of tenant receivables. The Company evaluates its reserve levels on a quarterly basis.

Net Operating Income, as defined, from Industrial Properties increased $0.3 million, or 1.2% for the year ended December 31, 2003 compared to the year ended December 31, 2002. Net operating income for the Core Industrial Portfolio increased $0.1 million, or 0.4% for the year ended December 31, 2003 compared to the same period in 2002 and an increase of $0.2 million was generated by the Industrial Acquisition.

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Non-Property Related Income and Expenses

Interest income decreased $0.3 million, or 61.8% to $0.2 million for the year ended December 31, 2003 compared to $0.5 million for the year ended December 31, 2002. This decrease was primarily attributable to a general decrease in interest rates.

General and administrative expenses increased $6.5 million, or 52.4% to $19.1 million for the year ended December 31, 2003 compared to $12.6 million for the year ended December 31, 2002. This increase was primarily due to an increase in accrued incentive compensation and was driven by a special long-term incentive plan for the Company’s executives for which the amount payable under the plan is based on the Company’s absolute and relative shareholder returns. (See note 16 to the Company’s consolidated financial statements for further discussion about the program.) The plan is accounted for using variable plan accounting which requires the Company to record the cumulative charge to the income statement based on the closing share price for the period. The quoted share price of the Company’s common stock reached its highest quarter-end closing price at December 31, 2003. For fiscal year 2003 the Company achieved a 52.6% total annual common stockholder return (annual appreciation of the quoted common share price plus dividends paid during the year), the highest since its initial public offering in 1997. The total compensation expense related to this award will be recorded over the three-year performance period and will be paid out if the specified performance measures are attained at the end of this period in December 2005. Management cannot predict the amounts that will be recorded in future periods related to this plan as it is based on the Company’s closing stock prices and related cumulative shareholder return calculations at the end of each period.

The increase in general and administrative expenses was also due to higher legal, reporting and public company costs incurred in connection with compliance with new requirements imposed by the Sarbanes-Oxley Act of 2002 and the New York Stock Exchange. The increases in general and administrative expenses were partially offset by the reversal of a $0.5 million reserve in connection with the Peregrine settlement agreement. The Company had initially recorded this reserve in the second quarter of 2002 for costs the Company paid for the fifth and final building that was to be lease to Peregrine. This building was surrendered to the Company in June 2002.

Net interest expense decreased $2.0 million, or 5.6% to $33.4 million for the year ended December 31, 2003 compared to $35.4 million for the year ended December 31, 2002. Gross interest and loan fee expense, before the effect of capitalized interest and loan fees, decreased $4.2 million, or 8.6% to $45.2 million for the year ended December 31, 2003 from $49.4 million for the year ended December 31, 2002, due to an overall decrease in the Company’s weighted average annual borrowing rates. Throughout 2002, the Company’s weighted average interest rate decreased from 6.8% at December 31, 2001 to 5.3% at December 31, 2002. In contrast, the Company’s weighted average interest rate remained relatively consistent throughout 2003. The Company’s weighted average interest rate was 5.3% at both January 1, 2003 and December 31, 2003. Total capitalized interest and loan fees decreased $2.2 million, or 15.9% to $11.8 million for the year ended December 31, 2003 from $14.0 million for the year ended December 31, 2002, primarily due to lower average balances eligible for capitalization during the year ended December 31, 2003 as compared to December 31, 2002.

Depreciation and amortization decreased $2.6 million, or 4.3% to $56.2 million for the year ended December 31, 2003 compared to $58.8 million for the year ended December 31, 2002. During the year ended December 31, 2002 the Company recorded accelerated depreciation and amortization charges of approximately $5.3 million for previously capitalized leasing costs related to the Company’s leases with Peregrine. The Company did not record a similar charge in 2003. This decrease was partially offset by an increase attributable to the development properties completed and stabilized since December 31, 2002.

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Income from Continuing Operations

Income from continuing operations before net gains on dispositions and minority interests increased $22.2 million or 49.9% to $66.7 million for the year ended December 31, 2003 compared to $44.5 million for the year ended December 31, 2002. The increase was primarily due to the increase in Net Operating Income from the Office Properties of $24.4 million.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

The following table reconciles the Company’s Net Operating Income by segment to the Company’s net income for the years ended December 31, 2002 and 2001.

	Year Ended December 31,						Dollar Change			Percentage Change
	2002			2001
	(dollars in thousands)
Net Operating Income, as defined
Office Properties	$	118,929		$	118,773		$	156		0.1	%
Industrial Properties		31,776			35,276			(3,500	)	(9.9	)
Total portfolio		150,705			154,049			(3,344	)	(2.2	)
Reconciliation to Consolidated Net Income:
Net Operating Income, as defined for reportable segments		150,705			154,049			(3,344	)	(2.2	)
Other expenses
General and administrative expenses		12,557			11,692			865		7.4
Interest expense		35,380			41,024			(5,644	)	(13.8	)
Depreciation and amortization		58,797			50,429			8,368		16.6
Interest income		513			1,030			(517	)	(50.2	)
Income from continuing operations before net gain on dispositions and minority interests		44,484			51,934			(7,450	)	(14.3	)
Net gain on disposition of operating properties		896			4,714			(3,818	)	(81.0	)
Income from continuing operations before minority interest		45,380			56,648			(11,268	)	(19.9	)
Minority interests attributable to continuing operations		(15,008	)		(21,192	)		6,184		29.2
Income from discontinued operations		9,940			4,367			5,573		127.6
Cumulative effect of change in accounting principle					(1,392	)		1,392		100.0
Net income	$	40,312		$	38,431		$	1,881		4.9	%

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Rental Operations

Management evaluates the operations of its portfolio based on operating property type. The following tables compare the Net Operating Income from continuing operations for the Office Properties and the Industrial Properties for the years ended December 31, 2002 and 2001.

Office Properties

	Total Office Portfolio									Core Office Portfolio(1)
	2002		2001		Dollar Change			Percentage Change		2002		2001		Dollar Change			Percentage Change
Operating revenues:
Rental income	$	145,113	$	137,323	$	7,790		5.7	%	$	119,973	$	120,488	$	(515	)	(0.4	)%
Tenant reimbursements		17,671		16,616		1,055		6.3			16,022		15,352		670		4.4
Other property income		2,583		6,231		(3,648	)	(58.5	)		2,312		417		1,895		454.4
Total		165,367		160,170		5,197		3.2			138,307		136,257		2,050		1.5
Property and related expenses:
Property expenses		27,148		25,874		1,274		4.9			23,598		23,036		562		2.4
Real estate taxes		12,143		11,089		1,054		9.5			9,975		9,145		830		9.1
Provision for bad debts		5,793		2,927		2,866		97.9			4,527		2,863		1,664		58.1
Ground leases		1,354		1,507		(153	)	(10.2	)		1,169		1,297		(128	)	(9.9	)
Total		46,438		41,397		5,041		12.2			39,269		36,341		2,928		8.1
Net operating income, as defined	$	118,929	$	118,773	$	156		0.1	%	$	99,038	$	99,916	$	(878	)	(0.9	)%

(1) Stabilized office properties owned at January 1, 2001 and still owned at December 31, 2003.

Total revenues from Office Properties increased $5.2 million, or 3.2% to $165.4 million for the year ended December 31, 2002 compared to $160.2 million for the year ended December 31, 2001. Rental income from Office Properties increased $7.8 million, or 5.7% to $145.1 million for the year ended December 31, 2002 compared to $137.3 million for the year ended December 31, 2001. The increase was primarily attributable to an increase of $9.2 million in rental income was generated by the office properties developed by the Company in 2002 and 2001 (the “Office Development Properties”). This increase was offset by a decrease of $0.9 million attributable to the office properties sold during 2001, net of the office property acquired in 2001 (the “Net Office Dispositions”) and a decrease of $0.5 million or 0.4% related to the Core Office Portfolio. This decrease in the Core Office Portfolio was primarily attributable to a decline in occupancy in this portfolio.

Tenant reimbursements from Office Properties increased $1.1 million, or 5.7% to $17.7 million for the year ended December 31, 2002 compared to $16.6 million for the year ended December 31, 2001. An increase of $0.7 million, or 4.4% in tenant reimbursements was generated by the Core Office Portfolio. This was primarily due to the reimbursement of property expenses at one property at which the previous tenant paid the expenses directly. An increase of $0.5 million generated by the Office Development Properties was offset by a decrease of $0.1 million attributable to the Net Office Dispositions. Other property income from Office Properties decreased $3.6 million or 58.5% to $2.6 million for the year ended December 31, 2002 compared to $6.2 million for the year ended December 31, 2001. During the year ended December 31, 2001 the Company recognized a $5.4 million lease termination fee from eToys. During the year ended December 31, 2002 the Company recognized lease termination fees of $1.2 million and $0.7 million resulting from the early termination of leases at two buildings in San Diego. The remaining amounts in other property income from Office Properties for both periods consisted primarily of lease termination fees, management fees and tenant late charges.

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Total expenses for Office Properties increased $5.0 million, or 12.2% to $46.4 million for the year ended December 31, 2002 compared to $41.4 million for the year ended December 31, 2001. Property expenses from Office Properties increased $1.3 million, or 4.9% to $27.2 million for the year ended December 31, 2002 compared to $25.9 million for the year ended December 31, 2001. An increase of $0.6 million in property expenses was attributable to the Core Office Portfolio. This increase was primarily attributable to the Company paying property expenses directly for one property at which the previous tenant paid the expenses directly. An increase of $0.9 million generated by the Office Development Properties was offset by a decrease of $0.2 million attributable to the Net Office Dispositions. Real estate taxes increased $1.0 million, or 9.5% to $12.1 million for the year ended December 31, 2002 as compared to $11.1 million for the year ended December 31, 2001. Real estate taxes for the Core Office Portfolio increased $0.8 million, or 9.1% for the year ended December 31, 2002 compared to the comparable period in 2001. This increase was primarily due to refunds received for prior year real estate taxes successfully appealed by the Company during the year ended December 31, 2001. An increase of $0.3 million attributable to the Office Development Properties was partially offset by a decrease of $0.1 million attributable to the Net Office Dispositions. The provision for bad debts increased $2.9 million, or 97.9% to $5.8 million for the year ended December 31, 2002 compared to $2.9 million for the year ended December 31, 2001. During 2002, the Company increased its reserve for unbilled deferred rents specifically related to the Company’s watchlist tenants. The Company evaluates its reserve levels on a quarterly basis. Ground lease expense decreased $0.2 million, or 10.2% for the year ended December 31, 2002 compared to the same period in 2001. Ground lease expense for the Core Office Portfolio decreased $0.1 million, or 9.9% for the year ended December 31, 2002 compared to the comparable period in 2001. During the second quarter of 2002 the Company renegotiated the ground leases at Kilroy Airport Center Long Beach resulting in a reduction of annual ground lease expense and simultaneously exercised the options to extend the ground leases for an additional fifty years. The ground leases now expire in July 2084.

Net Operating Income, as defined, from Office Properties increased $0.2 million, or 0.1% to $118.9 million for the year ended December 31, 2002 compared to $118.7 million for the year ended December 31, 2001. A decrease of $0.8 million attributable to the Core Office Portfolio was offset by an increase of $1.7 million in the Office Development Properties and decrease of $0.7 million in Net Office Dispositions.

Industrial Properties

	Total Industrial Portfolio									Core Industrial Portfolio(1)
	2002		2001		Dollar Change			Percentage Change		2002		2001		Dollar Change			Percentage Change
	(dollars in thousands)
Operating revenues:
Rental income	$	34,911	$	37,813	$	(2,902	)	(7.7	)%	$	34,618	$	34,034	$	584		1.7	%
Tenant reimbursements		3,804		4,030		(226	)	(5.6	)		3,774		3,479		295		8.5
Other property income		89		339		(250	)	(73.7	)		89		7		82		1171.4
Total		38,804		42,182		(3,378	)	(8.0	)		38,481		37,520		961		2.6
Property and related expenses:
Property expenses		2,985		2,579		406		15.7			2,985		2,116		869		41.1
Real estate taxes		3,021		3,499		(478	)	(13.7	)		2,985		3,118		(133	)	(4.3	)
Provision for bad debts		1,022		828		194		23.4			1,021		653		368		56.4
Total		7,028		6,906		122		1.8			6,992		5,887		1,104		18.8
Net operating income, as defined	$	31,776	$	35,276	$	(3,500	)	(9.9	)%	$	31,490	$	31,633	$	(143	)	(0.5	)%

(1) Stabilized industrial properties owned at January 1, 2001 and still owned at December 31, 2003.

Total revenues from Industrial Properties decreased $3.3 million, or 7.8% to $38.9 million for the year ended December 31, 2002 compared to $42.2 million for the year ended December 31, 2001. Rental income from

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Industrial Properties decreased $2.9 million, or 7.7% to $34.9 million for the year ended December 31, 2002 compared to $37.8 million for the year ended December 31, 2001. Rental income generated by the Core Industrial Portfolio increased $0.6 million, or 1.7% for the year ended December 31, 2002 as compared to the year ended December 31, 2001. This increase was primarily attributable to holdover rent received at one property in the Orange County Portfolio. Average occupancy in the Core Industrial Portfolio decreased 0.6% to 97.2% for the year ended December 31, 2002 compared to 97.8% for the year ended December 31, 2001. The $0.7 million increase in rental income generated by the Core Industrial Portfolio was offset by a decrease of $4.3 million in rental income attributable to the seventeen industrial buildings sold during 2001 (the “Industrial Dispositions”). An increase of $0.3 million was attributable to the one industrial building acquired during the year ended December 31, 2002 (the “Industrial Acquisition”).

Tenant reimbursements from Industrial Properties decreased $0.2 million, or 5.6% to $3.8 million for the year ended December 31, 2002 compared to $4.0 million for year ended December 31, 2001. An increase of $0.3 million, or 8.5% generated by the Core Industrial Portfolio, was offset by a decrease of $0.5 million attributable to the Industrial Dispositions. Other property income from Industrial Properties decreased $0.2 million, or 73.7% to $89,000 for the year ended December 31, 2002 compared to $0.3 million for the year ended December 31, 2001. During the year ended December 31, 2001, the Company received $0.3 million in forfeited escrow deposits on four properties for which the pending sale did not occur. These properties were subsequently sold during the fourth quarter of 2001.

Total expenses from Industrial Properties increased $0.2 million, or 2.8% to $7.1 million for the year ended December 31, 2002 compared to $6.9 million for the year ended December 31, 2001. Property expenses from Industrial Properties increased $0.4 million, or 15.8% to $3.0 million for the year ended December 31, 2002 compared to $2.6 million for the year ended December 31, 2001. An increase of $0.9 million in property expenses for the Core Industrial Portfolio was offset by a decrease of $0.5 million attributable to the Industrial Dispositions. The increase in the Core Industrial Portfolio is primarily due to the Company paying property expenses directly at one property at which the previous tenant paid the expenses directly. The tenant defaulted and the lease was terminated in July 2002. Real estate taxes decreased $0.5 million, or 13.7% to $3.0 million for the year ended December 31, 2002 compared to $3.5 million for the year ended December 31, 2001. Real estate taxes for the Core Industrial Portfolio decreased $0.1 million for the year ended December 31, 2002 compared to the same period in 2001, and the remaining decrease of $0.4 million was attributable to the Industrial Dispositions. The provision for bad debts increased $0.2 million, or 23.4% to $1.0 million for the year ended December 31, 2002 compared to $0.8 million for the year ended December 31, 2001. During 2002, the Company increased its reserve for unbilled deferred rents specifically related to the Company’s watchlist tenants. The Company evaluates its reserve levels on a quarterly basis.

Net Operating Income, as defined, from Industrial Properties decreased $3.5 million, or 9.9% to $31.8 million for the year ended December 31, 2002 compared to $35.3 million for the year ended December 31, 2001. Net operating income for the Core Industrial Portfolio decreased $0.1 million, or 0.5% for the year ended December 31, 2002 compared to the same period in 2001. An increase of $0.3 million attributable to the Industrial Acquisition was offset by a decrease of $3.7 million attributable to the Industrial Dispositions.

Non-Property Related Income and Expenses

Interest income decreased $0.5 million, or 50.2% to $0.5 million for the year ended December 31, 2002 compared to $1.0 million for the year ended December 31, 2001. A decrease of approximately $184,000 was attributable to interest earned on restricted cash balances held at Qualified Intermediaries, as defined by Section 1031 of the Internal Revenue Code, in January 2001, which were used in a tax deferred property exchange. The Company did not have any cash balances at Qualified Intermediaries in 2002. The remaining decrease was primarily attributable to a general decrease in interest rates.

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General and administrative expenses increased $0.9 million, or 7.4% to $12.6 million for the year ended December 31, 2002 compared to $11.7 million for the year ended December 31, 2001. For the year ended December 31, 2002, the Company recorded a $0.5 million charge to general and administrative expenses for costs the Company paid for the fifth and final building that was to be leased to Peregrine. Peregrine surrendered the building back to the Company in June 2002, at which time it was still under construction and was not yet included in the Company’s portfolio of stabilized operating properties. The remaining increase was primarily due to the non-cash amortization of the restricted stock grants that were granted in February 2002.

Net interest expense decreased $5.6 million, or 13.7% to $35.4 million for the year ended December 31, 2002 compared to $41.0 million for the year ended December 31, 2001. Gross interest expense, before the effect of capitalized interest, decreased $5.2 million or 9.6% to $49.4 million for the year ended December 31, 2002 from $54.6 million for the year ended December 31, 2001 primarily due to a decrease in the Company’s weighted average interest rate. The Company’s weighted average interest rate decreased to 5.3% at December 31, 2002 compared to 6.8% at December 31, 2001. Total capitalized interest and loan fees increased $0.4 million or 3.0% to $14.0 million for the year ended December 31, 2002 from $13.6 million for the year ended December 31, 2001 primarily due to higher average balances eligible for capitalization during the year ended December 31, 2002 as compared to the same period in 2001.

Depreciation and amortization increased $8.4 million, or 16.6% to $58.8 million for the year ended December 31, 2002 compared to $50.4 million for the year ended December 31, 2001. During the year ended December 31, 2002 the Company recorded accelerated depreciation and amortization charges of approximately $5.3 million for previously capitalized leasing costs related to the Company’s leases with Peregrine Systems, Inc. In addition, there was an increase attributable to the development properties completed and stabilized since December 31, 2001.

Income From Continuing Operations

Income from continuing operations before net gain on dispositions and minority interests decreased $7.4 million or 14.3% to $44.5 for the year ended December 31, 2002 compared to $51.9 million for the year ended December 31, 2001. The decrease was primarily due to the decrease in Net Operating Income from the Industrial Properties of $3.5 million, an increase in depreciation and amortization expense of $8.4 million offset primarily by an decrease in interest expense of $5.6 million.

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Building and Lease Information

The following tables set forth certain information regarding the Company’s Office and Industrial Properties at December 31, 2003:

Occupancy by Segment Type

Region	Number of Buildings	Square Feet Total	Occupancy
Office Properties:
Los Angeles	31	3,226,700	82.5	%
Orange County	7	387,327	80.0
San Diego	40	3,044,710	92.3
Other	4	657,450	95.0
	82	7,316,187	87.6	%
Industrial Properties:
Los Angeles	4	388,805	70.7	%
Orange County	44	4,194,381	96.3
Other	2	295,417	100.0
	50	4,878,603	94.5	%
Total Portfolio	132	12,194,790	90.3	%

Leasing Activity by Segment Type

For the year ended December 31, 2003

	Number of Leases(1)		Rentable Square Feet		Changes in Rents(2)		Changes in Cash Rents(3)		Retention Rates(4)		Weighted Average Lease Term (in months)
	New	Renewal	New(1)	Renewal
Office Properties	74	17	770,397	276,689	7.5	%	4.9	%	54.7	%	62
Industrial Properties	7	6	142,460	234,699	3.4	%	(0.5	)%	55.3	%	55
Total Portfolio	81	23	912,857	511,388	7.0	%	4.3	%	52.1	%	60

(1) Represents leasing activity for leases commencing during the period shown, including first and second generation space, net of month-to-month leases. Excludes leasing on new construction.

(2) Calculated as the change between GAAP rents for new/renewed leases and the expiring GAAP rents for the same space.

(3) Calculated as the change between stated rents for new/renewed leases and the expiring stated rents for the same space.

(4) Calculated as the percentage of space either renewed or expanded into by existing tenants at lease expiration.

Liquidity and Capital Resources

Current Sources of Capital and Liquidity

The Company seeks to create and maintain a capital structure that allows for financial flexibility and diversification of capital resources. The Company’s primary source of liquidity to fund distributions, debt service, leasing costs and capital expenditures is net cash from operations. The Company’s primary sources of liquidity to fund development and redevelopment costs, potential undeveloped land and property acquisitions, temporary working capital and unanticipated cash needs are the Company’s $425 million unsecured revolving line of credit, proceeds received from the Company’s disposition program and construction loans. As of December 31, 2003 and 2002, the Company’s total debt as a percentage of total market capitalization was 38.5%

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and 46.3%, respectively. As of December 31, 2003 and 2002 the Company’s total debt plus preferred equity as a percentage of total market capitalization was 46.6% and 55.7%, respectively.

As of December 31, 2003, the Company had borrowings of $235 million outstanding under its unsecured revolving line of credit (the “Credit Facility”) and availability of approximately $84.2 million. The Credit Facility bears interest at an annual rate between LIBOR plus 1.13% and LIBOR plus 1.75% (2.66% at December 31, 2003), depending upon the Company’s leverage ratio at the time of borrowing, and matures in March 2005. The fee for unused funds ranges from an annual rate of 0.20% to 0.35% depending on the Company’s leverage ratio. The Company expects to use the Credit Facility to finance development and redevelopment expenditures, to fund potential acquisitions and for other general corporate uses.

The Company has the ability to issue up to an additional $273 million of equity securities under a currently effective shelf registration statement.

Factors Which May Influence Future Sources of Capital and Liquidity

In February 2004, the Company borrowed $81 million under a mortgage loan that is secured by four office properties in a five-building complex and requires interest-only payments based on a variable annual interest rate of LIBOR plus 1.75% through July 2004. Beginning in August 2004 through August 2012, the scheduled maturity date, the loan requires monthly principal and interest payments based on a fixed annual interest rate of 5.57%. The Company used a portion of the proceeds to repay an outstanding mortgage loan with a principal balance of $20.3 million that was scheduled to mature in June of 2004. The remainder of the proceeds was used primarily to repay borrowings under the Credit Facility. The Company has also received a commitment from a financial institution for a $34 million mortgage loan that will be secured by the fifth building in the complex. The loan will be co-terminus with and have similar terms as the new $81 million loan with a final fixed annual interest rate of 4.95%. The closing of this loan is subject to customary conditions and is expected to occur in the first quarter of 2004. The Company intends to use the proceeds to repay borrowings under the Credit Facility.

In March 2004, the Company amended the terms of its Series A Preferred Units to reduce the distribution rate, extend the redemption date to September 30, 2009, and create a right of redemption at the option of the holders in the event of certain change of control events, certain repurchases of the Company’s publicly registered equity securities, an involuntary delisting of the Company’s common stock from the NYSE or a loss of REIT status. Commencing March 5, 2004, distributions on the Series A Preferred Units will accrue at a rate of 7.45% per annum. Prior to March 5, 2004, distributions on the Series A Preferred Units accrued at a rate of 8.075% per annum (see note 13 to the Company’s consolidated financial statements).

The Company has a fixed rate mortgage loan, with a principal balance of $74.8 million as of December 31, 2003. After January 2005, the mortgage note is subject to increases in the effective annual interest rate to the greater of 10.35% or the sum of the interest rate for U.S. Treasury Securities maturing 15 years from the reset date plus 2.00%. The contractual maturity date of this loan is February 2022, however the Company intends to refinance the debt in the second half of 2004 without any prepayment penalty. The Company has restricted cash balances, which totaled an aggregate of $8.3 million as of December 31, 2003, that are held as credit enhancements and as reserves for property taxes, capital expenditures and capital improvements in connection with this loan. When the Company repays the loan, the restricted balances that are outstanding at that time will become available as unrestricted funds to the Company.

In 2003 and 2002, the Company used proceeds from dispositions of operating properties of approximately $34.1 million and $46.5 million, respectively, to fund a portion of its development and redevelopment activities and its share repurchase program. The Company currently expects that it could dispose of approximately $20 million to $50 million of non-strategic assets in 2004; however management is also evaluating other financing sources to fund its development and redevelopment activities.

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The composition of the Company’s aggregate debt balances at December 31, 2003 and 2002 were as follows:

	Percentage of Total Debt				Weighted Average Interest Rate
	December 31, 2003		December 31, 2002		December 31, 2003		December 31, 2002
Secured vs. unsecured:
Secured	69.1	%	66.5	%	5.8	%	6.3	%
Unsecured	30.9	%	33.5	%	4.2	%	3.5	%
Fixed rate vs. variable rate:
Fixed rate(1)(2)(3)	72.6	%	63.5	%	6.3	%	6.7	%
Variable rate(4)	27.4	%	36.5	%	2.8	%	3.0	%
Total Debt					5.3	%	5.3	%
Total Debt Including Loan Fees					5.9	%	5.8	%

(1) At December 31, 2003 and 2002, the Company had an interest-rate swap agreement, which expires in January 2005, to fix LIBOR on $50 million of its variable rate debt at 4.46%.

(2) At December 31, 2003 and 2002, the Company had an interest-rate swap agreement, which expires in November 2005, to fix LIBOR on $50 million of its variable rate debt at 2.57%.

(3) At December 31, 2003 and 2002, the Company had interest-rate swap agreements, which expire in December 2006, to fix LIBOR on $50 million of its variable rate debt at 2.98%.

(4) At December 31, 2003 and 2002, the Company had interest-rate cap agreements, which expire in January 2005, to cap LIBOR on $100 million of its variable rate debt at 4.25%.

The percentage of fixed rate debt to total debt at December 31, 2003 and 2002 does not take into consideration the portion of variable rate debt capped by the Company’s interest-rate cap agreements. Including the effects of the interest-rate cap agreements, the Company had fixed or capped approximately 85.7% and 76.7% of its total outstanding debt at December 31, 2003 and 2002, respectively.

At December 31, 2003, 47.1% of the Company’s total debt, before the effect of hedging instruments, required interest payments based on LIBOR rates. During 2003, one-month LIBOR decreased from 1.38% at January 2, 2003 to 1.12% at December 31, 2003, a rate lower than it has been since the time of the Company’s IPO. Although the interest payments on 85.7% of the Company’s debt are either fixed, or hedged through the employment of interest-rate swap and cap agreements at December 31, 2003, the remaining 14.3% of the Company’s debt is exposed to fluctuations of the one-month LIBOR rate. The Company cannot provide assurance that it will be able to replace its interest-rate swap and cap agreements as they expire and, therefore, the Company’s results of operations could be exposed to rising interest rates in the future.

The following table lists the derivative financial instruments held by the Company as of December 31, 2003 and 2002:

Notional Amount	Instrument	Rate	Maturity
$  50,000	Cap	4.25%	01/2005
50,000	Cap	4.25%	01/2005
50,000	Swap	4.46%	01/2005
50,000	Swap	2.57%	11/2005
25,000	Swap	2.98%	12/2006
25,000	Swap	2.98%	12/2006
$250,000

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Following is the Company’s total market capitalization as of December 31, 2003:

	Shares/Units at December 31, 2003	Aggregate Principal Amount or $ Value Equivalent		% of Total Market Capitalization
DEBT:
Secured Debt		$	526,048	26.6	%
Unsecured Line of Credit			235,000	11.9
Total Debt		$	761,048	38.5
EQUITY:
8.075% Series A Cumulative Redeemable Preferred Units(1)	1,500,000	$	75,000	3.8
9.250% Series D Cumulative Redeemable Preferred Units(1)	900,000		45,000	2.3
7.800% Series E Cumulative Redeemable Preferred Stock(2)	1,610,000		40,250	2.0
Common Units Outstanding(3)	4,154,313		136,054	6.9
Common Shares Outstanding(3)	28,209,213		923,851	46.5
Total Equity		$	1,220,155	61.5
TOTAL MARKET CAPITALIZATION		$	1,981,203	100.0	%

(1) Value based on $50.00 per share liquidation preference.

(2) Value based on $25.00 per share liquidation preference.

(3) Value based on closing share price of $32.75 at December 31, 2003.

Contractual Obligations

The following table provides information with respect to the maturities and scheduled principal repayments of the Company’s secured debt and Credit Facility and scheduled interest payments of the Company’s fixed rate debt and interest rate swap agreements at December 31, 2003 and provides information about the minimum commitments due in connection with the Company’s ground lease obligations and capital commitments at December 31, 2003. The table does not reflect available maturity extension options.

	Payment Due by Period
	Less than 1 Year (2004)		1–3 Years (2005-2006)		3–5 Years (2007-2008)		More than 5 Years (After 2008)		Total
Principal Payments—Secured Debt	$	73,868	$	160,098	$	111,293	$	180,789	$	526,048
Principal Payments—Credit Facility				235,000						235,000
Interest Payments—Fixed Rate Debt(1)(2)(3)		26,693		38,316		32,490		27,537		125,036
Interest Payments—Interest Rate Swaps(1)(4)		5,089		2,987						8,076
Ground Lease Obligations(5)		1,478		2,933		2,940		72,498		79,849
Capital Commitments(6)		9,291								9,291
Total	$	116,419	$	439,334	$	146,723	$	280,824	$	983,300

(1) As of December 31, 2003, 72.6% of the Company’s debt was contractually fixed or constructively fixed through interest-rate swap agreements. (See notes 10 and 12 to the Company’s consolidated financial statements for details of the Company’s fixed rate debt and interest rate swap agreements.) The information in the table above reflects the Company’s projected interest rate obligations for these fixed-rate payments based on the contractual interest rates, interest payment dates and scheduled maturity dates. The remaining 27.4% of the Company’s debt bears interest at variable rates and the variable interest rate payments are based on LIBOR plus a spread that ranges from 1.40% to 1.85%. Management cannot reasonably determine the future interest obligations on its variable rate debt as management cannot predict what LIBOR rates will be in the future. As of December 31, 2003, LIBOR was 1.12%.

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(2) Represents scheduled interest payments for the Company’s total outstanding fixed-rate debt as of December 31, 2003 based on the contractual interest rates, interest payment dates and scheduled maturity dates. See note 10 to the Company’s consolidated financial statements for details of the Company’s fixed-rate debt.

(3) The Company has a fixed-rate mortgage with a principal balance of $74.8 million as of December 31, 2003 that it intends to refinance in the second half of 2004. This schedule includes the scheduled interest payments for this loan through January 2005 and does not reflect this potential prepayment. For further discussion on this loan see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”

(4) Represents the scheduled interest payments for the Company’s total outstanding interest rate swap agreements as of December 31, 2003, based on the contractual interest rates, interest payment dates and maturity dates. The interest payments are reported at the gross amount and do not reflect the offsetting variable payment to be received from the counterparty. The Company employs derivative instruments for hedging purposes only and does not hold interest rate swaps for speculative purposes. These cash flow hedges effectively convert a portion of the Company’s variable-rate debt to fixed-rate debt. The Company had interest-rate swap agreements with a total notional amount of $150 million as of December 31, 2003. See note 12 to the Company’s consolidated financial statements for details of the Company’s interest-rate swap agreements.

(5) The Company has noncancelable ground lease obligations for the SeaTac Office Center in Seattle, Washington expiring in December 2032, with an option to extend the lease for an additional 30 years; and Kilroy Airport Center in Long Beach, California with a lease period for Phases I, II, III and IV expiring in July 2084.

(6) See discussion under “Capital Commitments.”

The Credit Facility and certain other secured debt agreements contain covenants and restrictions requiring the Company to meet certain financial ratios and reporting requirements. Some of the more restrictive covenants include minimum debt service coverage ratios, a maximum total liabilities to total assets ratio, a maximum total secured debt to total assets ratio, minimum debt service coverage and fixed charge coverage ratios, a minimum consolidated tangible net worth and a limit of development activities as compared to total assets. Non-compliance with one or more of the covenants and restrictions could result in the full or partial principal balance of the associated debt becoming immediately due and payable. The Company was in compliance with all its covenants at December 31, 2003. In addition, the Company’s construction loan, which is due September 2004, has a limited recourse provision that holds the Company liable up to approximately $14.3 million plus any unpaid accrued interest.

Capital Commitments

As of December 31, 2003, the Company had one development project and two redevelopment projects that were either in lease-up or under construction. These projects have a total estimated investment of approximately $145 million. The Company has incurred an aggregate of approximately $114 million on these projects as of December 31, 2003, and currently projects it could spend approximately $25 million of the remaining $31 million of presently budgeted development costs during 2004, depending on leasing activity. In addition, the Company had two development projects and one redevelopment project that were added to the Company’s stabilized portfolio of operating properties in the second and third quarters of 2003, which had not yet reached stabilized occupancy as of December 31, 2003. Depending on leasing activity, the Company currently projects it could spend approximately $10 million for these projects during 2004. The Company also estimates it could spend an additional $9 million on other development projects in 2004, depending upon market conditions. The Company intends to finance these costs from among one or more of the following sources: borrowings under the Credit Facility and the existing construction loan, proceeds from the Company’s disposition program, the potential issuance of additional equity securities and working capital. See additional information regarding the Company’s in-process development and redevelopment portfolio under the caption “Development and Redevelopment Programs” in this report.

As of December 31, 2003, the Company had executed leases that committed the Company to $8 million in unpaid leasing costs and tenant improvements and the Company had contracts outstanding for approximately $1 million in capital improvements at December 31, 2003. In addition, for 2004, the Company plans to spend approximately $18 million to $22 million in capital improvements, tenant improvements, and leasing costs for properties within the Company’s stabilized portfolio, depending on leasing activity. Capital expenditures may fluctuate in any given period subject to the nature, extent and timing of improvements required to maintain the

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Company’s properties. Tenant improvements and leasing costs may also fluctuate in any given period depending upon factors such as the type of property, the term of the lease, the type of lease, the involvement of external leasing agents and overall market conditions.

Other Liquidity Needs

The Company is required to distribute 90% of its REIT taxable income (excluding capital gains) on an annual basis in order to qualify as a REIT for federal income tax purposes. Accordingly, the Company intends to continue to make, but has not contractually bound itself to make, regular quarterly distributions to common stockholders and common unitholders from cash flow from operating activities. All such distributions are at the discretion of the Board of Directors. The Company may be required to use borrowings under the Current Credit Facility, if necessary, to meet REIT distribution requirements and maintain its REIT status. The Company has historically distributed amounts in excess of its taxable income resulting in a return of capital to its stockholders, and currently has the ability to not increase its distributions to meet its REIT requirements for 2003. The Company considers market factors and Company performance in addition to REIT requirements in determining its distribution levels. Amounts accumulated for distribution to shareholders are invested primarily in interest-bearing accounts and short-term interest-bearing securities, which are consistent with the Company’s intention to maintain its qualification as a REIT. Such investments may include, for example, obligations of the Government National Mortgage Association, other governmental agency securities, certificates of deposit and interest-bearing bank deposits. On February 10, 2004, the Company declared a regular quarterly cash dividend of $0.495 per common share payable on April 16, 2004 to stockholders of record on March 31, 2004. This dividend is equivalent to an annual rate of $1.98 per share. In addition the Company is required to make quarterly distributions to its Series A and Series D Preferred unitholders and Series E Preferred Stockholders, which in aggregate total approximately $13 million of annualized preferred dividends and distributions.

The Company’s Board of Directors has approved a share repurchase program, pursuant to which the Company is authorized to repurchase up to an aggregate of four million shares of its outstanding common stock. An aggregate of 1,227,500 shares currently remain eligible for repurchase under this program. The Company may opt to repurchase shares of its common stock in the future depending upon market conditions.

The Company believes that it will have sufficient capital resources to satisfy its liquidity needs over the next twelve months. The Company estimates it will have a range of approximately $325 million to $363 million of available sources to meet its short-term cash needs as follows: estimated availability of approximately $84 million under its Credit Facility, $115 million of proceeds from new secured debt, estimated operating cash flow ranging from $98 million to $106 million, anticipated proceeds from dispositions of non-strategic assets ranging from $20 million to $50 million, and approximately $8 million from the release of restricted cash during 2004. The Company estimates it will have a range of approximately $213 million to $226 million of commitments and capital expenditures over the next twelve months comprised of the following: $74 million in secured debt principal repayments; planned expenditures for in-process development, stabilized development and new development projects ranging from $35 million to $44 million; $9 million of committed costs for executed leases and capital expenditures; budgeted capital improvements, tenant improvements and leasing costs for the Company’s stabilized portfolio ranging from approximately $18 million to $22 million, depending on leasing activity. In addition, based on the Company’s annualized dividends for the first quarter of 2004, the Company may distribute approximately $77 million to common and preferred stockholders and common and preferred unitholders in 2004. There can be, however, no assurance that the Company will not exceed these estimated expenditure and distribution levels or be able to obtain additional sources of financing on commercially favorable terms, or at all.

The Company expects to meet its long-term liquidity requirements, which may include property and undeveloped land acquisitions and additional future development and redevelopment activity, through retained cash flow, borrowings under the Credit Facility, additional long-term secured and unsecured borrowings, dispositions of non-strategic assets, issuance of common or preferred units of the Operating Partnership, and the

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potential issuance of debt or equity securities. The Company does not intend to reserve funds to retire existing debt upon maturity. The Company will instead, seek to refinance such debt at maturity or retire such debt through the issuance of equity securities, as market conditions permit.

Historical Recurring Capital Expenditures, Tenant Improvements and Leasing Costs

The following tables set forth the capital expenditures, tenant improvements and leasing costs, excluding expenditures that are recoverable from tenants, for renewed and re-tenanted space within the Company’s stabilized portfolio for the three years ended December 31, 2003 on a per square foot basis.

	Year Ended December 31,
	2003		2002		2001
Office Properties:
Capital Expenditures:
Capital expenditures per square foot	$	0.48	$	0.06	$	0.35
Tenant Improvement and Leasing Costs(1):
Replacement tenant square feet		736,638		296,484		126,865
Tenant improvements per square foot leased	$	16.31	$	6.85	$	8.04
Leasing commissions per square foot leased	$	7.31	$	7.43	$	5.53
Total per square foot	$	14.28	$	14.28	$	13.57
Renewal tenant square feet		276,689		244,366		503,693
Tenant improvements per square foot leased	$	2.77	$	4.69	$	3.42
Leasing commissions per square foot leased	$	5.19	$	2.20	$	2.67
Total per square foot	$	7.96	$	6.89	$	6.09
Total per square foot per year	$	6.09	$	3.71	$	3.39
Average lease term (in years)		5.2		5.7		5.8
Industrial Properties:
Capital Expenditures:
Capital expenditures per square foot	$	0.02	$	0.12	$	0.10
Tenant Improvement and Leasing Costs(1):
Replacement tenant square feet		142,460		388,883		170,692
Tenant improvements per square foot leased	$	5.35	$	4.61	$	2.04
Leasing commissions per square foot leased	$	1.83	$	1.95	$	1.41
Total per square foot	$	7.18	$	6.56	$	3.45
Renewal tenant square feet		234,699		180,555		548,304
Tenant improvements per square foot leased	$	0.21	$	1.11	$	1.28
Leasing commissions per square foot leased	$	0.05	$	0.72	$	0.54
Total per square foot	$	1.62	$	1.83	$	1.82
Total per square foot per year	$	1.27	$	1.27	$	1.10
Average lease term (in years)		4.6		6.6		4.8

(1) Includes only tenants with lease terms of 12 months or longer. Excludes leases for amenity, parking, retail and month-to-month tenants.

Capital expenditures may fluctuate in any given period subject to the nature, extent, and timing of improvements required to be made to the Properties. During 2003, the Company performed lobby and common area improvements at one complex of properties in El Segundo, California. The Company anticipates this level of capital expenditures will continue during 2004 for various improvements at other properties. The Company believes that all of its Office and Industrial Properties are well maintained and do not require significant capital improvements.

Tenant improvements and leasing costs may also fluctuate in any given year depending upon factors such as the property, the term of the lease, the type of lease, the involvement of external leasing agents and overall

54

market conditions. As several of the properties the Company disposed of during 2003 and 2002 were non-strategic multi-tenant office projects, which historically were re-leased at lower tenant improvement and leasing costs, the Company experienced increased tenant improvement and leasing costs per square foot in 2003. The Company anticipates that this trend will continue in 2004.

Off-Balance Sheet Arrangements

As of December 31, 2003, the Company does not have any off-balance sheet transactions, arrangements or obligations, including contingent obligations.

Historical Cash Flows

The principal sources of funding for development, redevelopment, acquisitions and capital expenditures are cash flow from operating activities, the Credit Facility, secured and unsecured debt financing and proceeds from the Company’s dispositions. The Company’s net cash provided by operating activities decreased $4.3 million, or 4.3% to $95.9 million for the year ended December 31, 2003 compared to $100.3 million for the year ended December 31, 2002. The decrease was primarily attributable a decrease in average occupancy. For the year ended December 31, 2003, average occupancy was 91.2% as compared to 93.9% for the year ended December 31, 2002. This decrease was partially offset by a net increase in cash received from tenants for lease termination fees of approximately $11.0 million during the year ended 2003 as compared to 2002. This net increase was primarily a result of the $18.3 million payment the Company received from Peregrine in the third quarter of 2003. In December 2002, the Company received a $4.6 million cash payment for a lease termination, which was included as deferred income on the Company’s balance sheet as of December 31, 2002. The Company recognized the corresponding $4.3 million net lease termination fee in January 2003, the lease termination date, and included the amount in other property income for the year ended December 31, 2003.

Net cash used in investing activities decreased $17.6 million, or 25.7% to $50.8 million for the year ended December 31, 2003 compared to $68.4 million for the year ended December 31, 2002. The decrease was primarily attributable to a decrease in development spending offset by lower net proceeds received from the disposition of operating properties used to fund a portion of the development costs. The Company scaled back its development activity during the last two years as a result of the economic environment and the related impact on leasing. Management will continue to position the Company to take advantage of development, redevelopment, acquisition and disposition opportunities as they arise. Development spending for future periods will depend on economic conditions and opportunities to commit to new development projects on a pre-leased basis. The Company currently expects that it will continue to fund a portion of its development and redevelopment activities with disposition proceeds; however management will also evaluate and consider other sources of financing.

Net cash used in financing activities increased $18.5 million, or 56.7% to $60.0 million for the year ended December 31, 2003 compared to $32.5 million for the year ended December 31, 2002. This increase was primarily attributable to a $41.1 million decrease in net borrowing activity in 2003 as compared to 2002, which was mainly due to the Company scaling back its development activity as discussed in the paragraph above. This increase was partially offset by the decrease in share repurchase activity. In 2003, the Company did not repurchase any shares under its share repurchase program. In 2002, the Company had repurchased 508,200 shares of common stock under this program for an aggregate price of $11.4 million. The increase in cash used in financing activities was also partially offset by the higher volume of stock option exercises in 2003 as compared to 2002. In 2003 the Company received $13.4 million in proceeds for the issuance of 664,528 shares in connection with the exercise of stock options as compared to $4.2 million in proceeds the Company received in 2002 for the issuance of 208,381 shares issued in connection with stock option exercises.

Non-GAAP Supplemental Financial Measure: Funds From Operations

Management believes that FFO is a useful supplemental measure of the Company’s operating performance. The Company computes FFO in accordance with the White Paper on FFO approved by the Board of Governors

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NAREIT. The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships and joint ventures. Other REITs may use different methodologies for calculating FFO, and accordingly, the Company’s FFO may not be comparable to other REITs.

Because FFO excludes depreciation and amortization, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses and interest costs, providing a perspective not immediately apparent from net income. In addition, management believes that FFO provides useful information to the investment community about the Company’s financial performance when compared to other REITs since FFO is generally recognized as the industry standard for reporting the operations of REITs.

However, FFO should not be viewed as an alternative measure of the Company’s operating performance since it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of the Company’s properties, which are significant economic costs and could materially impact the Company’s results from operations.

The following table presents the Company’s Funds from Operations, by quarter, for the years ended December 31, 2003, 2002, 2001, 2000 and 1999:

	2003 Quarter Ended
	December 31,			September 30,			June 30,			March 31,
	(in thousands)
Net income available for common shareholders	$	4,938		$	20,039		$	13,360		$	10,929
Adjustments:
Minority interest in earnings of Operating Partnership		711			3,059			2,056			1,686
Depreciation and amortization		14,548			14,327			13,167			13,705
Net gain on dispositions of operating properties					48			(3,690	)
Funds From Operations(1)	$	20,197		$	37,473		$	24,893		$	26,320
	2002 Quarter Ended
	December 31,			September 30,			June 30,			March 31,
	(in thousands)
Net income available for common shareholders	$	13,965		$	7,885		$	4,957		$	13,507
Adjustments:
Minority interest in earnings of Operating Partnership		2,094			1,239			986			1,510
Depreciation and amortization		14,303			14,516			18,311			12,136
Net gain on dispositions of operating properties		(6,100	)		(470	)		(896	)
Funds From Operations(1)	$	24,262		$	23,170		$	23,358		$	27,153

(1) Reported amounts are attributable to common shareholders and common unitholders.

(2) Commencing January 1, 2002 non-cash amortization of restricted stock grants is not added back to calculate FFO.

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	2001 Quarter Ended
	December 31,			September 30,			June 30,			March 31,
	(in thousands)
Net income available for common shareholders	$	7,625		$	9,283		$	15,097		$	6,426
Adjustments:
Minority interest in earnings of Operating Partnership		834			1,027			1,796			845
Depreciation and amortization		12,634			12,123			12,030			12,970
Net gain on dispositions of operating properties		(707	)		(2,468	)		(1,234	)		(305	)
Cumulative effect on change in accounting principle											1,392
Non-cash amortization of restricted stock grants(2)		547			547			548			548
Funds From Operations(1)	$	20,933		$	20,512		$	28,237		$	21,876
	2000 Quarter Ended
	December 31,			September 30,			June 30,			March 31,
	(in thousands)
Net income available for common shareholders	$	8,786		$	15,679		$	12,804		$	9,578
Adjustments:
Minority interest in earnings of Operating Partnership		1,241			2,227			1,843			1,372
Depreciation and amortization		11,037			9,941			9,645			9,323
Net (gain) loss on dispositions of operating properties					(7,288	)		(4,273	)		305
Non-cash amortization of restricted stock grants(2)		508			508			134			102
Funds From Operations(1)	$	21,572		$	21,067		$	20,153		$	20,680
	1999 Quarter Ended
	December 31,			September 30,			June 30,			March 31,
	(in thousands)
Net income available for common shareholders	$	8,278		$	10,911		$	10,796		$	9,910
Adjustments:
Minority interest in earnings of Operating Partnership		1,294			1,830			1,820			1,536
Depreciation and amortization		11,217			7,900			7,460			7,217
Net loss (gain) on dispositions of operating properties		29			(75	)
Non-cash amortization of restricted stock grants(2)		127			127			127			127
Funds From Operations(1)	$	20,945		$	20,693		$	20,203		$	18,790

(1) Reported amounts are attributable to common shareholders and common unitholders.

(2) Commencing January 1, 2002 non-cash amortization of restricted stock grants is not added back to calculate FFO.

Inflation

The majority of the Company’s leases require tenants to pay most operating expenses, including real estate taxes, utilities, insurance, and increases in common area maintenance expenses. The effect of such provisions is to reduce the Company’s exposure to increases in costs and operating expenses resulting from inflation.

New Accounting Pronouncements

On January 1, 2003, the Company adopted the provisions of SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS 145”). The most significant provisions of this statement relate to the rescission of Statement No. 4 “Reporting Gains and Losses from Extinguishment of Debt.” SFAS 145 also amends other existing authoritative pronouncements to make

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various technical corrections, clarify meanings or describe their applicability under changed conditions. Under SFAS 145, any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet certain defined criteria must be reclassified. The adoption of this statement did not have a material effect on the Company’s results of operations or financial condition.

On January 1, 2003, the Company adopted the provisions of SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The adoption of this statement did not have a material effect on the Company’s results of operations or financial condition.

On January 1, 2003, the Company adopted the initial recognition and measurement provisions of Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 significantly changes the current practice in the accounting for, and disclosure of, guarantees. Guarantees and indemnification agreements meeting the characteristics described in FIN 45 are required to be initially recorded as a liability at fair value. FIN 45 also requires a guarantor to make significant new disclosures for virtually all guarantees even if the likelihood of the guarantor having to make payment under the guarantee is remote. The Company adopted the disclosure provisions of FIN 45 as of December 31, 2002. The adoption of the provisions of this interpretation did not have a material effect on the Company’s results of operations or financial condition.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” and provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies to an entity in which either: (1) the equity investors (if any) lack one or more characteristics deemed essential to a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In December 2003, the FASB published a revision to FIN 46 (“FIN 46R”) to clarify some of the provisions of the interpretation and defer the effective date of implementation for certain entities. The provisions of FIN 46R are effective for the first reporting period ending after December 15, 2003 for entities considered to be special-purpose entities. The provisions for all other entities subject to FIN 46R are effective for financial statements of the first reporting period ending after March 15, 2004. On February 1, 2003, the Company adopted the provisions of this interpretation, which did not have a material effect on the Company’s results of operations or financial condition.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments imbedded in other contracts and for hedging activities under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities.” The provisions of SFAS 149 are generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this statement did not have a material effect on the Company’s results of operations or financial condition.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have a material effect on the Company’s results of operations or financial condition.

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On July 31, 2003, the SEC issued a clarification of Emerging Issues Task Force Topic D-42, “The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock” (“Topic D-42”). Topic D-42 provides, among other things, that any excess of the fair value of the consideration transferred to the holders of preferred stock redeemed over the carrying amount of the preferred stock should be subtracted from net earnings to determine net earnings available to common stockholders in the calculation of earnings per share. The SEC’s clarification of the guidance in Topic D-42 provides that the carrying amount of the preferred stock should be reduced by the related issuance costs.

The July 2003 clarification of Topic D-42 was effective for the Company beginning with the quarter ending September 30, 2003. The Company redeemed all of the outstanding 9.375% Series C Cumulative Redeemable Preferred Units (“Series C Preferred Units”) in November 2003 with the net proceeds from its 7.80% Series E Cumulative Redeemable Preferred Stock offering, which closed on November 21, 2003 (see Notes 13 and 14). This redemption resulted in a $0.9 million charge in 2003 relating to the initial issuance costs of the Series C Preferred units.

In December 2003, the FASB issued SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to improve financial statement disclosures for defined benefit plans. This standard requires that companies provide more details about their plan assets, benefit obligations, cash flows, benefit costs and other relevant information. SFAS No. 132 is effective for fiscal years ending after December 15, 2003, and for quarters beginning after December 15, 2003. The adoption of this statement did not have a material effect on the Company’s results of operations or financial condition.

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary market risk faced by the Company is interest rate risk. The Company mitigates this risk by maintaining prudent amounts of leverage, minimizing interest expense while continuously evaluating all available debt and equity resources and following established risk management policies and procedures which include the periodic use of derivatives. The Company’s primary strategy in entering into derivative contracts is to minimize the variability that changes in interest rates could have on its future cash flows. The Company generally employs derivative instruments that effectively convert a portion of its variable rate debt to fixed rate debt. The Company does not enter into derivative instruments for speculative purposes.

Information about the Company’s changes in interest rate risk exposures from December 31, 2002 to December 31, 2003 is incorporated herein by reference from “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Tabular Presentation of Market Risk

The tabular presentation below provides information about the Company’s interest rate sensitive financial and derivative instruments at December 31, 2003 and 2002. All of the Company’s interest rate sensitive financial and derivative instruments are held for purposes other than trading. For debt obligations, the table presents principal cash flows and related weighted average interest rates or the interest rate index by contractual maturity dates with the assumption that all debt extension options will be exercised. The interest rate spreads on the Company’s variable rate debt at December 31, 2003 and 2002 ranged from LIBOR plus 1.40% to LIBOR plus 1.85%. For the interest rate cap and swap agreements, the table presents the aggregate notional amount and weighted average interest rates or strike rates by contractual maturity date. The notional amounts are used solely to calculate the contractual cash flow to be received under the contract and do not reflect outstanding principal balances at December 31, 2003 and 2002. The table also presents comparative summarized information for financial and derivative instruments held at December 31, 2002.

Interest Rate Risk Analysis—Tabular Presentation

(dollars in millions)

	Maturity Date																		December 31, 2003						December 31, 2002
	2004			2005			2006			2007			2008			Thereafter			Total			Fair Value			Total			Fair Value
Liabilities:
Unsecured line of credit:
Variable rate				$	235.0														$	235.0		$	235.0		$	255.0		$	255.0
Variable rate index					LIBOR															LIBOR						LIBOR
Secured debt:
Variable rate	$	63.8		$	29.0		$	31.0											$	123.8		$	123.8		$	172.8		$	172.8
Variable rate index		LIBOR			LIBOR			LIBOR												LIBOR						LIBOR
Fixed rate	$	10.0		$	91.4		$	8.7		$	30.2		$	81.1		$	180.8		$	402.2		$	414.1		$	334.2		$	359.2
Average interest rate		7.10	%		8.22	%		6.73	%		6.68	%		4.19	%		7.07	%		6.72	%					7.44	%
Interest Rate Derivatives Used to Hedge Variable Rate Debt:
Interest rate swap agreements:
Notional amount				$	100.0		$	50.0											$	150.0		$	(2.7	)	$	150.0		$	(3.7	)
Fixed pay interest rate					3.52	%		2.98	%											3.34	%					3.34	%
Floating receive rate index					LIBOR			LIBOR
Interest rate cap agreements:
Notional amount				$	100.0														$	100.0		$	—		$	100.0		$	0.2
Cap rate					4.25	%														4.25	%					4.25	%
Forward rate index					LIBOR

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the index included at “Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.”

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

None.

ITEM 9A.    CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of December 31, 2003, the end of the fiscal year covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

There have been no significant changes in the Company’s internal control over financial reporting or identified in connection with the evaluation referenced above that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 is incorporated by reference to the Company’s definitive proxy statement for its annual stockholders’ meeting presently scheduled to be held on May 18, 2004.

ITEM 11.    EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated by reference to the Company’s definitive proxy statement for its annual stockholders’ meeting presently scheduled to be held on May 18, 2004.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 is incorporated by reference to the Company’s definitive proxy statement for its annual stockholders’ meeting presently scheduled to be held on May 18, 2004.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is incorporated by reference to the Company’s definitive proxy statement for its annual stockholders’ meeting presently scheduled to be held on May 18, 2004.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 is incorporated by reference to the Company’s definitive proxy statement for its annual stockholders’ meeting presently scheduled to be held on May 18, 2004.

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PART IV

ITEM 15.    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:

Independent Auditors’ Report	F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002	F-3
Consolidated Statements of Operations for the Years ended December 31, 2003, 2002 and 2001	F-4
Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2003, 2002 and 2001	F-5
Consolidated Statements of Cash Flows for the Years ended December 31, 2003, 2002 and 2001	F-6
Notes to Consolidated Financial Statements	F-7
Schedule of Valuation and Qualifying Accounts	F-44

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

Exhibit Number	Description
3(i).1	Articles of Amendment and Restatement of the Registrant (1)
3(i).2	Form of Certificate for Common Stock of the Registrant (1)
3(i).3*	Articles Supplementary of the Registrant designating its 7.45% Series A Cumulative Redeemable Preferred Stock
3(i).4	Articles Supplementary of the Registrant designating its Series B Junior Participating Preferred Stock (3)
3(i).5	Articles Supplementary of the Registrant designating its 9.250% Series D Cumulative Redeemable Preferred Stock (5)(6)
3(i).6	Articles Supplementary of the Registrant designating an additional 120,000 shares of its 9.250% Series D Cumulative Redeemable Preferred Stock (5)
3(i).7	Articles Supplementary of the Registrant designating its 7.80% Series E Cumulative Redeemable Preferred Stock (7)
3(ii).1	Amended and Restated Bylaws of the Registrant (1)
4.1	Registration Rights Agreement dated January 31, 1997(1)
4.2	Registration Rights Agreement dated February 6, 1998 (2)
4.3*	Second Amended and Restated Registration Rights Agreement dated as of March 5, 2004
4.4	Registration Rights Agreement dated November 24, 1998 (4)
4.5	Registration Rights Agreement dated as of October 31, 1997 (8)

63

Exhibit Number	Description
4.6	Rights Agreement dated as of October 2, 1998 between Kilroy Realty Corporation and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, which includes the form of Articles Supplementary of the Series B Junior Participating Preferred Stock of Kilroy Realty Corporation as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C (9)
4.7	Registration Rights Agreement dated as of December 9, 1999 (5)
4.8	First Amendment to Registration Rights Agreement of December 9, 1999 dated as of December 30, 1999 (6)
4.9	Registration Rights Agreement dated as of October 6, 2000 (10)
4.10	The Company is party to agreements in connection with long-term debt obligations, none of which individually exceeds ten percent of the total assets of the Company on a consolidated basis. Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Company agrees to furnish copies of these agreements to the Commission upon request
10.1*	Fifth Amended and Restated Agreement of Limited Partnership of Kilroy Realty, L.P. dated as of March 5, 2004
10.2	Omnibus Agreement dated as of October 30, 1996 by and among Kilroy Realty, L.P. and the parties named therein (1)
10.3	Supplemental Representations, Warranties and Indemnity Agreement by and among Kilroy Realty, L.P. and the parties named therein (1)
10.4	Pledge Agreement by and among Kilroy Realty, L.P., John B. Kilroy, Sr., John B. Kilroy, Jr. and Kilroy Industries (1)
10.5†	1997 Stock Option and Incentive Plan of the Registrant and Kilroy Realty, L.P. (1)
10.6	Form of Indemnity Agreement of the Registrant and Kilroy Realty, L.P. with certain officers and directors (1)
10.7	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 (11)
10.8	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 (11)
10.9	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 (12)
10.10	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 (12)
10.11	Lease Agreement dated December 30, 1988 by and between Kilroy Long Beach Associates and the City of Long Beach for Kilroy Long Beach Phase II (12)
10.12	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 (12)
10.13	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 (12)
10.14	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 (12)
10.15	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 (12)

64

Exhibit Number	Description
10.16	Development Agreement by and between Kilroy Long Beach Associates and the City of Long Beach (12)
10.17	Amendment No. 1 to Development Agreement by and between Kilroy Long Beach Associates and the City of Long Beach (12)
10.18	Ground Lease by and between Frederick Boysen and Ted Boysen and Kilroy Industries dated May 15, 1969 for SeaTac Office Center (11)
10.19	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 (11)
10.20	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 (11)
10.21	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 (11)
10.22	Memorandum of Lease dated April 1, 1980 by and among Bow Lake, Inc., as lessor, and Kilroy Industries and Sea/Tac Properties, Ltd., as lessees for Sea/Tac Office Center (11)
10.23	Amendment No. 1 to Ground Lease dated September 17, 1990 between Bow Lake, Inc., as lessor, and Sea/Tac Properties, Ltd., as lessee (11)
10.24	Amendment No. 2 to Ground Lease dated March 21, 1991 between Bow Lake, Inc., as lessor, and Sea/Tac Properties, Ltd., as lessee (11)
10.25	Property Management Agreement between Kilroy Realty Finance Partnership, L.P. and Kilroy Realty, L.P. (13)
10.26	Form of Environmental Indemnity Agreement (13)
10.27	Option Agreement by and between Kilroy Realty, L.P. and Kilroy Airport Imperial Co. (14)
10.28	Option Agreement by and between Kilroy Realty, L.P. and Kilroy Calabasas Associates (14)
10.29†	Employment Agreement between the Registrant and John B. Kilroy, Jr. (14)
10.30†	Amended and Restated Employment Agreement between the Registrant and Richard E. Moran Jr. (14)
10.31†	Employment Agreement between the Registrant and Jeffrey C. Hawken (15)
10.32†	Employment Agreement between the Registrant and C. Hugh Greenup (14)
10.33†	Noncompetition Agreement by and between the Registrant and John B. Kilroy, Sr. (1)
10.34†	Noncompetition Agreement by and between the Registrant and John B. Kilroy, Jr. (1)
10.35	License Agreement by and among the Registrant and the other persons named therein (14)
10.36	Mortgage Note (14)
10.37	Indemnity Agreement (14)
10.38	Form of Assignment of Leases, Rents and Security Deposits (14)
10.39	Variable Interest Rate Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of leases and Rents (14)
10.40	Form of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Leases and Rents (14)
10.41	Purchase and Sale Agreement and Joint Escrow Instructions dated April 30, 1997 by and between Mission Land Company, Mission-Vacaville, L.P. and Kilroy Realty, L.P. (15)

65

Exhibit Number	Description
10.42	Agreement of Purchase and Sale and Joint Escrow Instructions dated April 30, 1997 by and between Camarillo Partners and Kilroy Realty, L.P. (15)
10.43	Purchase and Sale Agreement and Escrow Instructions dated May 5, 1997 by and between Kilroy Realty L.P. and Pullman Carnegie Associates (16)
10.44	Amendment to Purchase and Sale Agreement and Escrow Instructions dated June 27, 1997 by and between Pullman Carnegie Associates and Kilroy Realty, L.P. (17)
10.45	Purchase and Sale Agreement, Contribution Agreement and Joint Escrow Instructions dated May 12, 1997 by and between Shidler West Acquisition Company, LLC and Kilroy Realty, L.P. (17)
10.46	First Amendment to Purchase and Sale Agreement, Contribution Agreement and Joint Escrow Instructions dated June 6, 1997 by and between Shidler West Acquisition Company, L.L.C. and Kilroy Realty, L.P. (17)
10.47	Second Amendment to Purchase and Sale Agreement, Contribution Agreement and Joint Escrow Instructions dated June 12, 1997 by and between Shidler West Acquisition Company, LLC and Kilroy Realty, L.P. (17)
10.48	Agreement of Purchase and Sale and Joint Escrow Instructions dated June 12, 1997 by and between Mazda Motor of America, Inc. and Kilroy Realty, L.P. (16)
10.49	First Amendment to Agreement of Purchase and Sale and Joint Escrow Instructions dated June 30, 1997 by and between Mazda Motor of America, Inc. and Kilroy Realty, L.P. (16)
10.50	Agreement for Purchase and Sale of 2100 Colorado Avenue, Santa Monica, California dated June 16, 1997 by and between Santa Monica Number Seven Associates L.P. and Kilroy Realty, L.P. (16)
10.51	Purchase and Sale Agreement and Joint Escrow Instructions dated July 10, 1997 by and between Kilroy Realty, L.P. and Mission Square Partners (18)
10.52	First Amendment to Purchase and Sale Agreement and Joint Escrow Instructions dated July 10, 1997 by and between Kilroy Realty, L.P. and Mission Square Partners dated August 22, 1997 (18)
10.53	Second Amendment to the Purchase and Sale Agreement and Joint Escrow Instructions dated July 10, 1997 by and between Kilroy Realty, L.P. and Mission Square Partners dated September 5, 1997 (18)
10.54	Third Amendment to the Purchase and Sale Agreement and Joint Escrow Instructions dated July 10, 1997 by and between Kilroy Realty, L.P. and Mission Square Partners dated September 19, 1997 (18)
10.55	Fourth Amendment to the Purchase and Sale Agreement and Joint Escrow Instructions dated July 10, 1997 by and between Kilroy Realty, L.P. and Mission Square Partners dated September 22, 1997 (18)
10.56	Fifth Amendment to the Purchase and Sale Agreement and Joint Escrow Instructions dated July 10, 1997 by and between Kilroy Realty, L.P. and Mission Square Partners dated September 23, 1997 (18)
10.57	Sixth Amendment to the Purchase and Sale Agreement and Joint Escrow Instructions dated July 10, 1998 by and between Kilroy Realty, L.P. and Mission Square Partners dated September 25, 1997 (18)
10.58	Seventh Amendment to the Purchase and Sale Agreement and Joint Escrow Instructions dated July 10, 1997 by and between Kilroy Realty, L.P. and Mission Square Partners dated September 29, 1997 (18)
10.59	Eighth Amendment to the Purchase and Sale Agreement and Joint Escrow Instructions dated July 10, 1997 by and between Kilroy Realty, L.P. and Mission Square Partners dated October 2, 1997 (18)

66

Exhibit Number	Description
10.60	Ninth Amendment to the Purchase and Sale Agreement and Joint Escrow Instructions dated July 10, 1997 by and between Kilroy Realty, L.P. and Mission Square Partners dated October 24, 1997 (18)
10.61	Contribution Agreement dated October 21, 1997 by and between Kilroy Realty, L.P. and Kilroy Realty Corporation and The Allen Group and the Allens (19)
10.62	Purchase and Sale Agreement and Escrow Instructions dated December 11, 1997 by and between Kilroy Realty, L.P. and Swede-Cal Properties, Inc., Viking Investors of Southern California and Viking Investors of Southern California II (20)
10.63	Amendment to the Contribution Agreement dated October 14, 1998 by and between Kilroy Realty, L.P. and Kilroy Realty Corporation and The Allen Group and the Allens dated October 21, 1997 (21)
10.64	Second Amended and Restated Guaranty of Payment (22)
10.65	Credit Agreement and Form of Promissory notes Aggregating $90.0 million (22)
10.66	Variable Interest Rate Deed of Trust, Leasehold Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing (22)
10.67	Guaranty of Recourse Obligations of Borrower (22)
10.68†	Employment Agreement between the Registrant and Tyler H. Rose (23)
10.69	Secured Promissory Notes and Deeds of Trusts Aggregating $80.0 Million Payable to Metropolitan Life Insurance Company dated January 10, 2002 (23)
10.70	Third Amended and Restated Revolving Credit Agreement and Form of Notes Aggregating $425 million (24)
10.71	Third Amended and Restated Guaranty of Payment (24)
21.1*	List of Subsidiaries of the Registrant
23.1*	Consent of Deloitte & Touche LLP
24.1*	Power of Attorney (included in the signature page of this Form 10-K)
31.1*	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2*	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1*	Section 1350 Certification of Chief Executive Officer
32.2*	Section 1350 Certification of Chief Financial Officer

 * Filed herewith

 † Management contract or compensatory plan or arrangement.

(1) Previously filed as an exhibit to the Registration Statement on Amendment No. 3 to Form S-11 (No. 333-15553).

(2) Previously filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on February 11, 1998.

(3) Previously filed as an exhibit to the Registration Statement on Amendment No. 1 to Form S-3 (No. 333-72229).

(4) Previously filed an exhibit on Form 8-K as filed with the Securities and Exchange Commission on December 11, 1998.

(5) Previously filed as an exhibit on Form 10-K for the year ended December 31, 1999.

(6) Previously filed as an exhibit to the Registration Statement on Form S-3 (No. 333-34638).

(7) Previously filed an exhibit on Form 8-A as filed with the Securities and Exchange Commission on October 24, 2003.

(8) Previously filed as an exhibit on Form 8-K/A as filed with the Securities and Exchange Commission on December 19, 1997.

(9) Previously filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on October 8, 1998.

(10) Previously filed as an exhibit on Form 10-K for the year ended December 31, 2000.

(11) Previously filed as an exhibit to the Registration Statement on Amendment No. 2 to Form S-11 (No. 333-15553).

67

(12) Previously filed as an exhibit to the Registration Statement on Form S-11 (No. 333-15553).

(13) Previously filed as an exhibit to the Registration Statement on Amendment No. 5 to Form S-11 (No. 333-15553).

(14) Previously filed as an exhibit to the Registration Statement on Amendment No. 4 to Form S-11 (No. 333-15553).

(15) Previously filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on June 6, 1997.

(16) Previously filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on July 15, 1997.

(17) Previously filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on July 3, 1997.

(18) Previously filed as an exhibit on Form 10-Q for the quarter ended September 30, 1997.

(19) Previously filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on November 21, 1997.

(20) Previously filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on December 29, 1997.

(21) Previously filed as an exhibit on Form 10-Q for the quarter ended September 30, 1998.

(22) Previously filed as an exhibit on Form 10-Q for the quarter ended September 30, 1999.

(23) Previously filed as an exhibit on Form 10-K for the year ended December 31, 2001.

(24) Previously filed as an exhibit on Form 10-Q for the quarter ended March 31, 2002.

(b)  Reports on Form 8-K

The Company filed a Current Report on Form 8-K dated October 27, 2003, under Items 9 and 12, in connection with its third quarter 2003 earnings release and attached to such report its third quarter 2003 Supplemental Financial Report.

The Company filed a Current Report on Form 8-K dated November 21, 2003, under Item 5, in connection with the issuance of 1,610,000 shares of its 7.80% Series E Cumulative Redeemable Preferred Stock.

The Company filed a Current Report on Form 8-K dated December 15, 2003, under Item 5, to update its historical financial statements for the fiscal year ended December 31, 2002, included in the Company’s Annual Report on Form 10-K for such year and the accompanying selected financial data for certain discontinued operations, and to reissue the Management’s Discussion and Analysis of Financial Condition and Results of Operations also included in that Form 10-K.

68

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 11, 2004.

KILROY REALTY CORPORATION
By:	/s/    JOHN B. KILROY, JR.
	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, Richard E. Moran Jr. and Ann Marie Whitney, 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, as amended, 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, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name	Title	Date
/s/    JOHN B. KILROY, SR.         John B. Kilroy, Sr.	Chairman of the Board	March 11, 2004
/s/    JOHN B. KILROY, JR.         John B. Kilroy, Jr.	President, Chief Executive Officer and     Director (Principal Executive     Officer)	March 11, 2004
/s/    RICHARD E. MORAN JR.         Richard E. Moran Jr.	Executive Vice President and     Chief Financial Officer     (Principal Financial Officer)	March 11, 2004
/s/    ANN MARIE WHITNEY         Ann Marie Whitney	Senior Vice President and Controller     (Principal Accounting Officer)	March 11, 2004
/s/    EDWARD F. BRENNAN         Edward F. Brennan	Director	March 11, 2004
/s/    JOHN R. D’EATHE         John R. D’Eathe	Director	March 11, 2004
/s/    WILLIAM P. DICKEY         William P. Dickey	Director	March 11, 2004
/s/    MATTHEW J. HART         Matthew J. Hart	Director	March 11, 2004
/s/    DALE F. KINSELLA         Dale F. Kinsella	Director	March 11, 2004

69

KILROY REALTY CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003 AND 2002

AND FOR THE THREE YEARS ENDED DECEMBER 31, 2003

TABLE OF CONTENTS

	Page
Independent Auditors’ Report	F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002	F-3
Consolidated Statements of Operations for the Years ended December 31, 2003, 2002 and 2001	F-4
Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2003, 2002 and 2001	F-5
Consolidated Statements of Cash Flows for the Years ended December 31, 2003, 2002 and 2001	F-6
Notes to Consolidated Financial Statements	F-7
Schedule of Valuation and Qualifying Accounts	F-44

F-1

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders of Kilroy Realty Corporation:

We have audited the accompanying consolidated balance sheets of Kilroy Realty Corporation (the “Company”) as of December 31, 2003 and 2002 and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the index at Item 15. These financial statements and the financial statement schedule are the responsibility of the management of the Company. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the 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 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

As discussed in Notes 2 and 22 to the financial statements, the Company changed the presentation of the results of operations and realized gains and losses from properties disposed of in accordance with the adoption of Statement of Financial Accounting Standard 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” during the year ended December 31, 2002.

DELOITTE & TOUCHE LLP

Los Angeles, California

February 25, 2004

F-2

KILROY REALTY CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	December 31,
	2003			2002
ASSETS
INVESTMENT IN REAL ESTATE (Notes 3, 4, 21 and 27):
Land and improvements	$	289,730		$	288,228
Buildings and improvements, net		1,305,145			1,289,525
Undeveloped land and construction in progress, net		131,411			108,465
Total investment in real estate		1,726,286			1,686,218
Accumulated depreciation and amortization		(321,372	)		(278,503	)
Investment in real estate, net		1,404,914			1,407,715
CASH AND CASH EQUIVALENTS		9,892			15,777
RESTRICTED CASH		8,558			6,814
CURRENT RECEIVABLES, NET (Note 5)		4,919			3,074
DEFERRED RENT RECEIVABLES, NET (Note 6)		36,804			29,466
DEFERRED LEASING COSTS, NET (Notes 7 and 8)		36,651			31,427
DEFERRED FINANCING COSTS, NET (Notes 9 and 12)		3,657			6,221
PREPAID EXPENSES AND OTHER ASSETS		7,240			6,108
TOTAL ASSETS	$	1,512,635		$	1,506,602
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Secured debt (Note 10)	$	526,048		$	507,037
Unsecured line of credit (Note 11)		235,000			255,000
Accounts payable, accrued expenses and other liabilities (Note 12)		39,905			43,917
Accrued distributions (Note 14)		16,369			15,670
Rents received in advance, tenant security deposits and deferred revenue		20,904			24,310
Total liabilities		838,226			845,934
COMMITMENTS AND CONTINGENCIES (Note 17)
MINORITY INTERESTS (Note 13):
8.075% Series A Cumulative Redeemable Preferred unitholders		73,716			73,716
9.375% Series C Cumulative Redeemable Preferred unitholders					34,464
9.250% Series D Cumulative Redeemable Preferred unitholders		44,321			44,321
Common unitholders of the Operating Partnership		66,502			68,196
Total minority interests		184,539			220,697
STOCKHOLDERS’ EQUITY (Note 14):
Preferred stock, $.01 par value, 25,290,000 shares authorized, none issued and outstanding
8.075% Series A Cumulative Redeemable Preferred stock, $.01 par value, 1,700,000 shares authorized, none issued and outstanding
Series B Junior Participating Preferred stock, $.01 par value, 400,000 shares authorized, none issued and outstanding
9.250% Series D Cumulative Redeemable Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued and outstanding
7.800% Series E Cumulative Redeemable Preferred stock 1,610,000 shares authorized, issued and outstanding		38,437
Common stock, $.01 par value, 150,000,000 shares authorized, 28,209,213 and 27,419,880 shares issued and outstanding, respectively		282			273
Additional paid-in capital		508,958			493,116
Distributions in excess of earnings		(53,449	)		(47,629	)
Accumulated net other comprehensive loss (Note 12)		(4,358	)		(5,789	)
Total stockholders’ equity		489,870			439,971
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,512,635		$	1,506,602

See accompanying notes to consolidated financial statements.

F-3

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

	Year Ended December 31,
	2003			2002			2001
REVENUES (Note 21):
Rental income	$	183,339		$	180,024		$	175,136
Tenant reimbursements		20,433			21,475			20,646
Other property income (Notes 2 and 20)		24,014			2,672			6,570
Total revenues		227,786			204,171			202,352
EXPENSES:
Property expenses		33,855			30,133			28,453
Real estate taxes		15,797			15,164			14,588
Provision for bad debts		1,583			6,815			3,755
Ground leases (Note 17)		1,296			1,354			1,507
General and administrative expenses (Notes 8 and 20)		19,140			12,557			11,692
Interest expense		33,385			35,380			41,024
Depreciation and amortization (Notes 2 and 8)		56,237			58,797			50,429
Total expenses		161,293			160,200			151,448
OTHER INCOME:
Interest income		196			513			1,030
Total other income		196			513			1,030
INCOME FROM CONTINUING OPERATIONS BEFORE NET GAIN ON DISPOSITIONS AND MINORITY INTERESTS		66,689			44,484			51,934
Net gain on dispositions of operating properties (Note 3)					896			4,714
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS		66,689			45,380			56,648
MINORITY INTERESTS:
Distributions on Cumulative Redeemable Preferred units		(13,163	)		(13,500	)		(13,500	)
Original issuance costs of redeemed preferred units (Notes 2 and 13)		(945	)
Minority interest in earnings of Operating Partnership attributable to continuing operations		(6,908	)		(4,392	)		(3,991	)
Recognition of previously reserved Development LLC preferred return (Note 13)					3,908
Minority interest in earnings of Development LLCs					(1,024	)		(3,701	)
Total minority interests		(21,016	)		(15,008	)		(21,192	)
INCOME FROM CONTINUING OPERATIONS		45,673			30,372			35,456
DISCONTINUED OPERATIONS (Note 22)
Revenues from discontinued operations		1,937			9,713			10,533
Expenses from discontinued operations		(1,036	)		(4,906	)		(5,655	)
Net gain on dispositions of discontinued operations		3,642			6,570
Minority interest in earnings of Operating Partnership attributable to discontinued operations		(604	)		(1,437	)		(511	)
Total income from discontinued operations		3,939			9,940			4,367
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE		49,612			40,312			39,823
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (Note 2)								(1,392	)
NET INCOME		49,612			40,312			38,431
PREFERRED DIVIDENDS		(349	)
NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS	$	49,263		$	40,312		$	38,431
Income from continuing operations per common share—basic (Note 23)	$	1.66		$	1.11		$	1.30
Income from continuing operations per common share—diluted (Note 23)	$	1.65		$	1.10		$	1.30
Net income per common share—basic (Note 23)	$	1.79		$	1.47		$	1.41
Net income per common share—diluted (Note 23)	$	1.78		$	1.45		$	1.40
Weighted average shares outstanding—basic (Note 23)		27,526,684			27,449,676			27,167,006
Weighted average shares outstanding—diluted (Note 23)		27,737,791			27,722,197			27,372,951
Dividends declared per common share (Note 24)	$	1.98		$	1.98		$	1.92

See accompanying notes to consolidated financial statements.

F-4

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share and per share data)

			Common Stock
	Preferred Stock		Number of Shares		Common Stock			Additional Paid-in Capital			Distributions in Excess of Earnings			Accumulated Net Other Comp. Loss			Total
BALANCE AT DECEMBER 31, 2000			26,475,470		$	265		$	460,390		$	(19,230	)				$	441,425
Net income												38,431						38,431
Net other comprehensive loss (Notes 2 and 12)															(5,778	)		(5,778	)
Comprehensive income																		32,653
Conversion of common units of the Operating Partnership			687,591			6			13,652									13,658
Exercise of stock options (Note 16)			270,190			2			5,028									5,030
Repurchase of common stock			(7,180	)		1			(230	)								(229	)
Non-cash amortization of restricted stock grants (Note 16)									2,190									2,190
Adjustment for minority interest (Note 2)									(1,735	)								(1,735	)
Dividends declared per common share ($1.92 per share)												(52,364	)					(52,364	)
BALANCE AT DECEMBER 31, 2001			27,426,071			274			479,295			(33,163	)		(5,778	)		440,628
Net income												40,312						40,312
Net other comprehensive loss (Notes 2 and 12)															(11	)		(11	)
Comprehensive income																		40,301
Repurchase of common stock (Note 14)			(518,571	)		(5	)		(11,776	)								(11,781	)
Conversion of common units of the Operating Partnership (Note 13)			222,270			2			5,490									5,492
Exercise of stock options (Note 16)			208,381			2			4,247									4,249
Issuance of restricted stock (Notes 14 and 16)			81,729
Non-cash amortization of restricted stock grants (Note 16)									3,709									3,709
Stock option expense (Notes 2 and 16)									23									23
Adjustment for minority interest (Note 2)									12,128									12,128
Dividends declared per common share ($1.98 per share)												(54,778	)					(54,778	)
BALANCE AT DECEMBER 31, 2002			27,419,880			273			493,116			(47,629	)		(5,789	)		439,971
Net income												49,612						49,612
Net other comprehensive income (Notes 2 and 12)															1,431			1,431
Comprehensive income																		51,043
Issuance of preferred stock	$	38,437																38,437
Exercise of stock options (Note 16)			664,528			8			13,444									13,452
Issuance of restricted stock (Notes 14 and 16)			123,678			1												1
Conversion of common units of the Operating Partnership (Note 13)			82,439			1			1,874									1,875
Repurchase of common stock (Note 14)			(78,630	)		(1	)		(1,713	)								(1,714	)
Non-cash amortization of restricted stock grants, net of forfeitures (Note 16)			(2,682	)					3,316									3,316
Stock option expense (Notes 2 and 16)									26									26
Adjustment for minority interest (Note 2)									(1,105	)								(1,105	)
Preferred dividends												(349	)					(349	)
Dividends declared per common share ($1.98 per share)												(55,083	)					(55,083	)
BALANCE AT DECEMBER 31, 2003	$	38,437	28,209,213		$	282		$	508,958		$	(53,449	)	$	(4,358	)	$	489,870

See accompanying notes to consolidated financial statements.

F-5

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2003			2002			2001
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	49,612		$	40,312		$	38,431
Adjustments to reconcile net income to net cash provided by operating activities (including discontinued operations):
Depreciation and amortization of building and improvements and leasing costs		55,748			59,804			51,913
Cumulative effect of change in accounting principle								1,392
Provision for uncollectible tenant receivables		2,096			2,233			2,356
Provision for uncollectible unbilled deferred rents		(320	)		4,683			1,485
Minority interests in earnings of Operating Partnership		7,512			5,829			4,502
Minority interests in earnings of Development LLCs					(2,884	)		3,701
Depreciation of furniture, fixtures and equipment		954			982			731
Non-cash amortization of restricted stock grants		3,129			3,424			2,190
Amortization of deferred financing costs		2,531			2,683			3,132
Non-cash charge for original issuance costs of redeemed preferred units		945
Net gain on dispositions of operating properties		(3,642	)		(7,466	)		(4,714	)
Other		(174	)		60			(131	)
Changes in assets and liabilities:
Current receivables		(3,941	)		(278	)		3,145
Deferred rent receivables		(7,691	)		(9,307	)		(9,359	)
Deferred leasing costs		(960	)		(1,013	)		(16	)
Prepaid expenses and other assets		(1,832	)		(1,786	)		(2,102	)
Accounts payable, accrued expenses and other liabilities		(4,206	)		(5,369	)		14.921
Rents received in advance and tenant security deposits		(3,406	)		8,355			(54	)
Accrued distributions to Cumulative Redeemable Preferred unitholders		(409	)
Net cash provided by operating activities		95,946			100,262			111,523
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for operating properties		(23,513	)		(21,067	)		(24,283	)
Expenditures for undeveloped land and construction in progress		(61,402	)		(84,113	)		(120,510	)
Acquisition of operating property					(7,569	)
Acquisition of minority interest in Development LLC’s					(2,189	)
Net proceeds received from dispositions of operating properties		34,076			46,499			64,846
Decrease in escrow deposits								1,100
Net cash used in investing activities		(50,839	)		(68,439	)		(78,847	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of secured and unsecured debt		107,340			155,664			53,502
Net (repayments) borrowing on unsecured line of credit		(20,000	)		100,000			(36,000	)
Principal payments on secured debt and unsecured term facility		(88,329	)		(208,214	)		(26,603	)
Net proceeds from issuance of 7.800% Series E Cumulative Redeemable Preferred stock (Note 14)		38,437
Redemption of 9.375% Series C Cumulative Redeemable Preferred units (Note 14)		(35,000	)
Repurchase of common stock		(1,714	)		(11,398	)
Financing costs		(377	)		(7,634	)		(2,422	)
Proceeds from exercise of stock options		13,452			4,248			5,030
(Increase) decrease in restricted cash		(1,744	)		(1,401	)		29,601
Distributions paid to common stockholders and common unitholders		(63,057	)		(61,609	)		(57,317	)
Net (distributions) contributions from minority interests in Development LLCs					(2,189	)		420
Net cash used in financing activities		(50,992	)		(32,533	)		(33,789	)
Net decrease in cash and cash equivalents		(5,885	)		(710	)		(1,113	)
Cash and cash equivalents, beginning of year		15,777			16,487			17,600
Cash and cash equivalents, end of year	$	9,892		$	15,777		$	16,487
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of capitalized interest	$	29,371		$	32,253		$	37,141
Distributions paid to Cumulative Redeemable Preferred unitholders	$	13,163		$	13,500		$	13,500
NON-CASH TRANSACTIONS:
Accrual of distributions payable to common stockholders and common unitholders (Note 14)	$	16,020		$	15,670		$	14,634
Issuance of common limited partnership units of the Operating Partnership to acquire minority interest in Development LLCs (Note 13)				$	38,689
Note receivable from related party repaid in connection with property acquisition							$	33,274

See accompanying notes to consolidated financial statements.

F-6

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Three Years Ended December 31, 2003

1.    Organization and Ownership

Kilroy Realty Corporation (the “Company”) owns, operates and develops office and industrial real estate located in California, Washington and Arizona. The Company, which qualifies and operates as a self-administered real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended, commenced operations upon the completion of its initial public offering in January 1997. The Company is the successor to the real estate business of the Kilroy Group, which consisted of the combination of Kilroy Industries (“KI”) and various entities, the properties of which were under the common control of KI and/or its stockholders, including the Company’s Chairman of the Board of Directors, John B. Kilroy, Sr., and the Company’s President and Chief Executive Officer, John B. Kilroy, Jr.

As of December 31, 2003, the Company’s stabilized portfolio of operating properties was comprised of 82 office buildings (the “Office Properties”) and 50 industrial buildings (the “Industrial Properties,” and together with the Office Properties, the “Properties”) which encompassed approximately 7.3 million and 4.9 million rentable square feet, respectively, and was 90.3% occupied. The Company’s stabilized portfolio of operating properties excludes properties currently under construction or “lease-up” properties. The Company defines “lease-up” properties as properties recently developed or redeveloped by the Company that have not yet reached 95% occupancy and are within one year following substantial completion. At December 31, 2003, the Company had one office property encompassing an aggregate of approximately 209,000 rentable square feet, which was in the lease-up phase. In addition, as of December 31, 2003, the Company had two office redevelopment properties under construction, which when completed are expected to encompass an aggregate of approximately 316,100 rentable square feet. All of the Company’s development, redevelopment and lease-up projects are located in Southern California.

The Company owns its interests in all of the Properties through Kilroy Realty, L.P. (the “Operating Partnership”) and Kilroy Realty Finance Partnership, L.P. (the “Finance Partnership”). The Company conducts substantially all of its activities through the Operating Partnership in which, as of December 31, 2003 and 2002, it owned an 87.2% and 86.6% general partnership interest, respectively. The remaining 12.8% and 13.4% common limited partnership interest in the Operating Partnership as of December 31, 2003 and 2002, respectively, was owned by certain of the Company’s executive officers and directors, certain of their affiliates, and other outside investors (see Note 13). Kilroy Realty Finance, Inc, (“Finance Inc.”), a wholly-owned subsidiary of the Company, is the sole general partner of the Finance Partnership and owns a 1% general partnership interest. The Operating Partnership owns the remaining 99% limited partnership interest.

In 1999, the Company, through the Operating Partnership, became a 50% managing member in two limited liability companies (the “Development LLCs”), which were formed to develop two multi-phased office projects in San Diego, California. The Allen Group, a group of affiliated real estate development and investment companies based in San Diego, California, was the other 50% member of the Development LLCs. On March 25, 2002, the Company acquired The Allen Group’s interest in the assets and assumed The Allen Group’s proportionate share of the liabilities of the Development LLCs (see Note 13). Subsequent to this transaction, the Development LLCs were liquidated and dissolved. The Development LLCs were consolidated for financial reporting purposes prior to their dissolution on March 25, 2002 since the Company controlled all significant development and operating decisions.

F-7

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2.    Basis of Presentation and Significant Accounting Policies

Basis of Presentation:

The consolidated financial statements of the Company include the consolidated financial position and results of operations of the Company, the Operating Partnership, the Finance Partnership, KSLLC and all wholly- owned subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.

Significant Accounting Policies:

Operating properties—Operating properties are carried at the lower of historical cost less accumulated depreciation or estimated fair value. The cost of operating properties includes the purchase price or development costs of the properties. Costs incurred for the acquisition, renovation and betterment of the operating properties are capitalized to the Company’s investment in that property. Maintenance and repairs are charged to expense as incurred. The Company’s stabilized portfolio of operating properties consists of all of the Company’s Office and Industrial Properties, excluding properties currently under construction or lease-up properties. Lease-up properties are included in land and improvements and building and improvements on the consolidated balance sheets.

A property is evaluated for potential impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. In the event that periodic assessments reflect that the carrying amount of a property exceeds the sum of the undiscounted cash flows (excluding interest) that are expected to result from the use and eventual disposition of the property, the Company would recognize an impairment loss to the extent the carrying amount exceeded the fair value of the property. The Company estimates the fair value using available market information or other industry valuation techniques such as present value calculations. The Company had not recorded any impairment losses for the years ended December 31, 2003, 2002 and 2001.

Depreciation and amortization of buildings and improvements—The cost of buildings and improvements are depreciated on the straight-line method over estimated useful lives of 25 to 40 years for buildings and the shorter of the lease term or useful life, ranging from one to 15 years, for tenant improvements. Depreciation expense for buildings and improvements for the three years ended December 31, 2003, 2002 and 2001, was $47.5 million, $46.8 million, and $41.9 million, respectively.

Construction in progress—Project costs clearly associated with the development and construction of a real estate project are capitalized as construction in progress. In addition, interest, loan fees, real estate taxes, general and administrative expenses that are directly associated with and incremental to the Company’s development activities, and other costs are capitalized during the period in which activities necessary to get the property ready for its intended use are in progress, including the pre-development and lease-up phases. Once the development and construction of the building shell of a real estate project is completed, the costs capitalized to construction in progress are transferred to land and improvements and buildings and improvements on the consolidated balance sheets as the historical cost of the property.

Cash and cash equivalents—The Company considers all money market funds with an original maturity of three months or less at the date of purchase to be cash equivalents.

Restricted cash—Restricted cash consists of cash held as collateral to provide credit enhancement for the Company’s mortgage debt, cash reserves for property taxes, capital expenditures and tenant improvements.

F-8

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Revenue recognition—In accordance with Statement of Financial Accounting Standards No. 13, “Accounting for Leases,” minimum annual rental revenue is recognized on a straight-line basis over the term of the related lease. Tenant reimbursement revenue, which is comprised of additional amounts recoverable from tenants for common area maintenance expenses and certain other recoverable expenses is recognized as revenue in the period in which the related expenses are incurred.

Allowances for uncollectible tenant receivables and unbilled deferred rent—Tenant receivables and unbilled deferred rent receivables are carried net of the allowances for uncollectible current tenant receivables and unbilled deferred rent. Management’s determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, individual receivables, current economic conditions, and other relevant factors. The allowances are increased through the provision for bad debts.

Deferred leasing costs—Costs incurred in connection with property leasing are capitalized as deferred leasing costs. Deferred leasing costs consist primarily of leasing commissions which are amortized on the straight-line method over the lives of the leases which generally range from one to 15 years. Management re-evaluates the remaining useful lives of leasing costs as the creditworthiness of the Company’s tenants and economic and market conditions change. If management determines the estimated remaining life of the respective lease has changed, the Company adjusts the amortization period.

Deferred financing costs—Costs incurred in connection with debt financing are capitalized as deferred financing costs. Deferred financing costs consist primarily of loan fees which are amortized using the effective interest method over the terms of the respective loans.

Derivative financial instruments—The Company is exposed to the effect of interest rate changes in the normal course of business. The Company mitigates these risks by following established risk management policies and procedures which include the periodic use of derivatives. The Company’s primary strategy in entering into derivative contracts is to minimize the volatility that changes in interest rates could have on its future cash flows. The Company employs derivative instruments that are designated as cash flow hedges, including interest rate swaps and caps, to effectively convert a portion of its variable-rate debt to fixed-rate debt. The Company does not enter into derivative instruments for speculative purposes.

On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (“SFAS”) 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” (collectively, “SFAS 133”). SFAS 133 establishes accounting and reporting standards for derivative instruments. Specifically, SFAS 133 requires the Company to recognize all of its derivatives as either assets or liabilities on the Company’s consolidated balance sheet at fair value and to defer the related gains or losses on these contracts in stockholders’ equity as a component of accumulated other net comprehensive income or loss. To the extent that any of these contracts are not perfectly effective in offsetting the change in the value of the interest payments being hedged, changes in fair value relating to the ineffective portion of these contracts would be recognized in earnings (see Note 12). In the event that the Company were to terminate a derivative contract before its maturity date and the forecasted hedged transactions (e.g., the interest payments on the variable rate debt) were still probable to occur, the gains or losses deferred in accumulated other net comprehensive loss (“AOCL”) associated with the terminated contract would remain in AOCL upon the termination and would be reclassified into earnings in the same period in which the hedged transactions affect earnings. If the forecasted hedged transactions were no longer probable to occur, the gains or losses deferred in AOCL would be recognized in earnings immediately upon termination of the derivative contract.

F-9

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In connection with the adoption of SFAS 133 on January 1, 2001, the Company recorded a $1.4 million cumulative effect of change in accounting principle to record an existing cap agreement at fair market value. Upon adoption, the Company also recorded a $2.0 million non-cash charge to other comprehensive loss to record the Company’s swap on the balance sheet at fair market value. The Company determines fair value based upon valuations obtained from an independent third-party for its outstanding interest rate swap and cap agreements at each balance sheet date. Valuations provided by the independent third-party are calculated using standard industry valuation procedures and rely on real-time market inputs consistent with valuation methods and data inputs employed by financial institutions and other market participants.

Minority interests—Minority interests represent the preferred and common limited partnership interests in the Operating Partnership and interests held by The Allen Group in the Development LLCs prior to their dissolution on March 25, 2002 (see Note 13). Net income is allocated to the common limited partners of the Operating Partnership (“Minority Interest of the Operating Partnership”) based on their ownership percentage of the Operating Partnership. The ownership percentage is determined by dividing the number of common limited partnership units held by the Minority Interest of the Operating Partnership by the total common limited partnership units outstanding. The issuance of additional shares of common stock or common limited partnership units results in changes to the Minority Interest of the Operating Partnership percentage as well as the total net assets of the Company. As a result, all common capital transactions result in an allocation between the stockholders’ equity and Minority Interest of the Operating Partnership in the accompanying consolidated balance sheets to account for the change in the Minority Interest of the Operating Partnership ownership percentage as well as the change in total net assets of the Company.

Other property income—Other property income primarily includes revenue earned from lease termination fees (see Note 20). For the year ended December 31, 2001, other property income also included approximately $0.8 million related to forfeited escrow deposits on four properties for which the pending sale did not occur.

Income taxes—The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a REIT, the Company must distribute annually at least 90% of its adjusted taxable income, as defined in the Code, to its shareholders and satisfy certain other organizational and operating requirements. The Company generally will not be subject to federal income taxes if it distributes 100% of its taxable income for each year to its shareholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes (including any applicable alternative minimum tax) on its taxable income at regular corporate rates and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and to federal income taxes and excise taxes on its undistributed taxable income. The Company believes that it has met all of the REIT distribution and technical requirements for the years ended December 31, 2003, 2002 and 2001 and was not subject to any federal income taxes (see Note 24 for tax treatment of the Company’s distributions). Management intends to continue to adhere to these requirements and maintain the Company’s REIT status.

In addition, any taxable income from the Company’s taxable REIT subsidiary, which was formed in August 2002, is subject to federal, state, and local income taxes. For the year ended December 31, 2003, the taxable REIT subsidiary did not have any GAAP or taxable net income and therefore did not incur any income tax expense.

Reclassifications—Certain prior year amounts have been reclassified to conform to the current year’s presentation.

F-10

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Use of estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 reported periods. Actual results could differ from those estimates.

Fair value of financial instruments—The Company calculates the fair value of financial instruments using available market information and appropriate present value or other valuation techniques such as discounted cash flow analyses. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The derived fair value estimates cannot always be substantiated by comparison to independent markets and in many cases, could not be realized in immediate settlement of the instrument. Fair values for certain financial instruments and all non-financial instruments are not required to be disclosed. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company at December 31, 2003 and 2002.

Concentration of credit risk—127 of the Company’s total 132 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 in which the tenants operate.

As of December 31, 2003, 2002 and 2001, the Company’s ten largest office tenants represented approximately 29.7%, 32.2% and 34.6% of total annual base rental revenues and its ten largest industrial tenants represented approximately 8.1%, 8.9% and 9.1%, respectively, of total annual base rental revenues. Of this amount, the Company’s largest tenant, The Boeing Company, accounted for approximately 7.5%, 9.5% and 10.9% of the Company’s total annual base revenues, for the years ended December 31, 2003, 2002 and 2001, respectively. At December 31, 2003 and 2002, the Company had $0.6 million and $0.2 million, respectively, in outstanding receivables from this tenant which were primarily reimbursement billings.

The Company has cash in financial institutions which is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $0.1 million per institution. At December 31, 2003 and 2002, the Company had cash accounts in excess of FDIC insured limits.

Adoption of Stock Option Accounting

In December 2002, the Financial Accounting Standards Board, (“FASB”) issued SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (“SFAS 148”). SFAS 148 amends SFAS 123 “Accounting for Stock-Based Compensation” (“SFAS 123”) to provide alternative methods of transition for an entity that voluntarily adopts the fair value recognition method of recording stock option expense. SFAS 148 also amends the disclosure provisions of Statement 123 and APB Opinion No. 28. “Interim Financial Reporting” to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock options on reported net income and earnings per share in annual and interim financial statements.

At December 31, 2003, the Company had one stock option and incentive plan, which is described more fully in Note 16. Effective January 1, 2002, the Company voluntarily adopted the fair value recognition provisions of SFAS 123, prospectively for all employee stock option awards granted or settled after January 1, 2002. Under the fair value recognition provisions of SFAS 123, total compensation expense related to stock options is determined using the fair value of the stock options on the date of grant. Total compensation expense is then recognized on a straight-line basis over the option vesting period

F-11

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Prior to 2002, the Company accounted for stock options issued under the recognition and measurement provisions of APB Opinion 25 “Accounting for Stock Issued to Employees and related Interpretations.” As a result, no stock option expense is reflected in 2001 net income, as all stock options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period.

	Year Ended December 31,
	2003			2002			2001
	(in thousands, except per share amounts)
Net income available for common shareholders, as reported	$	49,263		$	40,312		$	38,431
Add: Stock option expense included in reported net income		26			23
Deduct: Total stock option expense determined under fair value recognition method for all awards		(108	)		(160	)		(1,092	)
Pro forma net income available for common shareholders	$	49,181		$	40,175		$	37,339
Net Income per common share:
Basic—as reported	$	1.79		$	1.47		$	1.41
Basic—pro forma	$	1.62		$	1.46		$	1.37
Diluted—as reported	$	1.78		$	1.45		$	1.40
Diluted—pro forma	$	1.61		$	1.45		$	1.36

The Company did not issue any options in 2003. The fair value of each option grant issued in 2002 and 2001 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions (amounts shown as 2002 and 2001, respectively): (a) dividend yield of 7.03% for both years, (b) expected volatility of the Company’s stock of 24.6% and 24.8%, (c) risk free interest rate of 4.88%, and 4.47%, and (d) expected option life of seven years. The effects of applying the fair value provisions of SFAS 123 are not representative of the effects on net income and disclosed pro forma net income for future years because options vest over three years as discussed in Note 16 and additional awards can be made in future years.

Recent Accounting Pronouncements

On January 1, 2003, the Company adopted the provisions of SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS 145”). The most significant provisions of this statement relate to the rescission of Statement No. 4 “Reporting Gains and Losses from Extinguishment of Debt.” SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. Under SFAS 145, any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet certain defined criteria must be reclassified. The adoption of this statement did not have a material effect on the Company’s results of operations or financial condition.

On January 1, 2003, the Company adopted the provisions of SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity”. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The adoption of this statement did not have a material effect on the Company’s results of operations or financial condition.

F-12

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

On January 1, 2003, the Company adopted the initial recognition and measurement provisions of Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 significantly changes the current practice in the accounting for, and disclosure of, guarantees. Guarantees and indemnification agreements meeting the characteristics described in FIN 45 are required to be initially recorded as a liability at fair value. FIN 45 also requires a guarantor to make significant new disclosures for virtually all guarantees even if the likelihood of the guarantor having to make payment under the guarantee is remote. The Company adopted the disclosure provisions of FIN 45 as of December 31, 2002. The adoption of the provisions of this interpretation did not have a material effect on the Company’s results of operations or financial condition.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” and provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies to an entity in which either: (1) the equity investors (if any) lack one or more characteristics deemed essential to a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In December 2003, the FASB published a revision to FIN 46 (“FIN 46R”) to clarify some of the provisions of the interpretation and defer the effective date of implementation for certain entities. The provisions of FIN 46R are effective for the first reporting period ending after December 15, 2003 for entities considered to be special-purpose entities. The provisions for all other entities subject to FIN 46R are effective for financial statements of the first reporting period ending after March 15, 2004. On February 1, 2003, the Company adopted the provisions of this interpretation, which did not have a material effect on the Company’s results of operations or financial condition.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments imbedded in other contracts and for hedging activities under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities.” The provisions of SFAS 149 are generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this statement did not have a material effect on the Company’s results of operations or financial condition.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have a material effect on the Company’s results of operations or financial condition.

On July 31, 2003, the SEC issued a clarification of Emerging Issues Task Force Topic D-42, “The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock” (“Topic D-42”). Topic D-42 provides, among other things, that any excess of the fair value of the consideration transferred to the holders of preferred stock redeemed over the carrying amount of the preferred stock should be subtracted from net earnings to determine net earnings available to common stockholders in the calculation of earnings per share. The SEC’s clarification of the guidance in Topic D-42 provides that the carrying amount of the preferred stock should be reduced by the related issuance costs.

F-13

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The July 2003 clarification of Topic D-42 was effective for the Company beginning with the quarter ending September 30, 2003. The Company redeemed all of the outstanding 9.375% Series C Cumulative Redeemable Preferred Units (“Series C Preferred Units”) in November 2003 with the net proceeds from its 7.80% Series E Cumulative Redeemable Preferred Stock offering, which closed on November 21, 2003 (see Notes 13 and 16). This redemption resulted in a $0.9 million charge in 2003 relating to the initial issuance costs of the Series C Preferred units.

In December 2003, the FASB issued SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to improve financial statement disclosures for defined benefit plans. This standard requires that companies provide more details about their plan assets, benefit obligations, cash flows, benefit costs and other relevant information. SFAS No. 132 is effective for fiscal years ending after December 15, 2003, and for quarters beginning after December 15, 2003. The adoption of this statement did not have a material effect on the Company’s results of operations or financial condition.

3.    Dispositions and Acquisitions

Dispositions

During the year ended December 31, 2003, the Company sold the following properties:

Location	Property Type	Month of Disposition	Number of Buildings	Rentable Square Feet	Sales Price ($ in millions)
4351 Latham Avenue Riverside, CA	Office	April	1	21,300	$	2.8
5770 Armada Drive Carlsbad, CA	Office	May	1	81,700		14.4
Anaheim Corporate Center Anaheim, CA	Office	June	4	157,800		13.8
4361 Latham Avenue Riverside, CA	Office	July	1	30,600		4.7
			7	291,400	$	35.7

During the year ended December 31, 2003, the Company recorded a net gain of approximately $3.6 million in connection with the sale of these properties. The Company used the net proceeds to fund its development and redevelopment programs, pay down principal on mortgage loans and repay borrowings under the Credit Facility (defined in Note 11). The net income and the net gain on disposition for these properties have been included in discontinued operations for the years ended December 31, 2003, 2002 and 2001 (see Note 22).

F-14

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During the year ended December 31, 2002, the Company sold the following properties:

Location	Property Type	Month of Disposition	Number of Buildings	Rentable Square Feet	Sales Price ($ in millions)
3990 Ruffin Road San Diego, CA	Office	September	1	45,600	$	6.5
23600/23610 Telo Avenue Torrance, CA	Office	November	2	80,000		7.1
Walnut Park Business Center Diamond Bar, CA	Industrial	November	3	165,700		12.0
1240/1250 Lakeview Boulevard Anaheim, CA	Office	November	2	78,900		9.0
Alton Business Center Irvine, CA	Industrial	December	9	143,100		13.6
Total			17	513,300	$	48.2

During the year ended December 31, 2002, the Company recorded a net gain of approximately $6.6 million in connection with the sale of these properties. The Company used the net proceeds to fund its development program, finance the Company’s share repurchase program (see Note 14) and repay borrowings under the Credit Facility (defined in Note 11). The net income and the net gain on disposition for these properties have been included in discontinued operations for the years ended December 31, 2002 and 2001 (see Note 22).

During the year ended December 31, 2001, the Company sold the following properties:

Location	Property Type	Month of Disposition	Number of Buildings	Rentable Square Feet	Sales Price ($ in millions)
6828 Nancy Ridge Drive San Diego, CA	Industrial	February	1	39,700	$	3.3
199 & 201 N. Sunrise Avenue Roseville, CA	Industrial	April	2	162,200		15.4
4880 Santa Rosa Road Camarillo, CA	Office	August	1	41,100		6.6
1900 Aerojet Way Las Vegas, NV	Industrial	August	1	106,700		5.0
795 Trademark Drive Reno, NV	Industrial	September	1	75,300		7.3
41093 County Center Drive Temecula, CA	Industrial	September	1	77,600		5.4
1840 Aerojet Way Las Vegas, NV	Industrial	September	1	102,900		5.1
184-220 Technology Drive Irvine, CA	Industrial	October	10	157,500		19.0
2231 Rutherford Road Carlsbad, CA	Office	December	1	39,000		3.3
Total			19	802,000	$	70.4

F-15

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During the year ended December 31, 2001, the Company recorded a net gain of approximately $4.7 million in connection with the sale of these properties. The Company used the net proceeds to fund its development program and repay borrowings under the Credit Facility (defined in Note 11). During the year ended December 31, 2002, the Company recognized a gain of approximately $896,000 related to the disposition of an industrial property in Irvine, California that the Company sold in October 2001. This additional gain had previously been reserved for financial reporting purposes until certain contingencies associated with the disposition were resolved. The net income and the net gain on disposition for these properties have been included in continuing operations for the years ended December 31, 2002 and 2001 as it relates to properties sold prior to the prospective adoption of SFAS 144 (see Note 22).

Acquisition of Industrial Property

In August 2002, the Company acquired one industrial property, including undeveloped land adjacent to one of the Company’s stabilized redevelopment projects, located in Santa Ana, California (see Note 4), from an unaffiliated third party for approximately $8.1 million. The property encompasses approximately 107,000 rentable square feet and was 100% leased as of December 31, 2003.

Acquisition of Minority Interest in Development LLC Properties

On March 25, 2002, the Company acquired The Allen Group’s interest in the assets of the Development LLCs which included nine San Diego office properties encompassing approximately 848,300 rentable square feet, and three San Diego development sites, encompassing approximately 11.9 acres (see Notes 1 and 13).

4.    Development and Redevelopment Projects

Stabilized Development Projects

During the year ended December 31, 2003, the Company added the following three development projects to the Company’s stabilized portfolio. All of these projects were completed in 2002 and in the lease-up phase as of December 31, 2002.

Project Name / Submarket	Property Type	Completion Date	Stabilization Date	Number of Buildings	Rentable Square Feet	Percentage Committed (1)
12100 W. Olympic Blvd West Los Angeles, CA	Office	Q2 2002	Q2 2003	1	151,000	61	%
999 Sepulveda Blvd El Segundo, CA	Office	Q3 2002	Q3 2003	1	133,300	31	%
3721 Valley Centre Drive Del Mar, CA	Office	Q3 2002	Q3 2003	1	114,800	100	%
Total				3	399,100

(1) Percentage committed includes executed leases and letters of intent, calculated on a square footage basis.

F-16

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During the year ended December 31, 2002, the Company added the following six development projects to the Company’s stabilized portfolio:

Project Name / Submarket	Property Type	Completion Date	Stabilization Date	Number of Buildings	Rentable Square Feet
15051 Ave. of Science Rancho Bernardo, CA	Office	Q2 2001	Q1 2002	1	70,600
4939 Directors Place Sorrento Mesa, CA	Office	Q1 2002	Q1 2002	1	60,700
23975 Park Sorrento Calabasas, CA	Office	Q2 2001	Q2 2002	1	100,600
15073 Ave. of Science Rancho Bernardo, CA	Office	Q2 2001	Q2 2002	1	46,800
10390 Pacific Center Ct. Sorrento Mesa, CA	Office	Q4 2001	Q2 2002	1	68,400
12340 El Camino Real Del Mar, CA	Office	Q3 2002	Q3 2002	1	89,100
Total				6	436,200

Lease-Up Projects

The Company completed the following office development project in 2003, which was in the lease-up phase at December 31, 2003:

Project Name / Submarket	Property Type	Completion Date	Number of Buildings	Rentable Square Feet	Estimated Stabilization Date (1)	Percentage Committed (2)
12400 High Bluff Del Mar, CA	Office	Q3 2003	1	209,000	Q3 2004	84	%

(1) Based on Management’s estimation of the earlier of the stabilized occupancy (95%) or one year from the date of substantial completion.

(2) Percentage committed includes executed leases and letters of intent, calculated on a square footage basis.

Redevelopment Projects Under Construction

During the year ended December 31, 2003, the Company reclassified the following two properties out of the Company’s stabilized portfolio and into the Company’s redevelopment portfolio. The Company is converting one of these properties from office space to life science space and is performing extensive interior refurbishments at the other property since it had been occupied by a single tenant for approximately 30 years.

Project Name / Submarket	Pre and Post Redevelopment Property Type	Estimated Completion Date	Estimated Stabilization Date (1)	Number of Buildings	Rentable Square Feet
5717 Pacific Center Blvd.
Sorrento Mesa, CA	Office to Life Science	Q1 2004	Q1 2005	1	68,000
909 Sepulveda Blvd. El Segundo, CA	Office	Q2 2004	Q2 2005	1	248,100
Total				2	316,100

(1) Based on Management’s estimation of the earlier of the stabilized occupancy (95%) or one year from the date of substantial completion.

F-17

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Completed Redevelopment Projects

During the year ended December 31, 2003, the Company added the following two redevelopment projects to the Company’s stabilized portfolio:

Project Name / Submarket	Pre and Post Redevelopment Type	Completion Date	Stabilization Date	Number of Buildings	Rentable Square Feet	Percentage Committed (1)
1700 Carnegie (2)
Santa Ana, CA	R & D to Office	Q3 2002	Q3 2003	1	76,500	48	%
10421 Pacific Center Court (3)	Office to	Q3 2003	Q3 2003	1	79,900	61	% (4)
Sorrento Mesa, CA	Life Science
Total				2	156,400

(1) Percentage committed includes executed leases and letters of intent, calculated on a square footage basis.

(2) This project was in the lease-up phase as of December 31, 2002.

(3) The Company started the redevelopment of this building and reclassified this property out of the Company’s stabilized portfolio and into the Company’s redevelopment portfolio in the first quarter of 2003.

(4) The Company converted approximately 48,500 square feet of this building to life science space at the request of the tenant. The remainder of the space was leased to another tenant and the lease expired in November 2003.

5.    Current Receivables

Current receivables consisted of the following at December 31:

	2003			2002
	(in thousands)
Tenant rent, reimbursements, and other receivables	$	11,291		$	7,573
Allowance for uncollectible tenant receivables		(6,372	)		(4,499	)
Current receivables, net	$	4,919		$	3,074

6.    Deferred Rent Receivables

Deferred rent receivables consisted of the following at December 31:

	2003			2002
	(in thousands)
Unbilled deferred rent	$	42,471		$	35,453
Allowance for unbilled deferred rent		(5,667	)		(5,987	)
Deferred rent receivables, net	$	36,804		$	29,466

7.    Deferred Leasing Costs

Deferred leasing costs are summarized as follows at December 31:

	2003			2002
	(in thousands)
Deferred leasing costs	$	61,860		$	57,233
Accumulated amortization		(25,209	)		(25,806	)
Deferred leasing costs, net	$	36,651		$	31,427

F-18

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

8.    Charge for Previously Capitalized Leasing Costs

In 2002, Peregrine Systems, Inc. (“Peregrine”) leased four office buildings totaling approximately 423,900 rentable square feet under four separate leases. Peregrine had filed a voluntary petition for relief under Chapter 11 of the bankruptcy code on September 22, 2002. Peregrine had advised the Company that it likely would not need all of the buildings upon resolution of its financial issues, therefore, during the year ended December 31, 2002, the Company recorded a $5.3 million charge to depreciation and amortization for leasing commissions and certain tenant improvements that were previously capitalized in connection with the leases with Peregrine. In addition, the Company recorded a $0.5 million charge to general and administrative expenses for costs the Company paid for a fifth and final building that was to be leased to Peregrine. Peregrine surrendered this building back to the Company in June 2002, at which time it was still under construction and was not yet included in the Company’s portfolio of operating properties (see Note 20).

9.    Deferred Financing Costs

Deferred financing costs are summarized as follows at December 31:

	2003			2002
	(in thousands)
Deferred financing costs	$	15,750		$	15,257
Fair value of interest rate cap agreements (See Note 12)		4			212
Accumulated amortization		(12,097	)		(9,248	)
Deferred financing costs, net	$	3,657		$	6,221

F-19

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10.    Secured Debt

The following table sets forth the composition of the Company’s secured debt at December 31:

	2003		2002
	(in thousands)
Mortgage note payable, due April 2009, fixed interest at 7.20%, monthly principal and interest payments	$	86,811	$	88,630
Mortgage loan payable, due August 2008, fixed interest at 3.80%, monthly principal and interest payments		79,640
Mortgage note payable, due January 2005, fixed interest at 6.70%, monthly principal and interest payments		78,377		79,287
Mortgage note payable, due January 2005, fixed interest at 8.35%, monthly principal and interest payments(a)		74,819		76,509
Mortgage note payable, due October 2003, interest at LIBOR plus 1.75%, (3.19% at December 31, 2002), monthly interest-only payments(b)				75,671
Construction loan payable, due September 2004, interest at LIBOR plus 1.85% (2.91% and 3.23% at December 31, 2003 and 2002, respectively)(b)(c)(d)		43,582		16,242
Mortgage loan payable, due January 2006, interest at LIBOR plus 1.75%, (2.91% and 3.17% at December 31, 2003 and 2002, respectively), monthly interest only payments(b)		31,000		31,000
Mortgage loan payable, due December 2005, interest at LIBOR plus 1.40%, (2.56% and 2.82% at December 31, 2003 and 2002, respectively), monthly interest only payments(b)(e)		29,000		29,000
Mortgage note payable, due May 2017, fixed interest at 7.15%, monthly principal and interest payments		25,555		26,652
Mortgage note payable, due June 2004, interest at LIBOR plus 1.75%, (2.92% and 3.13% at December 31, 2003 and 2002, respectively), monthly principal and interest payments(b)		20,253		20,910
Mortgage loan payable, due August 2007, fixed interest at 6.51%, monthly principal and interest payments		17,747		17,951
Mortgage loan payable, due November 2014, fixed interest at 8.13%, monthly principal and interest payments		12,324		12,516
Mortgage note payable, due December 2005, fixed interest at 8.45%, monthly principal and interest payments		10,974		11,549
Mortgage note payable, due November 2014, fixed interest at 8.43%, monthly principal and interest payments		6,790		9,737
Mortgage loan payable, due August 2007, fixed interest at 7.21%, monthly principal and interest payments		4,823		4,966
Mortgage note payable, due October 2013, fixed interest at 8.21%, monthly principal and interest payments		4,353		6,417
	$	526,048	$	507,037

(a) After January 2005, the mortgage note is subject to increases in the effective annual interest rate to the greater of 10.35% or the sum of the interest rate for U.S. Treasury Securities maturing 15 years from the reset date plus 2.00%. The contractual maturity date is February 2022, however the Company intends to refinance the debt prior to January 2005 without any prepayment penalty.

(b) The variable interest rates stated as of December 31, 2003 and 2002 are based on the last repricing date during the respective periods which vary based on the terms of each note. The repricing rates may not be equal to LIBOR at December 31, 2003 and 2002.

(c) This construction loan has a limited recourse provision that holds the Company liable for up to approximately $14.3 million plus any unpaid accrued interest.

(d) The maturity of this loan may be extended for up to one year.

(e) The maturity of this loan may be extended for up to two one-year periods.

F-20

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company’s secured debt was collateralized by 73 operating properties and one in process development project at December 31, 2003 with a combined net book value of $681 million and 79 operating properties and one in process development project at December 31, 2002 with a combined net book value of $614 million. As of December 31, 2003 and 2002, the Company’s secured debt had a weighted average interest rate, excluding loan fees, of 5.78% and 5.97%, respectively.

At December 31, 2003, eleven of the Company’s secured loans contained restrictions that would require the payment of prepayment penalties for the acceleration of outstanding debt. The mortgage notes payable are secured by deeds of trust on certain of the Company’s properties and the assignment of certain rents and leases associated with those properties.

Certain secured debt agreements contain restrictive covenants including minimum debt yields and debt service coverage ratios. The Company was in compliance with all of the covenants at December 31, 2003 and 2002.

Scheduled contractual principal payments for the above secured debt at December 31, 2003, assuming the Company does not exercise any of the extension options, were as follows:

Year Ending	(in thousands)
2004	$	73,868
2005		120,434
2006		39,664
2007		30,183
2008		81,110
Thereafter		180,789
Total	$	526,048

11.    Unsecured Line of Credit

In March 2002, the Company obtained a $425 million unsecured revolving credit facility (the “Credit Facility”) with a bank group led by J.P. Morgan Securities, Inc. to replace its previous $400 million unsecured revolving credit line which was scheduled to mature in November 2002. The Company repaid its $100 million unsecured debt facility, which was scheduled to mature September 2002, with borrowings under the Credit Facility. As of December 31, 2003, the Company had borrowings of $235.0 million outstanding under the Credit Facility and availability of approximately $84.2 million. The Credit Facility bears interest at an annual rate between LIBOR plus 1.13% and LIBOR plus 1.75% (2.66% and 2.92% at December 31, 2003 and 2002, respectively), depending upon the Company’s leverage ratio at the time of borrowing, and matures in March 2005. The fee for unused funds ranges from an annual rate of 0.20% to 0.35% depending on the Company’s leverage ratio. The Company expects to use the Credit Facility to finance development and redevelopment expenditures, to fund potential acquisitions and for other general corporate uses.

The Credit Facility and certain other secured debt arrangements contain covenants requiring the Company to meet certain financial ratios and reporting requirements. Some of the more restrictive financial covenants include a minimum debt service coverage ratio, a maximum total liabilities to total assets ratio, a maximum total secured debt to total assets ratio, minimum debt service coverage and fixed charge coverage ratios, a minimum consolidated tangible net worth and a limit of development activities as compared to total assets. The Company was in compliance with all of its debt covenants at December 31, 2003 and 2002.

F-21

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Total interest and loan fees capitalized for the years ended December 31, 2003, 2002 and 2001 were $11.8 million, $14.0 million and $13.6 million, respectively.

12.    Derivative Financial Instruments

As of December 31, 2003 and 2002, the Company reported liabilities of $2.7 million and $3.7 million, respectively, reflecting the fair value of its interest rate swap agreements which are included in other liabilities in the consolidated balance sheets. As of December 31, 2003 and 2002, the Company reported assets of $4,000 and $0.2 million reflecting the fair value of its interest rate cap agreements which are included in deferred financing costs in the consolidated balance sheets (see Note 9).

The following table sets forth the terms and fair market value of the Company’s derivative financial instruments at December 31:

Type of Instrument	Notional Amount		Index	Strike		Maturity Date	2003			2002
	(in thousands)						(in thousands)
Interest rate swap	$	50,000	LIBOR	4.46	%	January 2005	$	(1,608	)	$	(2,735	)
Interest rate swap		50,000	LIBOR	2.57	%	November 2005		(553	)		(457	)
Interest rate swap		25,000	LIBOR	2.98	%	December 2006		(251	)		(248	)
Interest rate swap		25,000	LIBOR	2.98	%	December 2006		(251	)		(248	)
Total included in other liabilities								(2,663	)		(3,688	)
Interest rate cap		50,000	LIBOR	4.25	%	January 2005		2			106
Interest rate cap		50,000	LIBOR	4.25	%	January 2005		2			106
Total included in deferred financing costs								4			212
Total							$	(2,659	)	$	(3,476	)

The instruments described above have been designated as cash flow hedges. The Company uses these instruments to hedge the interest rate risk associated with a portion of its pool of outstanding variable-rate debt that is equal in principal amount to the notional amount of the Company’s outstanding derivative instruments. (See Notes 10 and 11 for a discussion of the Company’s outstanding variable rate and fixed rate debt.) The significant terms of the Company’s pool of outstanding variable-rate debt, which include the LIBOR index and the repricing dates, have been set to effectively match the terms of the Company’s hedging instruments. The Company’s strategy is to effectively convert a portion of its variable-rate debt to fixed-rate debt.

During 2002, the Company paid a $2.4 million premium to enter into two interest rate cap agreements, which represented the fair market value at the inception of the agreements. This premium is being amortized into earnings over the term of the cap agreements using the caplet value approach.

As of December 31, 2003 and 2002, the balance in accumulated net other comprehensive loss was $4.4 million and $5.8 million, respectively, relating to the net decrease in the fair market value of the derivative instruments outstanding at the end of each period. For the years ended December 31, 2003, 2002 and 2001, the Company did not record any gains or losses attributable to cash flow hedge ineffectiveness since the terms of the Company’s derivative contracts and debt obligations were and are expected to continue to be effectively matched. Amounts reported in accumulated other comprehensive loss will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the year ending December 31, 2004, the Company estimates that it will reclassify approximately $4.5 million to interest expense.

F-22

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

13.    Minority Interests

Common Limited Partnership Unitholders

The Company owned an 87.2% and 86.6% general partnership interest in Operating Partnership as of December 31, 2003 and 2002, respectively. The remaining 12.8% and 13.4% common limited partnership interest as of December 31, 2003 and 2002, respectively, was owned by certain of the Company’s executive officers and directors, certain of their affiliates, and other outside investors in the form of common limited partnership units. The common limited partnership units are redeemable at the option of the unitholders. Upon receipt of the notice of redemption, the Company may elect, subject to certain limitations, to exchange the common limited partnership units for shares of the Company’s common stock on a one-for-one basis or cash equal to the fair market value at the time of redemption.

During the years ended December 31, 2003 and 2002, 82,439 and 222,270 common limited partnership units of the Operating Partnership were exchanged into shares of the Company’s common stock on a one-for-one basis, respectively. Of these common limited partnership units exchanged in 2003 and 2002, 25,299 and 177,563, respectively, common limited partnership units were owned by a partnership affiliated with The Allen Group. Neither the Company nor the Operating Partnership received any proceeds from the issuance of the common stock to the common limited partnership holders.

Preferred Unitholders

As of December 31, 2003 and 2002, the Company had issued and outstanding 1,500,000 8.075% Series A Cumulative Redeemable Preferred units (the “Series A Preferred units”) and 900,000 9.250% Series D Cumulative Redeemable Preferred units (the “Series D Preferred units”) representing preferred limited partnership interests in the Operating Partnership with a liquidation value of $50.00 per unit. The Series A and Series D Preferred units, which may be called by the Operating Partnership at a price equal to the liquidation value on or after February 6, 2003 and December 9, 2004, respectively, have no stated maturity or mandatory redemption and are not convertible into any other securities of the Operating Partnership. The Series A and Series D Preferred Units are exchangeable at the option of the majority of the holders for shares of the Company’s 8.075% Series A Cumulative Redeemable Preferred stock beginning February 6, 2008 and the Company’s 9.250% Series D Cumulative Redeemable Preferred beginning December 9, 2009, respectively, or earlier under certain circumstances.

Each series of preferred units may be exchanged for shares of a corresponding series of preferred stock of the Company’s preferred stock at the election of 51% of the holders of the applicable series of preferred units:

(i) if distributions on the applicable series have not been timely made for any six prior quarters, or the Operating Partnership is likely to become a publicly traded partnership for federal income tax purposes;

(ii) if, prior to the tenth anniversary of their date of issuance, the respective class of preferred units would not be considered “stock and securities” for federal income tax purposes; and

(iii) at any time following the tenth anniversary of their date of issuance.

In addition, each series of preferred units may also be exchanged for shares of a corresponding series of the Company’s preferred stock if either the Operating Partnership or the initial holder of the preferred units believes, based upon the opinion of counsel, that the character of Operating Partnership’s assets and income would not allow it to qualify as a REIT if it were a corporation. In lieu of exchanging preferred units for preferred stock, the Company may elect to redeem all or a portion of the respective series of preferred units for cash in an amount equal to $50.00 per unit plus accrued and unpaid distributions. Each series may only be exchanged in whole, but not in part, and each exchange is subject to the REIT ownership limits contained in the Company’s charter.

F-23

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2002, the Company also had issued and outstanding 700,000 9.375% Series C Cumulative Redeemable Preferred units (the “Series C Preferred units”), representing preferred limited partnership interests in the Operating Partnership with a liquidation value of $50.00 per unit. In November 2003, the Operating Partnership redeemed all 700,000 outstanding Series C Preferred Units with proceeds from a public offering for 1,610,000 shares of its 7.80% Series E Cumulative Redeemable Preferred Stock (see Note 14.) In 2003, the Company recorded a $0.9 million charge relating to the initial issuance costs of the redeemed units.

The Company makes quarterly distributions to the preferred unitholders each February, May, August and November. The following table sets forth the accrued distributions payable to preferred unitholders that is included in the Series A, Series C and Series D Preferred unit balances on the balance sheet at December 31, 2003 and 2002:

	December 31,
	2003		2002
	(in thousands)
Distributions payable to:
Series A Preferred Units	$	757	$	757
Series C Preferred Units				410
Series D Preferred Units		520		520
	$	1,277	$	1,687

Development LLC’s

On March 25, 2002, the Company acquired The Allen Group’s minority interest in the assets and assumed The Allen Group’s proportionate share of the liabilities of the Development LLCs. The net consideration was approximately $40.9 million. The acquisition was funded with $2.2 million in cash and 1,398,068 common limited partnership units of the Operating Partnership valued at $38.7 million based upon the closing share price of the Company’s common stock as reported on the New York Stock Exchange. In connection with the acquisition, the Company recognized $3.9 million of preferred return income that had been previously earned but fully reserved for financial reporting purposes until the acquisition was complete and the related litigation between the parties was settled. The preferred return investment earned a 12.5% annual rate of return. In connection with the acquisition, the Company repaid three construction loans, which were secured by certain of the Development LLC properties.

14.    Stockholders’ Equity

Preferred Stock

In November 2003, the Company completed a public offering for 1,610,000 shares of its 7.80% Series E Cumulative Redeemable Preferred Stock (“Series E Preferred Stock”). The Series E Preferred Stock has a liquidation preference of $25.00 per share and may be redeemed at the option of the Company on or after November 21, 2008, or earlier under certain circumstances. Dividends on the Series E Preferred Stock are cumulative and will be payable quarterly in arrears on the 15^th day of each February, May, August and November. The Series E Preferred Stock has no stated maturity and will not be subject to mandatory redemption or any sinking fund. The Company used the net proceeds from the offering to redeem all outstanding Series C Preferred Units (see Note 13).

F-24

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Restricted Shares

In February 2004, 2003 and 2002, the Company’s Compensation Committee granted an aggregate of 111,159, 118,733 and 81,729 restricted shares, respectively, of the Company’s common stock to certain executive officers and key employees. In 2003, the Company’s Executive Compensation Committee granted an aggregate of 4,945 restricted shares of the Company’s common stock to non-employee board members as part of the board members’ annual compensation and one newly elected board member’s initial equity award. The restricted shares are subject to restrictions determined by the Company’s Compensation Committee. The restricted shares have the same dividend and voting rights as common stock, are legally issued and outstanding, and are included in the Company’s calculation of weighted average diluted outstanding shares at December 31, 2003, 2002 and 2001 (see Note 16 for the terms of the restricted stock grants and the related amortization of compensation expense).

Exchange of Common Limited Partnership Units

During 2003 and 2002, 82,439 and 222,270 common limited partnership units of the Operating Partnership were exchanged into shares of the Company’s common stock, respectively (see Note 13). Neither the Company nor the Operating Partnership received any proceeds from the issuance of the common stock to the common limited partnership unitholders.

Share Repurchases

During the year ended December 31, 2003, the Company accepted the return, at the current quoted market price, of 78,630 shares of its common stock from certain key employees in accordance with the provisions of its incentive stock plan to satisfy minimum statutory tax-withholding requirements related to restricted shares that vested during this period.

In November 2002, the Company’s Board of Directors authorized the repurchase of an additional one million shares under its existing common stock share repurchase program. This action increased the total authorized shares under this program to an aggregate of four million shares. During the year ended December 31, 2002, the Company repurchased 508,200 shares of its common stock in open market transactions for an aggregate price of $11.4 million, or $22.39 per share. The Company did not repurchase any shares during the years ended December 31, 2003 and 2001. Repurchases were funded primarily through proceeds received from the Company’s disposition program, working capital and borrowings on the Company’s Credit Facility. As of December 31, 2003, an aggregate of 1,227,500 shares remained eligible for repurchase under this program.

Dividend Reinvestment and Direct Purchase Plan

The Company has a Dividend Reinvestment and Direct Purchase Plan (the “Plan”) designed to provide the Company’s stockholders and other investors with a convenient and economical method to purchase shares of the Company’s common stock. The Plan consists of three programs that provide existing common stockholders and other investors the opportunity to purchase additional shares of the Company’s common stock by reinvesting cash dividends or making optional cash purchases within specified parameters. Depending on the program, the Plan acquires shares of the Company’s common stock from either new issuances directly from the Company, from the open market or from privately negotiated transactions. As of December 31, 2003, no shares had been acquired under the Plan from new issuances.

F-25

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Registration Statements

In 2003, the SEC declared effective the Company’s registration statement on Form S-3, which registered the potential issuance and resale of up to a total of 1,398,068 shares of the Company’s common stock that may be issued in redemption of 1,398,068 common limited partnership units of the Operating Partnership previously issued in connection with the acquisition of the minority interest in the Development LLC properties (see Notes 2 and 13). In 2002, the SEC declared effective the Company’s registration statement on Form S-3, which registered the potential issuance and resale of up to a total of 1,133 shares of the Company’s common stock in exchange for 1,133 common limited partnership units of the Operating partnership previously issued in connection with a related party acquisition. The common limited partnership units may be exchanged at the Company’s option into shares of the Company’s common stock on a one-for-one basis. Neither the Company nor the Operating Partnership will receive any proceeds from the issuance of the common stock resulting from any such exchange.

The Company has the ability to issue up to an additional $273 million of equity securities, available as of the date of this report, under a currently effective “shelf” registration statement.

Accrued Distributions

Accrued distributions at December 31, 2003 and 2002, consisted of the following amounts payable to registered common stockholders of record holding 28,209,213 and 27,419,880 shares of common stock, respectively, common unitholders holding 4,154,313 and 4,236,752 common limited partnership units of the Operating Partnership, respectively, and registered preferred stockholders of 1,610,000 and zero shares of Series E Preferred Stock, respectively:

	December 31,
	2003		2002
	(in thousands)
Distributions payable to:
Common stockholders	$	13,964	$	13,573
Common unitholders of the Operating Partnership		2,056		2,097
Total accrued distribution to common stockholders and unitholders		16,020		15,670
Preferred stockholders		349		—
Total accrued distributions	$	16,369	$	15,670

15.    Future Minimum Rent

The Company has operating leases with tenants that expire at various dates through 2018 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. Future minimum rent under operating leases, excluding tenant reimbursements of certain costs, as of December 31, 2003, are summarized as follows:

Year Ending	(in thousands)
2004	$	173,625
2005		161,571
2006		143,131
2007		123,115
2008		104,208
Thereafter		454,819
Total	$	1,160,469

F-26

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

16.     Employee Retirement and Stock Option and Incentive Plans

Retirement Savings Plan

The Company has a retirement savings plan designed to qualify under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan allows participants to defer up to sixty percent of their eligible compensation on a pre-tax basis, subject to certain maximum amounts allowed by the Internal Revenue Code. The 401(k) Plan provides for a matching contribution by the Company in an amount equal to fifty-cents for each one dollar of participant contributions up to a maximum of five percent of the participant’s annual salary. Participants vest immediately in the amounts contributed by the Company. Employees of the Company are eligible to participate in the 401(k) Plan on the first day of the month after three months of service. For each of the years ended December 31, 2003, 2002, and 2001, the Company contributed $0.3 million to the 401(k) Plan.

Stock Option and Incentive Plan

The Company has established a stock option and incentive plan (the “Stock Plan”) for the purpose of attracting and retaining officers and key employees, under which restricted shares or stock options may be granted. The Stock Plan authorizes the issuance of 3,000,000 shares of common stock of the Company. The Compensation Committee, comprised of three Directors who are not officers of the Company, determines compensation, including awards under the Stock Plan, for the Company’s executive officers.

In February 2002, the Company’s Compensation Committee approved two new programs under the Stock Plan for the future potential issuance of restricted shares of common stock and one program under the Stock Plan for the potential payment of cash to certain key employees as part of their annual and long-term incentive compensation. The number of shares that will ultimately be issued and the amount of cash that will ultimately be paid under these programs will be contingent upon both the Company and the individuals meeting certain financial, operating and development performance targets during each fiscal year. The awards are payable at the discretion of the Compensation Committee. The restricted stock awards will vest over different periods depending upon the specific program and will be expensed over the performance and vesting periods.

In February 2004, the Company’s Compensation Committee granted an aggregate of 111,159 restricted shares of common stock to certain executive officers and key employees. Compensation expense for the restricted shares is calculated based on the closing per share price of $34.85 on the February 10, 2004 grant date and is amortized on a straight-line basis over the performance and vesting period. Of the shares granted, 21,234 vest over a one-year period, 68,403 vest over a two-year period and 21,522 vest over a four-year period. The Company recorded approximately $1.1 million in compensation expense related to this restricted stock grant during the year ended December 31, 2003.

In February 2003, the Company’s Compensation Committee granted an aggregate of 118,733 restricted shares of common stock to certain executive officers and key employees. Compensation expense for the restricted shares is calculated based on the closing per share price of $21.63 on the February 10, 2003 grant date and is amortized on a straight-line basis over the performance and vesting period. Of the shares granted, 25,903 vest over a one-year period and 92,830 vest over a two-year period. The compensation expense related to this restricted stock grant was approximately $1.0 million for both years ended December 31, 2003 and 2002.

In February 2002, the Company’s Compensation Committee granted an aggregate of 81,729 restricted shares of common stock to certain executive officers. Compensation expense for the restricted shares is calculated based on the closing per share price of $25.74 on the February 26, 2002 grant date and is amortized on a straight-line basis over the performance and vesting period. Of the shares granted, 20,541 vested over a one-

F-27

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

year period and 61,188 vest over a two-year period. The compensation expense related to this restricted stock grant was approximately $0.9 million and $1.1 million for the year ended December 31, 2003 and 2002, respectively.

In March 2003, the Company’s Executive Compensation Committee implemented a special long-term compensation program for the Company’s executive officers that provides for cash compensation to be earned at the end of a three-year period if the Company attains certain performance measures based on annualized total shareholder returns on an absolute and relative basis. The targets for the relative component require the Company to obtain an annualized total return to stockholders that is at or above the 70^th percentile of annualized total return to stockholders achieved by members of a pre-defined peer group during the same three-year period. The amount payable for the absolute component is based upon the amount by which the annualized total return to stockholders over the three-year period exceeds 10%. Amounts paid under the special long-term compensation program are payable at the discretion of the Executive Compensation Committee. During the year ended December 31, 2003, the Company accrued approximately $5.9 million of compensation expense related to this plan.

Board Compensation

In May 2003, the Company’s Executive Compensation Committee granted an aggregate of 3,945 restricted shares of the Company’s common stock to non-employee board members as part of the board members’ annual compensation. In July 2003, the Company’s Executive Compensation Committee granted 1,000 shares to the Company’s newly elected board member representing his initial equity award. The restricted stock was granted under the Company’s 1997 Stock Option and Incentive Plan in accordance with the Company’s new Board of Directors compensation plan. The new Board of Directors compensation plan was approved by the Board of Directors in May 2003. Compensation expense for the 3,945 and 1,000 restricted shares is calculated based on the closing per share price of $25.38 and $28.48 on the respective May 8, 2003 and July 24, 2003 grant dates and is being amortized over the respective two-year and four-year vesting periods. The Company recorded compensation expense of approximately $35,000 related to these restricted stock grants during the year ended December 31, 2003.

Stock Options

At December 31, 2003, 2002 and 2001, an aggregate of 214,714, 1,167,272 and 1,436,341 options were exercisable for shares of the Company’s common stock at a weighted average exercise price of $23.86, $23.30 and $23.15, respectively. The weighted average exercise price of the options outstanding at December 31, 2003, 2002 and 2001 was $24.09, $23.40 and $23.22, respectively, with weighted average remaining contractual lives of 4.9 years, 5.0 years and 6.0 years, respectively. Stock options vest at 33 ¹/3% per year over three years beginning on the first anniversary date of the grant and are exercisable at the market value on the date of the grant. The term of each option is ten years from the date of the grant.

F-28

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company’s stock option activity is summarized as follows:

	Number of Options		Weighted Average Exercise Price
Outstanding at December 31, 2000	2,012,799		$	23.13
Granted	25,000			26.51
Exercised	(424,797	)		22.43
Cancelled	(80,000	)		25.06
Outstanding at December 31, 2001	1,533,002			23.22
Granted	25,000			25.77
Exercised	(292,403	)		22.67
Cancelled	(25,000	)		23.00
Outstanding at December 31, 2002	1,240,599			23.40
Granted	—			—
Exercised	(1,000,890	)		23.24
Cancelled	—			—
Outstanding at December 31, 2003	239,709		$	24.09

Effective January 1, 2002, the Company voluntarily adopted the fair value recognition provisions of SFAS 123, prospectively for all employee awards granted, modified, or settled after January 1, 2002 (see Note 2). Accordingly, the Company recorded approximately $26,000 and $23,000 of compensation expense for the years ended December 31, 2003 and 2002, respectively. This compensation expense relates to the Company’s grant of 25,000 stock options to the Company’s non-employee Directors, which occurred in February 2002.

17.    Commitments and Contingencies

Operating leases—The Company has noncancelable ground lease obligations on the SeaTac Office Center in Seattle, Washington expiring December 2032, with an option to extend the lease for an additional 30 years; and Kilroy Airport Center, Long Beach, California with a lease period for Phases I, II, III and IV expiring in July 2084. On the Kilroy Airport Center and the SeaTac Office Center ground leases, rentals are subject to adjustments every five years based on the Consumer Price Index.

During the year ended December 31, 2002 the Company renegotiated the ground leases at Kilroy Airport Center, Phases I, II, and III in Long Beach, California, resulting in a reduction of annual ground lease expense of approximately $0.3 million. The ground lease obligation will be subject to fair market value adjustments every five years. The Company also exercised the option to extend the ground leases for an additional fifty years. The ground leases now expire in July 2084 as discussed above.

During the year ended December 31, 2003, the Company renegotiated the ground lease at Kilroy Airport Center, Phase IV in Long Beach, California. The Company leases this land, which is adjacent to the Company’s other properties at Kilroy Airport Center, Long Beach, for future development opportunities. The ground lease term was extended to July 2084 subject to the Company’s right to terminate this lease upon written notice to the landlord on or before October 2007. Should the Company elect not to terminate the lease, the ground lease obligation will be subject to a fair market rental adjustment upon the completion of a building on the premises or in October 2007, whichever occurs first, and at scheduled dates thereafter.

F-29

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The minimum commitment under these leases at December 31, 2003 was as follows:

Year Ending	(in thousands)
2004	$	1,478
2005		1,466
2006		1,467
2007		1,470
2008		1,470
Thereafter		72,498
Total	$	79,849

Litigation—With exception of the lawsuit disclosed in Note 20, neither the Company nor any of the Company’s Properties are presently subject to any material litigation nor, to the Company’s knowledge, is any material litigation threatened against any of them which if determined unfavorably to the Company would have a material adverse effect on the Company’s cash flows, financial condition or results of operations. The Company is party to litigation arising in the ordinary course of business, none of which if determined unfavorably to the Company, individually or in the aggregate, is expected to have a material adverse effect on the Company’s cash flows, financial condition or results of operations.

Environmental Matters—The Company follows the policy of monitoring its Properties for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, the Company is not currently aware of any environmental liability with respect to the Properties that would have a material effect on the Company’s financial condition, results of operations and cash flows. Further, the Company is not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that the Company believes would require additional disclosure or the recording of a loss contingency.

18.    Related-Party Transactions

As part of the Company’s marketing strategy, KSSLC had an agreement with TradeWind Navigation, Inc., a company owned solely by John B. Kilroy, Sr., to charter a sailing vessel for 26 weeks during the year. The Company used the sailing vessel in its marketing efforts by sponsoring broker events. During the years ended December 31, 2003, 2002 and 2001, KSLLC paid TradeWind Navigation, Inc. approximately $94,000, $0.3 million and $0.3 million, under this agreement. This agreement was terminated in April 2003.

In July 2002, KAICO, a partnership owned by John B. Kilroy, Sr., the Chairman of the Company’s Board of Directors, John B. Kilroy, Jr. the Company’s President and Chief Executive Officer, and certain other Kilroy family members, received a $1.4 million net insurance payment for earthquake related damage to three buildings in an office complex the Company acquired from KAICO in a series of transactions from May 2000 through January 2001. In connection with the acquisition, KAICO and the Company agreed that KAICO would be entitled to retain all claims under policies of insurance in effect with respect to these properties, with the exception that KAICO transferred to the Company the rights to any claims under any insurance policy that related to the portion of the complex known as 909 Sepulveda Boulevard. Of the total $1.4 million payment, $1.2 million related to claims for 955 and 999 Sepulveda Boulevard and $0.2 million related to claims for 909 Sepulveda Boulevard. Based on the agreement between KAICO and the Company discussed above, the $0.2 million that related to 909 Sepulveda Boulevard was paid to a wholly-owned subsidiary of the Company in July 2002.

F-30

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

At December 31, 2002, other assets include a note receivable and accrued interest totaling approximately $0.2 million due from a Senior Vice President of the Company. The officer repaid the principal and interest balance in full in June 2003. The note, which was issued in November 2000, accrued interest at 8% and was secured by real property owned by the officer.

19.    Fair Value of Financial Instruments

The carrying amounts of the Company’s cash and cash equivalents, restricted cash and accounts payable approximate fair value due to their short-term maturities. The carrying amounts of the Company’s variable-rate secured debt and outstanding borrowings on the Credit Facility approximate fair value since the interest rates on these instruments are equivalent to rates currently offered to the Company (see Notes 10 and 11).

For fixed-rate secured debt, the Company estimates fair value by using discounted cash flow analyses based on borrowing rates for similar types of borrowing arrangements. The fair value of the Company’s fixed-rate secured debt was approximately $414 million and $359 million at December 31, 2003 and 2002, respectively. See Note 10 for further detail on the Company’s secured debt and Note 12 for the fair value of the Company’s derivative instruments.

20.    Lease Termination Fees

Peregrine Systems, Inc.

Under the terms of Peregrine’s plan of reorganization and in accordance with a settlement agreement approved by the bankruptcy court in July 2003, the Company received a payment in the third quarter of 2003 of approximately $18.3 million and is scheduled to receive four additional payments of approximately $750,000 each to be paid annually over the next four years resulting from Peregrine’s early termination of leases it had with the Company. In connection with the settlement agreement, the Company reduced its allowance for unbilled deferred rents by approximately $2.0 million for amounts specifically related to the terminated Peregrine leases, and reversed a $0.5 million reserve previously charged to general and administrative expenses for costs the Company paid for the fifth building that was to be leased to Peregrine (see Note 8). The Company then recorded a net lease termination fee of $18.0 million representing the $18.3 million payment received in the third quarter of 2003 plus the $2.6 million net present value of the payments to be received in the future, offset by $2.9 million of receivables and other costs and obligations associated with the leases. In addition, the Company increased its provision for bad debts by $2.6 million to reserve the portion of the lease termination fee that related to the future annual payments.

eToys, Inc.

In January 2001, one of the Company’s tenants, eToys, Inc. (“eToys”) defaulted on its lease and, thereafter, declared bankruptcy on March 7, 2001. Prior to the eToys’ bankruptcy filing, the Company drew $15.0 million under two letters of credit which were held as credit support under the terms of the lease and as security for the related tenant improvements and leasing commissions. In May 2001, the United States Bankruptcy Court for the District of Delaware approved a stipulation rejecting the eToys’ lease. The Company recorded a net lease termination fee of $5.4 million representing the $15.0 million of letter of credit proceeds offset by $9.6 million of accounts receivable and other costs and obligations associated with the lease.

In August 2002, EBC I, formerly known as eToys, filed a lawsuit in the Superior Court of the State of Californnia against the Company seeking return of the proceeds from two letters of credit previously drawn down by the Company. The tenant originally caused its lenders to deliver an aggregate of $15 million in letters of credit to secure its obligations under its lease with the Company and also to secure its obligations to repay the Company

F-31

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

for certain leasing and tenant improvement costs. eToys defaulted on its lease and other obligations to the Company in January 2001 and subsequently filed for bankruptcy in March 2001. Management strongly disagrees with the points outlined in the suit and is vigorously defending itself against the claim. However, if EBC I were to prevail in this action, it could have a material adverse effect upon the financial condition, results of operations and cash flows of the Company.

Other Significant Lease Termination Fees

In January 2003, the Company recognized a $4.3 million net lease termination fee resulting from the early termination of a lease at an office property in Sorrento Mesa, California, which encompasses approximately 68,000 rentable square feet. Subsequent to the termination of this lease, this property was moved to the Company’s redevelopment portfolio (see Note 4) since the Company is repositioning it for life science use.

21.    Segment Disclosure

The Company’s reportable segments consist of the two types of commercial real estate properties for which management internally evaluates operating performance and financial results: Office Properties and Industrial Properties. The Company also has certain corporate level activities including legal administration, accounting, finance, and management information systems which are not considered separate operating segments.

The Company evaluates the performance of its segments based upon net operating income. Net operating income is defined as operating revenues (rental income, tenant reimbursements and other property income) less property and related expenses (property expenses, real estate taxes, and ground leases) and excludes interest income and expense, depreciation and amortization, and corporate general and administrative expenses. The accounting policies of the reportable segments are the same as those described in the Company’s summary of significant accounting policies (see Note 2). There is no intersegment activity.

F-32

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following tables reconcile the Company’s segment activity to its consolidated results of operations and financial position as of and for the years ended December 31, 2003, 2002 and 2001.

	Year Ended December 31,
	2003			2002			2001
	(in thousands)
Revenues and Expenses:
Office Properties:
Operating revenues(1)	$	189,695		$	165,367		$	160,170
Property and related expenses		46,583			46,438			41,397
Net operating income, as defined		143,112			118,929			118,773
Industrial Properties:
Operating revenues(1)		38,091			38,804			42,182
Property and related expenses		5,948			7,028			6,906
Net operating income, as defined		32,143			31,776			35,276
Total Reportable Segments:
Operating revenues(1)		227,786			204,171			202,352
Property and related expenses		52,531			53,466			48,303
Net operating income, as defined		175,255			150,705			154,049
Reconciliation to Consolidated Net Income:
Total net operating income, as defined, for reportable segments		175,255			150,705			154,049
Other unallocated revenues:
Other income		196			513			1,030
Other unallocated expenses:
General and administrative expenses		19,140			12,557			11,692
Interest expense		33,385			35,380			41,024
Depreciation and amortization		56,237			58,797			50,429
Income from continuing operations		66,689			44,484			51,934
Net gain on dispositions of operating properties(2)					896			4,714
Minority interests		(21,016	)		(15,008	)		(21,192	)
Income from discontinued operations		3,939			9,940			4,367
Cumulative effect of change in accounting principle								(1,392	)
Net income		49,612			40,312			38,431
Preferred dividends		(349	)
Net income available to common shareholders	$	49,263		$	40,312		$	38,431

(1) All operating revenues are comprised of amounts received from third-party tenants.

(2) In accordance with SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” the net income and the net gain on disposition of properties sold subsequent to January 1, 2002 are reflected in the consolidated statement of operations as discontinued operations for all periods presented. The net gain on dispositions of operating properties for the year ended December 31, 2002 relates to the disposition of an office property the Company sold in the fourth quarter of 2001. This additional gain had previously been reserved for financial reporting purposes until certain litigation associated was resolved in the second quarter of 2002.

F-33

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	December 31,
	2003		2002
	(in thousands)
Assets:
Office Properties:
Land, buildings and improvements, net	$	1,062,425	$	1,081,971
Undeveloped land and construction in progress, net		131,411		108,465
Total assets(1)		1,262,587		1,242,437
Industrial Properties:
Land, buildings and improvements, net		211,079		217,279
Total assets(1)		220,701		229,245
Total Reportable Segments:
Land, buildings and improvements, net		1,273,504		1,299,250
Undeveloped land and construction in progress, net		131,411		108,465
Total assets(1)		1,483,288		1,471,682
Reconciliation to Consolidated Assets:
Total assets for reportable segments		1,483,288		1,471,682
Other unallocated assets:
Cash and cash equivalents		9,892		15,777
Restricted cash		8,558		6,814
Deferred financing costs, net		3,657		6,221
Prepaid expenses and other assets		7,240		6,108
Total consolidated assets	$	1,512,635	$	1,506,602

(1) Includes land, buildings and improvements, undeveloped land and construction in progress, current receivables, deferred rents receivable, and deferred leasing costs, all shown on a net basis.

	December 31,
	2003		2002
	(in thousands)
Capital Expenditures:(1)
Office Properties:
Expenditures for undeveloped land and construction in progress	$	56,433	$	117,600
Acquisition of operating properties				7,569
Recurring capital expenditures and tenant improvements		22,226		14,490
Industrial Properties:
Recurring capital expenditures and tenant improvements		740		1,120
Total Reportable Segments:
Expenditures for undeveloped land and construction in progress		56,433		117,600
Acquisition of operating properties				7,569
Recurring capital expenditures and tenant improvements		22,966		15,610

(1) Total consolidated capital expenditures are equal to the same amounts disclosed for total reportable segments.

F-34

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

22.    Discontinued Operations

In accordance with SFAS 144, the net income and the net gain on dispositions of operating properties sold subsequent to December 31, 2001 are reflected in the consolidated statement of operations as discontinued operations for all periods presented. For the years ended December 31, 2003, 2002 and 2001, discontinued operations related to the seven office buildings that the Company sold in 2003 (see Note 3). For the years ended December 31, 2002 and 2001, discontinued operations also related to the 12 industrial and five office buildings that the Company sold in 2002 (see Note 3). In connection with the disposition of one of the buildings sold in 2003 and one of the buildings sold in 2002 the Company repaid approximately $8.0 million and $4.1 million, respectively, in principal of a mortgage loan partially secured by these properties. The related interest expense was allocated to discontinued operations. The following table summarizes the income and expense components that comprise discontinued operations:

	Year Ended December 31,
	2003			2002			2001
	(in thousands)
REVENUES:
Rental income	$	1,718		$	8,517		$	9,258
Tenant reimbursements		207			1,170			1,246
Other property income		12			26			29
Total revenues		1,937			9,713			10,533
EXPENSES:
Property expenses		317			1,600			1,751
Real estate taxes		159			862			907
Provision for bad debts		13			101			127
Interest expense		82			354			655
Depreciation and amortization		465			1,989			2,215
Total expenses		1,036			4,906			5,655
Income from discontinued operations before net gain on dispositions of discontinued operations and minority interest		901			4,807			4,878
Net gain on dispositions of discontinued operations		3,642			6,570
Minority interest in earnings of Operating Partnership attributable to discontinued operations		(604	)		(1,437	)		(511	)
Total income from discontinued operations	$	3,939		$	9,940		$	4,367

The following table summarizes the total income from discontinued operations by the Company’s reportable segments:

	Year Ended December 31,
	2003		2002		2001
	(in thousands)
Reportable Segments:
Office Properties	$	3,939	$	5,510	$	3,019
Industrial Properties				4,430		1,348
Total income from discontinued operations	$	3,939	$	9,940	$	4,367

F-35

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

23.    Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the sum of the weighted-average number of common shares outstanding for the period plus the assumed exercise of all dilutive securities. The Company does not consider common limited partnership units of the Operating Partnership to be dilutive securities since the exchange of common limited partnership units into common stock is on a one for one basis and would not have any effect on diluted earnings per share. The following table reconciles the numerator and denominator of the basic and diluted per-share computations for net income for the years ended December 31, 2003, 2002 and 2001:

	Year Ended December 31,
	2003			2002		2001
	(in thousands, except share and per share amounts)
Numerator:
Net income from continuing operations before cumulative effect of change in accounting principle and preferred dividends	$	45,673		$	30,372	$	35,456
Discontinued operations		3,939			9,940		4,367
Preferred dividends		(349	)
Cumulative effect of change in accounting principle							(1,392	)
Net income available for common shareholders—numerator for basic and diluted earnings per share	$	49,263		$	40,312	$	38,431
Denominator:
Basic weighted average shares outstanding		27,526,684			27,449,676		27,167,006
Effect of dilutive securities—stock options and restricted shares		211,107			272,521		205,945
Diluted weighted average shares and common share equivalents outstanding		27,737,791			27,722,197		27,372,951
Basic earnings per share:
Net income from continuing operations before cumulative effect of change in accounting principle and preferred dividends	$	1.66		$	1.11	$	1.30
Discontinued operations		0.14			0.36		0.16
Preferred dividends		(0.01	)
Cumulative effect of change in accounting principle							(0.05	)
Net income available to common shareholders	$	1.79		$	1.47	$	1.41
Diluted earnings per share:
Net income from continuing operations before cumulative effect of change in accounting principle and preferred dividends	$	1.65		$	1.10	$	1.30
Discontinued operations		0.14			0.35		0.15
Preferred dividends		(0.01	)
Cumulative effect of change in accounting principle							(0.05	)
Net income available to common shareholders	$	1.78		$	1.45	$	1.40

At December 31, 2003, Company employees and directors held no options to purchase shares of the Company’s common stock that were antidilutive to the diluted earnings per share computation.

F-36

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

24.    Tax Treatment of Distributions

The following table reconciles the dividends declared per common share to the dividends paid per common share during the years ended December 31, 2003, 2002 and 2001 as follows:

	2003			2002			2001
Dividends declared per common share	$	1.980		$	1.980		$	1.920
Less: Dividends declared in the current year, and paid in the following year		(0.495	)		(0.495	)		(0.480	)
Add: Dividends declared in the prior year, and paid in the current year		0.495			0.480			0.450
Dividends paid per common share	$	1.980		$	1.965		$	1.890

The income tax treatment for distributions reportable for the years ended December 31, 2003, 2002, and 2001 as identified in the table above, was as follows:

	2003				2002				2001
Ordinary income	$	1.213	61.26	%	$	1.522	77.47	%	$	1.093	57.82	%
Return of capital		0.690	34.84			0.292	14.88			0.742	39.27
Capital gains(1)		0.041	2.07			0.070	3.56			0.029	1.52
Unrecaptured section 1250 capital gains		0.036	1.83			0.081	4.09			0.026	1.39
	$	1.980	100.00	%	$	1.965	100.00	%	$	1.890	100.00	%

(1) 2003 Capital Gains are comprised of approximately $0.014 in Qualified 5-Year Gains and approximately $0.027 in Post May 5th Capital Gain Distributions. 2002 and 2001 Capital Gains are comprised entirely of 20% Rate Gains.

25.    Quarterly Financial Information (Unaudited)

Summarized quarterly financial data for the years ended December 31, 2003 and 2002 was as follows:

	2003 Quarter Ended(1)
	March 31,		June 30,		September 30,			December 31,
	(in thousands, except per share amounts)
Revenues from continuing operations	$	53,932	$	49,638	$	70,011		$	54,205
Net Operating Income from continuing operations(2)		40,695		39,485		54,691			40,386
Income from continuing operations		10,496		9,850		20,043			5,287
Discontinued operations		433		3,510		(4	)
Preferred dividends									(349	)
Net income available for common shareholders		10,929		13,360		20,039			4,938
Net income per common share—basic	$	0.40	$	0.49	$	0.73		$	0.18
Net income per common share—diluted	$	0.40	$	0.49	$	0.72		$	0.18

(1) The summation of the quarterly financial data may not equal the annual number reported on the consolidated statement of operations due to rounding differences.

(2) See Note 21 for definition of Net Operating income.

F-37

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	2002 Quarter Ended(1)
	March 31,		June 30,		September 30,		December 31,
	(in thousands, except per share amounts)
Revenues from continuing operations	$	50,618	$	51,208	$	49,781	$	52,564
Net Operating Income from continuing operations(2)		38,475		37,159		37,002		38,069
Income from continuing operations		12,332		3,677		6,554		7,812
Discontinued operations		1,175		1,280		1,331		6,153
Net income available for common shareholders		13,507		4,957		7,885		13,965
Net income per common share—basic	$	0.50	$	0.18	$	0.29	$	0.51
Net income per common share—diluted	$	0.49	$	0.18	$	0.28	$	0.50

(1) The summation of the quarterly financial data may not equal the annual number reported on the consolidated statement of operations due to rounding differences.

(2) See Note 21 for definition of Net Operating income.

The quarterly financial information does not equal the amounts reported on the Company’s quarterly reports on Form 10Q due to the reclassification of the net income and net gains on the dispositions of operating properties sold subsequent to December 31, 2001 to discontinued operations, in accordance with SFAS 144 (see Note 22).

26.    Subsequent Events

On January 16, 2004, aggregate distributions of $16.0 million were paid to common stockholders and common unitholders of record on December 31, 2003.

On February 10, 2004, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.495 per common share payable on April 16, 2004 to shareholders of record on March 31, 2004.

On February 10, 2004, the Company’s Board of Directors also declared a dividend of $0.4875 per share on the Company’s Series E Preferred Stock payable on May 14, 2004 to preferred stockholders of record on May 1, 2004.

On February 17, 2004, aggregate distributions of $0.7 million were paid to preferred stockholders of record on February 1, 2004 for the period commencing on and including November 21, 2003 and ending on and including February 14, 2004.

On February 17, 2004, aggregate distributions of $2.6 million were paid to the Series A and Series D Preferred unitholders.

In February 2004, the Company borrowed $81 million under a mortgage loan that is secured by four office properties in a five-building complex and requires interest-only payments based on a variable annual interest rate of LIBOR plus 1.75% through July 2004. Beginning in August 2004 through August 2012, the scheduled maturity date, the loan requires monthly principal and interest payments based on a fixed annual interest rate of 5.57%. The Company used a portion of the proceeds to repay an outstanding mortgage loan with a principal balance of $20.3 million that was scheduled to mature in June of 2004. The remainder of the proceeds was used primarily to repay borrowings under the Credit Facility. The Company has also received a commitment from a financial institution for a $34 million mortgage loan that will be secured by the fifth building in the complex. The loan will be co-terminus with and have similar terms as the new $81 million loan with a final fixed annual interest rate of 4.95%. The closing of this loan is subject to customary conditions and is expected to occur in the first quarter of 2004. The Company intends to use the proceeds to repay borrowings under the Credit Facility.

On March 5, 2004, the Company amended the terms of its Series A Preferred Units to reduce the distribution rate and extend the optional redemption date to September 30, 2009. Commencing March 5, 2004, distributions on the Series A Preferred Units will accrue at a rate of 7.45% per annum.

F-38

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

27.    Schedule of Rental Property

	December 31, 2003
	Initial Cost							Costs Capitalized Subsequent to Acquisition/ Improvement		Gross Amounts at Which Carried at Close of Period						Accumulated Depreciation		Date of Acquisition(A)/ Construction(C)(1)		Net Rentable Square Feet
Property Location	Encumbrances			Land		Buildings and Improvements				Land		Building		Total
	(dollars in thousands)
Office Properties:
Kilroy Airport Center, El Segundo El Segundo, California	$	74,819	(3)	$	6,141	$	69,195	$	28,503	$	6,141	$	97,698	$	103,839	$	63,632	1983	(C)	706,302
Kilroy Airport Center, Phase I— Long Beach, California									25,573				25,573		25,573		5,296	1997	(A)	225,083
Kilroy Airport Center, Phase II— Long Beach, California							47,387		11,928				59,315		59,315		31,456	1989	(C)	395,613
La Palma Business Center 4175 E. La Palma Avenue Anaheim, California		(3	)		1,518		2,612		748		1,518		3,360		4,878		787	1997	(A)	43,228
2829 Townsgate Road Thousand Oaks, California		(3	)		5,248		8,001		1,307		5,248		9,308		14,556		2,300	1997	(A)	81,158
181/185 S. Douglas Street El Segundo, California		(3	)		525		4,687		3,973		628		8,557		9,185		4,786	1978	(C)	62,150
SeaTac Office Center Seattle, Washington							25,993		20,767				46,760		46,760		34,025	1977	(C)	532,430
2100 Colorado Avenue Santa Monica, California		86,811	(4)		5,474		26,087		474		5,476		26,559		32,035		4,945	1997	(A)	94,844
5151-5155 Camino Ruiz Camarillo, California					4,501		19,710		1,957		4,501		21,667		26,168		4,286	1997	(A)	265,372
111 Pacifica Irvine, California		(4	)		5,165		4,653		1,460		5,166		6,112		11,278		1,394	1997	(A)	67,381
2501 Pullman/1700 Carnegie Santa Ana, California					6,588		9,211		4,913		7,127		13,585		20,712		1,584	1997	(A)	129,766
26541 Agoura Road Calabasas, California					1,979		9,630		2,331		1,979		11,961		13,940		4,176	1997	(A)	90,878
9451 Toledo Way Irvine, California							869		1,201				2,070		2,070		938	1997	(A)	27,200
1633 26th Street Santa Monica, California					2,080		6,672		1,468		2,040		8,180		10,220		2,154	1997	(A)	44,915
12400 High Bluff San Diego, California		43,582	(5)		15,167		40,497				15,167		40,497		55,664		356	2003	(A)	208,961
601 Valencia Avenue Brea, California					3,518		2,900		129		3,519		3,028		6,547		617	1997	(A)	60,891
3750 University Avenue Riverside, California					2,909		19,372		877		2,912		20,246		23,158		3,936	1997	(A)	124,986
6215/6220 Greenwich Drive San Diego, California		19,114	(6)		4,796		15,863		8,225		5,148		23,736		28,884		5,125	1997	(A)	212,214
6055 Lusk Avenue San Diego, California		79,640	(7)		3,935		8,008		21		3,942		8,022		11,964		1,413	1997	(A)	93,000
6260 Sequence Drive San Diego, California		(7	)		3,206		9,803		23		3,212		9,820		13,032		1,730	1997	(A)	130,000
6290 Sequence Drive San Diego, California		(7	)		2,403		7,349		17		2,407		7,362		9,769		1,297	1997	(A)	90,000
8101 Kaiser Blvd Anaheim, California					2,369		6,180		400		2,377		6,572		8,949		1,299	1997	(A)	60,177
3130 Wilshire Blvd. Santa Monica, California					8,921		6,579		5,146		9,188		11,458		20,646		3,011	1997	(A)	88,338

F-39

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	December 31, 2003
	Initial Cost						Costs Capitalized Subsequent to Acquisition/ Improvement			Gross Amounts at Which Carried at Close of Period						Accumulated Depreciation		Date of Acquisition(A)/ Construction(C)(1)		Net Rentable Square Feet
Property Location	Encumbrances		Land		Buildings and Improvements					Land		Building		Total
	(dollars in thousands)
12312 W. Olympic Blvd. Los Angeles, California			$	3,325	$	12,202	$	576		$	3,399	$	12,704	$	16,103	$	2,272	1997	(A)	78,000
525 N. Brand Blvd. Glendale, California				1,360		8,771		1,656			1,373		10,414		11,787		1,634	1997	(A)	43,647
Kilroy Airport Long Beach— Phase IV(2) Long Beach, California								2,088					2,088		2,088		1,568
501 Santa Monica Blvd. Santa Monica, California	(4	)		4,547		12,044		1,965			4,551		14,005		18,556		2,735	1998	(A)	70,045
6340/6350 Sequence Drive San Diego, California	(4	)		7,375		22,126		2,402			7,386		24,517		31,903		4,877	1998	(A)	199,000
15378 Avenue of Science San Diego, California	(7	)		3,565		3,796		1,569			3,565		5,365		8,930		825	1998	(A)	68,910
Pacific Corporate Center San Diego, California	(4	)		14,979		39,634		9,323			14,978		48,958		63,936		8,500	1998	(A)	411,339
9455 Towne Center Drive San Diego, California	(7	)				3,936		3,143			3,118		3,961		7,079		810	1998	(A)	45,195
12225/12235 El Camino Real San Diego, California	(7	)		3,207		18,176		71			3,213		18,241		21,454		2,734	1998	(A)	115,513
12348 High Bluff Drive San Diego, California	(7	)		1,629		3,096		2,019			1,629		5,115		6,744		1,784	1999	(C)	40,274
4690 Executive Drive San Diego, California	(7	)		1,623		7,926		455			1,623		8,381		10,004		1,392	1999	(A)	50,929
9785/9791 Towne Center Drive San Diego, California	(7	)		4,536		16,554		46			4,546		16,590		21,136		2,251	1999	(A)	126,000
5005/5010 Wateridge Vista Drive San Diego, California	20,253	(8)		7,106		15,816		4,974			9,334		18,562		27,896		2,635	1999	(C)	172,778
3579 Valley Center Drive San Diego, California				2,167		6,897		2,892			2,858		9,098		11,956		968	1999	(C)	52,375
Kilroy Airport Center—Phase III Long Beach, California						49,654		4,217					53,871		53,871		11,036	1999/2000	(C)	328,502
12390 El Camino Real San Diego, California	31,000	(9)		3,453		11,981		1,359			3,453		13,340		16,793		2,041	2000	(C)	72,332
6310 Sequence Drive San Diego, California	(4	)		2,941		4,946		(7	)		2,941		4,939		7,880		820	2000	(C)	62,415
15435/15445 Innovation Drive San Diego, California	10,974	(10)		4,286		12,622		13			4,286		12,635		16,921		3,659	2000	(C)	103,000
24025 Park Sorrento Calabasas, California	25,555	(11)		845		15,896		414			845		16,310		17,155		2,833	2000	(C)	100,592
12200 W. Olympic Blvd. Los Angeles, California				4,329		35,488		7,410			3,977		43,250		47,227		5,544	2000	(C)	151,019
3611 Valley Centre Drive San Diego, California				4,184		19,352		5,871			5,259		24,148		29,407		2,414	2000	(C)	129,680
3811 Valley Centre Drive San Diego, California				3,452		16,152		4,538			4,457		19,685		24,142		1,990	2000	(C)	112,563
4955 Directors Place San Diego, California	17,747	(12)		2,521		14,122		2,326			3,227		15,742		18,969		1,995	2000	(C)	76,246
10390 Pacific Center San Diego, California				3,267		5,779		7,734			3,267		13,513		16,780		582	2001	(C)	68,400

F-40

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	December 31, 2003
	Initial Cost							Costs Capitalized Subsequent to Acquisition/ Improvement			Gross Amounts at Which Carried at Close of Period						Accumulated Depreciation		Date of Acquisition(A)/ Construction(C)(1)		Net Rentable Square Feet
Property Location	Encumbrances			Land		Buildings and Improvements					Land		Building		Total
	(dollars in thousands)
5717 Pacific Center San Diego California				$	2,693	$	6,280	$	(8,973	)							$	385	2001	(C)	67,995
23975 Park Sorrento Calabasas, California			(11)		765		17,720		2,349			765		20,069		20,834		2,371	2001	(C)	100,592
23925 Park Sorrento San Diego, California			(11)		50		2,346		172			50		2,518		2,568		250	2001	(C)	11,789
909 N. Sepulveda Blvd. El Segundo, California					3,576		34,042		(37,618	)								1,988	2001	(A)	251,842
15051 Avenue of Science San Diego, California					2,888		5,780		5,552			2,888		11,332		14,220		892	2001	(C)	70,617
15073 Avenue of Science San Diego, California					2,070		5,728		1,483			2,070		7,211		9,281		958	2001	(C)	46,759
3661 Valley Centre Drive San Diego, California					4,038		21,144		5,727			4,725		26,184		30,909		2,150	2001	(C)	129,752
10243 Genetic Center Drive San Diego, California			(9)		4,632		19,549		(27	)		4,632		19,522		24,154		1,920	2001	(C)	102,875
12100 W. Olympic Blvd. Los Angeles, California					352		45,611		6,437			9,633		42,767		52,400		1,210	2002	(C)	151,000
4939 Directors Place San Diego, California			(12)		2,225		12,698		807			2,198		13,531		15,730		744	2002	(C)	60,662
12340 El Camino Real San Diego, California					4,201		13,896		3,465			4,201		17,361		21,562		767	2002	(C)	89,168
3721 Valley Centre Blvd. San Diego, California					4,297		18,967		4,760			4,254		23,770		28,024		498	2002	(C)	114,780
999 N. Sepulveda Blvd. El Segundo, California					1,407		34,326		2,319			1,407		36,646		38,052		594	2002	(C)	133,678
TOTAL OFFICE PROPERTIES	$	409,495		$	204,334	$	946,311	$	174,948		$	217,804	$	1,107,789	$	1,325,593	$	263,169			7,844,985
Industrial Properties:
2031 E. Mariposa Avenue El Segundo, California			(3)	$	132	$	867	$	2,698		$	132	$	3,565	$	3,697	$	3,541	1954	(C)	192,053
3340 E. La Palma Avenue Anaheim, California			(3)		67		1,521		4,942			67		6,463		6,530		4,554	1966	(C)	153,320
2260 E. El Segundo Blvd. El Segundo, California			(3)		1,423		4,194		2,136			1,703		6,050		7,753		4,033	1979	(C)	113,820
2265 E. El Segundo Blvd. El Segundo, California			(3)		1,352		2,028		651			1,571		2,460		4,031		1,923	1978	(C)	76,570
1000 E. Ball Road Anaheim, California			(3)		838		1,984		921			838		2,905		3,743		2,548	1956  1974	(C) (A)	100,000
1230 S. Lewis Road Anaheim, California			(3)		395		1,489		2,058			395		3,547		3,942		2,936	1982	(C)	57,730
12681/12691 Pala Drive Garden Grove, California			(3)		471		2,115		2,689			471		4,804		5,275		4,275	1980	(A)	84,700
2270 E. El Segundo Blvd. El Segundo, California					361		100		156			419		198		617		126	1977	(C)	6,362
5115 N. 27th Avenue Phoenix, Arizona					125		1,206		843			125		2,049		2,174		1,336	1962	(C)	130,877
12752/12822 Monarch Street Garden Grove, California			(3)		3,975		5,238		587			3,975		5,825		9,800		1,329	1997	(A)	277,037
4155 E. La Palma Avenue Anaheim, California			(3)		1,148		2,681		385			1,148		3,066		4,214		706	1997	(A)	74,618
4125 E. La Palma Avenue Anaheim, California			(3)		1,690		2,604		14			1,690		2,618		4,308		554	1997	(A)	70,862
Brea Industrial Complex Brea, California		29,000	(13)		1,263		13,927		247			1,263		14,174		15,437		2,788	1997	(A)	276,278

F-41

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	December 31, 2003
	Initial Cost							Costs Capitalized Subsequent to Acquisition/ Improvement			Gross Amounts at Which Carried at Close of Period						Accumulated Depreciation		Date of Acquisition(A)/ Construction(C)(1)		Net Rentable Square Feet
Property Location	Encumbrances			Land		Buildings and Improvements					Land		Building		Total
	(dollars in thousands)
Garden Grove Industrial Complex Garden Grove, California				$	1,868	$	11,894	$	482		$	1,868	$	12,376	$	14,244	$	2,520	1997	(A)	275,971
17150 Von Karman Irvine, California			(13)		4,848		7,342		72			4,848		7,414		12,262		1,432	1997	(A)	157,458
7421 Orangewood Avenue Garden Grove, California			(3)		612		3,967		1,668			612		5,635		6,247		858	1997	(A)	82,602
5325 East Hunter Avenue Anaheim, California		4,823	(15)		1,728		3,555					1,728		3,555		5,283		677	1997	(A)	109,449
9401 Toledo Way Irvine, California					8,572		7,818		(2,331	)		5,665		8,394		14,059		1,484	1997	(A)	244,800
12400 Industry Street Garden Grove, California					943		2,110		35			943		2,145		3,088		423	1997	(A)	64,200
2055 S.E. Main Street Irvine, California					772		2,343		148			772		2,491		3,263		480	1997	(A)	47,583
14831 Franklin Avenue Tustin, California					1,112		1,065		271			1,113		1,335		2,448		367	1997	(A)	36,256
1675 MacArthur Costa Mesa, California			(15)		2,076		2,114		153			2,076		2,267		4,343		383	1997	(A)	50,842
3130/3150 Miraloma Anaheim, California		78,377	(15)		3,335		3,727		(11	)		3,335		3,716		7,051		674	1997	(A)	144,000
3125 E. Coronado Street Anaheim, California			(15)		3,669		4,341		245			3,669		4,586		8,255		806	1997	(A)	144,000
1951 E. Carnegie Santa Ana, California					1,830		3,630		1,381			1,844		4,997		6,841		1,043	1997	(A)	100,000
5115 E. La Palma Avenue Anaheim, California			(15)		2,462		6,675		4,502			2,464		11,175		13,639		2,140	1997	(A)	286,139
3735 Imperial Highway Stockton, California		4,353	(14)		764		10,747		18			764		10,765		11,529		1,897	1997	(A)	164,540
1250 N. Tustin Avenue Anaheim, California			(13)		2,098		4,158		200			2,098		4,358		6,456		673	1998	(A)	84,185
2911 Dow Avenue Tustin, California					1,124		2,408		519			1,124		2,927		4,051		428	1998	(A)	51,410
25202 Towne Center Drive Foothill Ranch, California			(15)		3,334		8,243		4,731			4,949		11,359		16,308		3,161	1998	(C)	303,533
3250 E. Carpenter Avenue Anaheim, California			(3)						2,289					2,289		2,289		504	1998	(C)	41,225
925 / 1075 Lambert Road Brea, California			(15)		3,326		7,020		1,754			3,326		8,774		12,100		2,145	2000	(C)	178,811
Anaheim Technology Center Anaheim, California			(15)		10,648		20,221		4,705			10,648		24,926		35,574		5,257	2000	(C)	593,992
2525 Pullman Anaheim, California					4,283		3,276		872			4,283		4,148		8,431		202	2002	(A)	103,380
TOTAL INDUSTRIAL PROPERTIES	$	116,553		$	72,644	$	156,608	$	40,030		$	71,926	$	197,356	$	269,282	$	58,203			4,878,603
TOTAL ALL PROPERTIES	$	526,048		$	276,978	$	1,102,919	$	214,978		$	289,730	$	1,305,145	$	1,594,875	$	321,372			12,723,588

(1) Represents date of construction or acquisition by the Company, or the Company’s Predecessor, the Kilroy Group.

(2) These costs represent infrastructure costs incurred in 1989.

(3) These properties secure a $74.8 million mortgage note.

(4) These properties secure a $86.8 million mortgage note.

(5) These properties secure a $43.6 million mortgage note.

(6) These properties secure a $12.3 million and a $6.3 million mortgage note.

F-42

KILROY REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(7) These properties secure a $79.6 million mortgage note.

(8) These properties secure a $20.3 million mortgage note, which was subsequently paid off in February 2004.

(9) These properties secure a $31.0 million mortgage note.

(10) These properties secure a $11.0 million mortgage note.

(11) These properties secure a $25.6 million mortgage note.

(12) These properties secure a $17.7 million mortgage note.

(13) These properties secure a $29.0 million mortgage note.

(14) These properties secure a $4.4 million mortgage note.

(15) These properties secure a $4.8 million and a $78.4 million mortgage note.

The aggregate gross cost of property included above for federal income tax purposes, approximated $1.6 billion as of December 31, 2003.

The following table reconciles the historical cost of the total investment in real estate, net from January 1, 2001 to December 31, 2003:

	Year Ended December 31,
	2003		2002			2001
	(in thousands)
Land, building and improvements, beginning of year	$	1,577,753	$	1,409,865		$	1,321,439
Net additions during period—Acquisition, improvements, etc. (net of dispositions)		17,122		167,888			88,426
Land, building and improvements, end of year		1,594,875		1,577,753			1,409,865
Undeveloped land and construction in progress, net, beginning of year		108,465		191,129			162,633
Change in undeveloped land and construction in progress, net		22,946		(82,664	)		28,496
Undeveloped land and construction in progress, net, end of year		131,411		108,465			191,129
Total investment in real estate, net, end of year	$	1,726,286	$	1,686,218		$	1,600,994

The following table reconciles the accumulated depreciation from January 1, 2001 to December 31, 2003:

	Year Ended December 31,
	2003		2002		2001
	(in thousands)
Beginning of year	$	278,503	$	241,665	$	205,332
Net additions during the period		42,869		36,838		36,333
End of year	$	321,372	$	278,503	$	241,665

F-43

KILROY REALTY CORPORATION

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

Year ended December 31, 2003, 2002 and 2001

(in thousands)

	Balance at Beginning of Period		Charged to Costs and Expenses or Rental Revenue			Deductions			Balance at End of Period
Allowance for Uncollectible Tenant Receivables
Year Ended December 31, 2003—Allowance for uncollectible tenant receivables	$	4,499	$	2,096		$	(223	)	$	6,372
Year Ended December 31, 2002—Allowance for uncollectible tenant receivables	$	2,835	$	2,233		$	(569	)	$	4,499
Year Ended December 31, 2001—Allowance for uncollectible tenant receivables	$	1,617	$	2,356		$	(1,138	)	$	2,835
Allowance for Unbilled Deferred Rent
Year Ended December 31, 2003—Allowance for unbilled deferred rent	$	5,987	$	(320	)	$	—		$	5,667
Year Ended December 31, 2002—Allowance for unbilled deferred rent	$	3,452	$	4,683		$	(2,148	)	$	5,987
Year Ended December 31, 2001—Allowance for unbilled deferred rent	$	2,000	$	1,485		$	(33	)	$	3,452

F-44

EXHIBIT INDEX

Exhibit Number	Description
3(i).1	Articles of Amendment and Restatement of the Registrant (1)
3(i).2	Form of Certificate for Common Stock of the Registrant (1)
3(i).3*	Articles Supplementary of the Registrant designating its 7.45% Series A Cumulative Redeemable Preferred Stock
3(i).4	Articles Supplementary of the Registrant designating its Series B Junior Participating Preferred Stock (3)
3(i).5	Articles Supplementary of the Registrant designating its 9.250% Series D Cumulative Redeemable Preferred Stock (5)(6)
3(i).6	Articles Supplementary of the Registrant designating an additional 120,000 shares of its 9.250% Series D Cumulative Redeemable Preferred Stock (6)
3(i).7	Articles Supplementary of the Registrant designating its 7.80% Series E Cumulative Redeemable Preferred Stock (7)
3(ii).1	Amended and Restated Bylaws of the Registrant (1)
4.1	Registration Rights Agreement dated January 31, 1997(1)
4.2	Registration Rights Agreement dated February 6, 1998 (2)
4.3*	Second Amended and Restated Registration Rights Agreement dated as of March 5, 2004
4.4	Registration Rights Agreement dated November 24, 1998 (4)
4.5	Registration Rights Agreement dated as of October 31, 1997 (8)
4.6	Rights Agreement dated as of October 2, 1998 between Kilroy Realty Corporation and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, which includes the form of Articles Supplementary of the Series B Junior Participating Preferred Stock of Kilroy Realty Corporation as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C (9)
4.7	Registration Rights Agreement dated as of December 9, 1999 (5)
4.8	First Amendment to Registration Rights Agreement of December 9, 1999 dated as of December 30, 1999 (6)
4.9	Registration Rights Agreement dated as of October 6, 2000 (10)
4.10	The Company is party to agreements in connection with long-term debt obligations, none of which individually exceeds ten percent of the total assets of the Company on a consolidated basis. Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Company agrees to furnish copies of these agreements to the Commission upon request
10.1*	Fifth Amended and Restated Agreement of Limited Partnership of Kilroy Realty, L.P. dated as of March 5, 2004
10.2	Omnibus Agreement dated as of October 30, 1996 by and among Kilroy Realty, L.P. and the parties named therein (1)
10.3	Supplemental Representations, Warranties and Indemnity Agreement by and among Kilroy Realty, L.P. and the parties named therein (1)
10.4	Pledge Agreement by and among Kilroy Realty, L.P., John B. Kilroy, Sr., John B. Kilroy, Jr. and Kilroy Industries (1)
10.5†	1997 Stock Option and Incentive Plan of the Registrant and Kilroy Realty, L.P. (1)
10.6	Form of Indemnity Agreement of the Registrant and Kilroy Realty, L.P. with certain officers and directors (1)

Exhibit Number	Description
10.7	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 (11)
10.8	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 (11)
10.9	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 (12)
10.10	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 (12)
10.11	Lease Agreement dated December 30, 1988 by and between Kilroy Long Beach Associates and the City of Long Beach for Kilroy Long Beach Phase II (12)
10.12	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 (12)
10.13	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 (12)
10.14	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 (12)
10.15	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 (12)
10.16	Development Agreement by and between Kilroy Long Beach Associates and the City of Long Beach (12)
10.17	Amendment No. 1 to Development Agreement by and between Kilroy Long Beach Associates and the City of Long Beach (12)
10.18	Ground Lease by and between Frederick Boysen and Ted Boysen and Kilroy Industries dated May 15, 1969 for SeaTac Office Center (11)
10.19	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 (11)
10.20	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 (11)
10.21	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 (11)
10.22	Memorandum of Lease dated April 1, 1980 by and among Bow Lake, Inc., as lessor, and Kilroy Industries and Sea/Tac Properties, Ltd., as lessees for Sea/Tac Office Center (11)
10.23	Amendment No. 1 to Ground Lease dated September 17, 1990 between Bow Lake, Inc., as lessor, and Sea/Tac Properties, Ltd., as lessee (11)
10.24	Amendment No. 2 to Ground Lease dated March 21, 1991 between Bow Lake, Inc., as lessor, and Sea/Tac Properties, Ltd., as lessee (11)
10.25	Property Management Agreement between Kilroy Realty Finance Partnership, L.P. and Kilroy Realty, L.P. (13)
10.26	Form of Environmental Indemnity Agreement (13)
10.27	Option Agreement by and between Kilroy Realty, L.P. and Kilroy Airport Imperial Co. (14)
10.28	Option Agreement by and between Kilroy Realty, L.P. and Kilroy Calabasas Associates (14)
10.29†	Employment Agreement between the Registrant and John B. Kilroy, Jr. (14)
10.30†	Amended and Restated Employment Agreement between the Registrant and Richard E. Moran Jr. (14)

Exhibit Number	Description
10.31†	Employment Agreement between the Registrant and Jeffrey C. Hawken (15)
10.32†	Employment Agreement between the Registrant and C. Hugh Greenup (14)
10.33†	Noncompetition Agreement by and between the Registrant and John B. Kilroy, Sr. (1)
10.34†	Noncompetition Agreement by and between the Registrant and John B. Kilroy, Jr. (1)
10.35	License Agreement by and among the Registrant and the other persons named therein (14)
10.36	Mortgage Note (14)
10.37	Indemnity Agreement (14)
10.38	Form of Assignment of Leases, Rents and Security Deposits (14)
10.39	Variable Interest Rate Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of leases and Rents (14)
10.40	Form of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Leases and Rents (14)
10.41	Purchase and Sale Agreement and Joint Escrow Instructions dated April 30, 1997 by and between Mission Land Company, Mission-Vacaville, L.P. and Kilroy Realty, L.P. (15)
10.42	Agreement of Purchase and Sale and Joint Escrow Instructions dated April 30, 1997 by and between Camarillo Partners and Kilroy Realty, L.P. (15)
10.43	Purchase and Sale Agreement and Escrow Instructions dated May 5, 1997 by and between Kilroy Realty L.P. and Pullman Carnegie Associates (16)
10.44	Amendment to Purchase and Sale Agreement and Escrow Instructions dated June 27, 1997 by and between Pullman Carnegie Associates and Kilroy Realty, L.P. (17)
10.45	Purchase and Sale Agreement, Contribution Agreement and Joint Escrow Instructions dated May 12, 1997 by and between Shidler West Acquisition Company, LLC and Kilroy Realty, L.P. (17)
10.46	First Amendment to Purchase and Sale Agreement, Contribution Agreement and Joint Escrow Instructions dated June 6, 1997 by and between Shidler West Acquisition Company, L.L.C. and Kilroy Realty, L.P. (17)
10.47	Second Amendment to Purchase and Sale Agreement, Contribution Agreement and Joint Escrow Instructions dated June 12, 1997 by and between Shidler West Acquisition Company, LLC and Kilroy Realty, L.P. (17)
10.48	Agreement of Purchase and Sale and Joint Escrow Instructions dated June 12, 1997 by and between Mazda Motor of America, Inc. and Kilroy Realty, L.P. (16)
10.49	First Amendment to Agreement of Purchase and Sale and Joint Escrow Instructions dated June 30, 1997 by and between Mazda Motor of America, Inc. and Kilroy Realty, L.P. (16)
10.50	Agreement for Purchase and Sale of 2100 Colorado Avenue, Santa Monica, California dated June 16, 1997 by and between Santa Monica Number Seven Associates L.P. and Kilroy Realty, L.P. (16)
10.51	Purchase and Sale Agreement and Joint Escrow Instructions dated July 10, 1997 by and between Kilroy Realty, L.P. and Mission Square Partners (18)
10.52	First Amendment to Purchase and Sale Agreement and Joint Escrow Instructions dated July 10, 1997 by and between Kilroy Realty, L.P. and Mission Square Partners dated August 22, 1997 (18)
10.53	Second Amendment to the Purchase and Sale Agreement and Joint Escrow Instructions dated July 10, 1997 by and between Kilroy Realty, L.P. and Mission Square Partners dated September 5, 1997 (18)
10.54	Third Amendment to the Purchase and Sale Agreement and Joint Escrow Instructions dated July 10, 1997 by and between Kilroy Realty, L.P. and Mission Square Partners dated September 19, 1997 (18)

Exhibit Number	Description
10.55	Fourth Amendment to the Purchase and Sale Agreement and Joint Escrow Instructions dated July 10, 1997 by and between Kilroy Realty, L.P. and Mission Square Partners dated September 22, 1997 (18)
10.56	Fifth Amendment to the Purchase and Sale Agreement and Joint Escrow Instructions dated July 10, 1997 by and between Kilroy Realty, L.P. and Mission Square Partners dated September 23, 1997 (18)
10.57	Sixth Amendment to the Purchase and Sale Agreement and Joint Escrow Instructions dated July 10, 1998 by and between Kilroy Realty, L.P. and Mission Square Partners dated September 25, 1997 (18)
10.58	Seventh Amendment to the Purchase and Sale Agreement and Joint Escrow Instructions dated July 10, 1997 by and between Kilroy Realty, L.P. and Mission Square Partners dated September 29, 1997 (18)
10.59	Eighth Amendment to the Purchase and Sale Agreement and Joint Escrow Instructions dated July 10, 1997 by and between Kilroy Realty, L.P. and Mission Square Partners dated October 2, 1997 (18)
10.60	Ninth Amendment to the Purchase and Sale Agreement and Joint Escrow Instructions dated July 10, 1997 by and between Kilroy Realty, L.P. and Mission Square Partners dated October 24, 1997 (18)
10.61	Contribution Agreement dated October 21, 1997 by and between Kilroy Realty, L.P. and Kilroy Realty Corporation and The Allen Group and the Allens (19)
10.62	Purchase and Sale Agreement and Escrow Instructions dated December 11, 1997 by and between Kilroy Realty, L.P. and Swede-Cal Properties, Inc., Viking Investors of Southern California and Viking Investors of Southern California II (20)
10.63	Amendment to the Contribution Agreement dated October 14, 1998 by and between Kilroy Realty, L.P. and Kilroy Realty Corporation and The Allen Group and the Allens dated October 21, 1997 (21)
10.64	Second Amended and Restated Guaranty of Payment (22)
10.65	Credit Agreement and Form of Promissory notes Aggregating $90.0 million (22)
10.66	Variable Interest Rate Deed of Trust, Leasehold Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing (22)
10.67	Guaranty of Recourse Obligations of Borrower (22)
10.68†	Employment Agreement between the Registrant and Tyler H. Rose (23)
10.69	Secured Promissory Notes and Deeds of Trusts Aggregating $80.0 Million Payable to Metropolitan Life Insurance Company dated January 10, 2002 (23)
10.70	Third Amended and Restated Revolving Credit Agreement and Form of Notes Aggregating $425 million (24)
10.71	Third Amended and Restated Guaranty of Payment (24)
21.1*	List of Subsidiaries of the Registrant
23.1*	Consent of Deloitte & Touche LLP
24.1*	Power of Attorney (included in the signature page of this Form 10-K)
31.1*	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2*	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1*	Section 1350 Certification of Chief Executive Officer
32.2*	Section 1350 Certification of Chief Financial Officer

 * Filed herewith

 † Management contract or compensatory plan or arrangement.

(1) Previously filed as an exhibit to the Registration Statement on Amendment No. 3 to Form S-11 (No. 333-15553).

(2) Previously filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on February 11, 1998.

(3) Previously filed as an exhibit to the Registration Statement on Amendment No. 1 to Form S-3 (No. 333-72229).

(4) Previously filed an exhibit on Form 8-K as filed with the Securities and Exchange Commission on December 11, 1998.

(5) Previously filed as an exhibit on Form 10-K for the year ended December 31, 1999.

(6) Previously filed as an exhibit to the Registration Statement on Form S-3 (No. 333-34638).

(7) Previously filed an exhibit on Form 8-A as filed with the Securities and Exchange Commission on October 24, 2003.

(8) Previously filed as an exhibit on Form 8-K/A as filed with the Securities and Exchange Commission on December 19, 1997.

(9) Previously filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on October 8, 1998.

(10) Previously filed as an exhibit on Form 10-K for the year ended December 31, 2000.

(11) Previously filed as an exhibit to the Registration Statement on Amendment No. 2 to Form S-11 (No. 333-15553).

(12) Previously filed as an exhibit to the Registration Statement on Form S-11 (No. 333-15553).

(13) Previously filed as an exhibit to the Registration Statement on Amendment No. 5 to Form S-11 (No. 333-15553).

(14) Previously filed as an exhibit to the Registration Statement on Amendment No. 4 to Form S-11 (No. 333-15553).

(15) Previously filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on June 6, 1997.

(16) Previously filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on July 15, 1997.

(17) Previously filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on July 3, 1997.

(18) Previously filed as an exhibit on Form 10-Q for the quarter ended September 30, 1997.

(19) Previously filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on November 21, 1997.

(20) Previously filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on December 29, 1997.

(21) Previously filed as an exhibit on Form 10-Q for the quarter ended September 30, 1998.

(22) Previously filed as an exhibit on Form 10-Q for the quarter ended September 30, 1999.

(23) Previously filed as an exhibit on Form 10-K for the year ended December 31, 2001.

(24) Previously filed as an exhibit on Form 10-Q for the quarter ended March 31, 2002.

EX-3.I.3

Exhibit 3(i).3

KILROY REALTY CORPORATION

ARTICLES SUPPLEMENTARY

1,500,000 SHARES

7.45% SERIES A CUMULATIVE REDEEMABLE PREFERRED STOCK

Kilroy Realty Corporation, a Maryland corporation (the “Company”), hereby certifies to the State Department of Assessments and Taxation of Maryland that:

FIRST: By or as contemplated by Articles Supplementary filed with the State Department of Assessments and Taxation of Maryland (the “Department”) on February 6, 1998 (the “February 6, 1998 Articles Supplementary”), the Corporation classified 1,500,000 shares of its authorized but unissued Preferred Stock, par value $.01 per share (“Preferred Stock”), as a separate class of Preferred Stock designated as “8.075% Series A Cumulative Redeemable Preferred Stock”, and set the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, terms and conditions of redemption and other terms and conditions of such shares, all as set forth in the February 6, 1998 Articles Supplementary. By or as contemplated by Articles Supplementary filed with the Department on April 20, 1998 (the “April 20, 1998 Articles Supplementary”, and together with the February 6, 1998 Articles Supplementary, the “Prior Articles Supplementary”), the Corporation classified an additional 200,000 shares of its authorized but unissued Preferred Stock as “8.075% Series A Cumulative Redeemable Preferred Stock, having the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, terms and conditions of redemption and other terms and conditions, identical to those as set forth in the February 6, 1998 Articles Supplementary. Correspondingly, and pursuant to or as contemplated by the Prior Articles Supplementary, there were classified as a separate class of Preferred Stock an aggregate of 1,700,000 shares designated as “8.075% Series A Cumulative Redeemable Preferred Stock.”

SECOND: As of the date hereof, no shares of Preferred Stock of the Corporation previously classified or designated as 8.075% Series A Cumulative Redeemable Preferred Stock pursuant to or as contemplated by the Prior Articles Supplementary have been issued by the Corporation, and accordingly, no such shares are either issued or outstanding as of the date hereof.

THIRD: Pursuant to the authority expressly vested in the Board of Directors by the Company by Article IV of the Articles of Amendment and Restatement of the Company filed with the Department on January 21, 1997, as amended, modified and supplemented to date (the “Charter”), and Section 2-105 of the Maryland General Corporation Law (the “MGCL”), the Board of Directors of the Company and/or a duly authorized committee thereof (the “Board of Directors”), by resolutions duly adopted on February 10, 2004 and March 1, 2004, has determined it to be in the best interest of the Corporation that 1,500,000 shares of Preferred Stock of the Corporation previously classified and designated as 8.075% Series A Cumulative Redeemable Preferred Stock pursuant to or as contemplated by the Prior Articles Supplementary, be reclassified, and to that end (i) reclassified such previously classified shares as a separate class

of Preferred Stock to be designated as the “7.45% Series A Cumulative Redeemable Preferred Stock”, (ii) authorized the issuance of a maximum of 1,500,000 shares of such class of Preferred Stock, and (iii) set the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, terms and conditions of redemption and other terms and conditions of such class of Preferred Stock. As a result of the reclassification as aforesaid and as contemplated herein of 1,500,000 shares of Preferred Stock previously classified and designated as 8.075% Series A Preferred Stock, 200,000 shares of Preferred Stock shall continue or remain classified or designated as “8.075% Series A Cumulative Redeemable Preferred Stock”, and in lieu of the 1,500,000 shares of 8.075% Series A Cumulative Redeemable Preferred Stock there shall be 1,500,000 shares of Preferred Stock reclassified as a separate class of Preferred Stock designated as “7.45% Series A Cumulative Redeemable Preferred Stock.”

FOURTH: The class of Preferred Stock of the Company created by the resolutions duly adopted by the Board of Directors of the Company and referred to in Article THIRD of these Articles Supplementary shall have the following designation, number of shares, preferences, conversion and other rights, voting powers, restrictions and limitation as to dividends, qualifications, terms and conditions of redemption and other terms and conditions:

Section 1. Designation And Number. A series of Preferred Stock, designated the “7.45% Series A Cumulative Redeemable Preferred Stock” (the “Series A Preferred Stock”) is hereby established. The number of shares of Series A Preferred Stock shall be 1,500,000.

Section 2. Rank. The Series A Preferred Stock will, with respect to distributions or rights upon voluntary or involuntary liquidation, winding-up or dissolution of the Company, or both, rank senior to all classes or series of Common Stock (ad defined in the Charter) and to all classes or series of equity securities of the Company now or hereafter authorized, issued or outstanding, other than any class or series of equity securities of the Company expressly designated as ranking on a parity with or senior to the Series A Preferred Stock as to distributions or rights upon voluntary or involuntary liquidation, winding-up or dissolution of the Company, or both. For purposes of these Articles Supplementary, the term “Parity Preferred Stock” shall be used to refer to any class or series of equity securities of the Company now or hereafter authorized, issued or outstanding expressly designated by the Company to rank on a parity with Series A Preferred Stock with respect to distributions or rights upon voluntary or involuntary liquidation, winding-up or dissolution of the Company, or both, as the context may require. The term “equity securities” does not include debt securities, which will rank senior to the Series A Preferred Stock prior to conversion.

Section 3. Distributions. (a) Payment of Distributions. Subject to the rights of holders of Parity Preferred Stock as to the payment of distributions and holders of equity securities ranking senior to the Series A Preferred Stock as to payment of distributions, holders of Series A Preferred Stock will be entitled to receive, when, as and if declared by the Company, out of funds legally available for the payment of distributions, cumulative preferential cash distributions at the rate per annum of 7.45% of the $50.00 liquidation preference per share of Series A Preferred Stock. Such distributions shall be cumulative, shall accrue from the original date of issuance and will be payable quarterly in arrears, on or before the 15th of February, May, August and November of each year and, in the event of a redemption, on the redemption dates

2

(each a “Preferred Stock Distribution Payment Date”), commencing in each case on the first Preferred Stock Distribution Payment Date after the original date of issuance. The amount of the distribution payable for any period will be computed on the basis of a 360-day year of twelve 30-day months and for any period shorter than a full quarterly period for which distributions are computed, the amount of the distribution payable will be computed on the basis of the actual number of days elapsed in such a 30-day month. If any date on which distributions are to be made on the Series A Preferred Stock is not a Business Day (as defined herein), then payment of the distribution to be made on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. Distributions on the Series A Preferred Stock will be made to the holders of record of the Series A Preferred Stock on the relevant record dates, which, unless otherwise provided by the Company with respect to any distribution, will be 15 Business Days prior to the relevant Preferred Stock Distribution Payment Date (each a “Distribution Record Date”). Notwithstanding anything to the contrary set forth herein, each share of Series A Preferred Stock shall also continue to accrue all accrued and unpaid distributions up to the exchange date on any Series A Preference Unit (as defined in the Fifth Amended and Restated Limited Partnership Agreement of Kilroy Realty, L.P. dated as of March 5, 2004 (the “Fifth Amendment”)) validly exchanged into such share of Series A Preferred Stock in accordance with the provisions of such Fifth Amendment.

The term “Business Day” shall mean each day, other than a Saturday or a Sunday, which is not a day on which banking institutions in New York, New York or Los Angeles, California are authorized or required by law, regulation or executive order to close.

(b) Limitation on Distributions. No distributions on the Series A Preferred Stock shall be declared or paid or set apart for payment by the Company at such time as the terms and provisions of any agreement of the Company, including any agreement relating to its indebtedness, prohibits such declaration, payment or setting apart for payment or provides that such declaration, payment or setting apart for payment would constitute a breach thereof or a default thereunder, or if such declaration, payment or setting apart for payment shall be restricted or prohibited by law.

(c) Distributions Cumulative. Notwithstanding the foregoing, distributions on the Series A Preferred Stock will accrue whether or not the terms and provisions set forth in SECTION 3(b) hereof at any time prohibit the current payment of distributions, whether or not the Company has earnings, whether or not there are funds legally available for the payment of such of such distributions and whether or not such distributions are authorized. Accrued but unpaid distributions on the Series A Preferred Stock will accumulate as of the Preferred Stock Distribution Payment Date on which they first become payable. Accumulated and unpaid distributions will not bear interest.

(d) Priority as to Distributions. (i) So long as any Series A Preferred Stock is outstanding, no distribution of cash or other property shall be authorized, declared, paid or set apart for payment on or with respect to any class or series of Common Stock or any class or series of other stock of the Company ranking junior as to the payment of distributions to the

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Series A Preferred Stock (such Common Stock or other junior stock, collectively, “Junior Stock”) nor shall any cash or other property be set aside for or applied to the purchase, redemption or other acquisition for consideration of any Series A Preferred Stock, any Parity Preferred Stock with respect to distributions or any Junior Stock, unless, in each case, all distributions accumulated on all Series A Preferred Stock and all classes and series of outstanding Parity Preferred Stock as to payment of distributions have been paid in full. The foregoing sentence will not prohibit (i) distributions payable solely in Junior Stock, (ii) the conversion of Junior Stock or Parity Preferred Stock into stock of the Company ranking junior to the Series A Preferred Stock as to distributions, and (iii) purchase by the Company of such Series A Preferred Stock, Parity Preferred Stock with respect to distributions or Junior Stock pursuant to Article IV.E. of the Charter with respect to the Common Stock and comparable Charter provisions with respect to other classes of capital stock of the Company to the extent required to preserve the Company’s status as a real estate investment trust.

(ii) So long as distributions have not been paid in full (or a sum sufficient for such full payment is not so set apart) upon the Series A Preferred Stock, all distributions authorized and declared on the Series A Preferred Stock and all classes or series of outstanding Parity Preferred Stock with respect to distributions shall be authorized and declared so that the amount of distributions authorized and declared per share of Series A Preferred Stock and such other classes or series of Parity Preferred Stock shall in all cases bear to each other the same ratio that accrued distributions per share on the Series A Preferred Stock and such other classes or series of Parity Preferred Stock (which shall not include any accumulation in respect of unpaid distributions for prior distribution periods if such class or series of Parity Preferred Stock do not have cumulative distribution rights) bear to each other.

(e) No Further Rights. Holders of Series A Preferred Stock shall not be entitled to any distributions, whether payable in cash, other property or otherwise, in excess of the full cumulative distributions described herein.

Section 4. Liquidation Preference. (a) Payment of Liquidating Distributions. Subject to the rights of holders of Parity Preferred Stock with respect to rights upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company and subject to equity securities ranking senior to the Series A Preferred Stock with respect to rights upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, the holders of Series A Preferred Stock shall be entitled to receive out of the assets of the Company, the holders of Series A Preferred Stock shall be entitled to receive out of the assets of the Company legally available for distribution or the proceeds thereof, after payment or provision for debts and other liabilities of the Company, but before any payment or distributions of the assets shall be made to holders of Common Stock or any other class or series of shares of the Company that ranks junior to the Series A Preferred Stock as to rights upon liquidation, dissolution or winding-up of the Company, an amount equal to the sum of (i) a liquidation preference of $50 per share of Series A Preferred Stock, and (ii) an amount equal to any accumulated and unpaid distributions thereon to the date of payment. In the event that, upon such voluntary or involuntary liquidation, dissolution or winding-up, there are insufficient assets to permit full payment of liquidating distributions to the holders of Series A Preferred Stock and any Parity Preferred Stock as to rights upon liquidation, dissolution or winding-up of the Company, all payments of liquidating distributions on the Series A Preferred Stock and such Parity Preferred

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Stock shall be made so that the payments on the Series A Preferred Stock and such Parity Preferred Stock shall in all cases bear to each other the same ratio that the respective rights of the Series A Preferred Stock and such other Parity Preferred Stock (which shall not include any accumulation in respect of unpaid distributions for prior distribution periods if such Parity Preferred Stock do not have cumulative distribution rights) upon liquidation, dissolution or winding-up of the Company bear to each other.

(b) Notice. Written notice of any such voluntary or involuntary liquidation, dissolution or winding-up of the Company, stating the payment date or dates when, and the place or places where, the amounts distributable in such circumstances shall be payable, shall be given by (i) fax and (ii) by first class mail, postage pre-paid, not less than 30 and not more than 60 days prior to the payment date stated therein, to each record holder of the Series A Preferred Stock at the respective addresses of such holders as the same shall appear on the same transfer records of the Company.

(c) No Further Rights. After payment of the full amount of the liquidating distributions to which they are entitled, the holders of Series A Preferred Stock will have no right or claim to any of the remaining assets of the Company.

(d) Consolidation, Merger or Certain Other Transactions. The consolidation or merger or other business combination of the Company with or into any corporation, trust or other entity (or of any corporation, trust or other entity with or into the Company) shall not be deemed to constitute a liquidation, dissolution or winding-up of the Company.

(e) Permissible Distributions. In determining whether a distribution (other than upon voluntary or involuntary liquidation) by dividend, redemption or other acquisition of shares of stock of the Company or otherwise is permitted under the MGCL, no effect shall be given to amounts that would be needed, if the Company were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of holders of shares of stock of the Company whose preferential rights upon dissolution are superior to those receiving the distribution.

Section 5. Optional Redemption. (a) Right of Optional Redemption. The Series A Preferred Stock may not, subject to Section 7 hereof and except as provided in Section 5(c) hereof, be redeemed prior to September 30, 2009. On or after such date, the Company shall have the right to redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, upon not less than 30 nor more than 60 days’ written notice, at a redemption price, payable in cash, equal to $50 per share of Series A Preferred Stock plus accumulated and unpaid distributions to the date of redemption (“Redemption Price”). If fewer than all of the outstanding shares of Series A Preferred Stock are to be redeemed, the shares of Series A Preferred Stock to be redeemed shall be selected pro rata (as nearly as practicable without creating fractional units).

(b) Limitation on Redemption. (i) The redemption price of the Series A Preferred Stock (other than the portion thereof consisting of accumulated but unpaid distributions) will be payable solely out of the sale proceeds of capital stock of the Company and from no other source. For purposes of the preceding sentence, “capital stock” means any equity

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securities (including Common Stock and Preferred Stock), shares, participation or other ownership interests (however designated) and any rights (other than debt securities convertible into or exchangeable for equity securities) or options to purchase any of the foregoing.

(ii) Subject to Section 7 hereof, the Company may not redeem fewer than all of the outstanding shares of Series A Preferred Stock (pursuant to Section 5(a) or (c) hereof) unless all accumulated and unpaid distributions have been paid on all Series A Preferred Stock for all quarterly distribution periods terminating on or prior to the date of redemption.

(c) Redemption at the Option of the Holder. Notwithstanding any provision herein to the contrary but expressly subject to the limitations set forth in this Section 5(c), so long as any Series A Preferred Stock remains outstanding, in the event of the occurrence of a Covered Transaction (defined below), the Company shall offer to redeem, on the date such Covered Transaction is completed or occurs, all of the Series A Preferred Stock outstanding at the Redemption Price, payable in cash, provided, however, that the Company shall only be obligated to effect such redemption if the redemption of the Series A Preferred Stock was elected in writing by the holders of not less than a majority of the then outstanding Series A Preferred Stock in accordance with this Section 5(c). The payment of any portion of the Redemption Price shall be subject only to the prior right of payment of outstanding indebtedness, as applicable, and the restrictions or limitations imposed upon such payment by applicable law or otherwise under these Articles Supplementary or the terms applicable to any Parity Preferred Stock. The Company shall give written notice of a Covered Transaction to each of the respective holders of record of the Series A Preferred Stock, at their respective addresses as they appear on the transfer records of the Company, by the earlier of (i) not less than thirty (30) days prior to the completion or occurrence of a Covered Transaction, if such completion or occurrence is known, or (ii) as soon as practicable after the completion or occurrence of a Covered Transaction. Such notice shall not set forth any non-public information concerning such Covered Transaction. Each of the holders of record of the Series A Preferred Stock shall have until 5:00 p.m. (PST) on the fifteenth (15th) day following receipt of such notice from the Company, to give the Company notice of such holder’s election that the Series A Preferred Stock be redeemed. Notwithstanding any provision herein to the contrary, with respect to a Covered Transaction that arises under clause (c) of the definition of Covered Transaction set forth below, in the event that the Company so fails to qualify as a real estate investment trust for any reason other than an affirmative election by the Company not to qualify, (a) the Company shall give notice of the occurrence of a Covered Transaction to each of the holders of record of the Series A Preferred Stock within 15 days after discovery of such failure to qualify, (b) each of the holders of record of the Series A Preferred Stock shall have until 5:00 p.m. (PST) on the fifteenth (15th) day following receipt of such notice from the Company, to give the Company notice of such holder’s election that the Series A Preferred Stock be redeemed and (c) if the holders of not less than a majority of the then outstanding Series A Preferred Stock have elected to have the Series A Preferred Stock redeemed, the Series A Preferred Stock shall be redeemed on a date not later than 45 days following the date of discovery of the Company’s failure to qualify.

For purposes of this Section 5(c), the term “Covered Transaction” shall mean (a) the Company’s completion of a “Rule 13e-3 transaction” (as defined in Rule 13e-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) in which, as a result of such transaction, the Company’s common stock is no longer registered under Section 12 of the

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Exchange Act, except that this clause (a) shall not apply to any delisting of the Company’s common stock from the New York Stock Exchange or any national securities exchange (as defined in the Exchange Act), (b) the completion of any transaction or series of transactions that would result in a Reorganization Event (defined below) of the Company or (c) the Company’s failure (or election not) to qualify as a real estate investment trust as defined in Section 856 (or any successor section) of the Internal Revenue Code of 1986, as amended.

For purposes of this Section 5(c), the term “Reorganization Event” shall mean (x) any sale or other disposition of all or substantially all of the assets of the Company, as the case may be, to an entity that is not an Affiliate of the Company; or (y) any consolidation, amalgamation, merger, business combination, share exchange, reorganization or similar transaction involving the Company pursuant to which the stockholders of the Company immediately prior to the consummation of such transaction will own less than a majority of the equity interests in the entity surviving such transaction; provided, however, a Reorganization Event shall not include any transaction contemplated by clauses (x) or (y) of this definition if the surviving entity has unsecured debt outstanding which is rated at least the lowest credit rating level established as investment grade by at least two of Standard & Poor’s, Moody’s Investor Service and Fitch Ratings (it being understood that as of the date of these Articles Supplementary the lowest investment grade rating of Standard & Poor’s is BBB-, the lowest investment grade rating of Moody’s is Baa3 and the lowest investment grade rating of Fitch Ratings is BBB-) and such rating has been reaffirmed in light of the contemplated transaction.

(d) Procedures for Redemption. (i) Notice of redemption will be (i) faxed, and (ii) mailed by the Company, postage prepaid, not less than 30 nor more than 60 days prior to the redemption date, addressed to the respective holders of record of the Series A Preferred Stock to be redeemed at their respective addresses as they appear on the transfer records of the Company. No failure to give or defect in such notice shall affect the validity of the proceedings for the redemption of any Series A Preferred Stock except as to the holder to whom such notice was defective or not given. In addition to any information required by law or by the applicable rules of any exchange upon which the Series A Preferred Stock may be listed or admitted to trading, each such notice shall state: (i) the redemption date, (ii) the redemption price, (iii) the number of shares of Series A Preferred Stock to be redeemed, (iv) the place or places where such shares of Series A Preferred Stock are to be surrendered for payment of the redemption price, (v) that distributions on the Series A Preferred Stock to be redeemed will cease to accumulate on such redemption date and (vi) that payment of the redemption price and any accumulated and unpaid distributions will be made upon presentation and surrender of such Series A Preferred Stock. If fewer than all of the shares of Series A Preferred Stock held by any holder are to be redeemed, the notice mailed to such holder shall also specify the number of shares of Series A Preferred Stock held by such holder to be redeemed.

(ii) If the Company gives a notice of redemption in respect of Series A Preferred Stock (which notice will be irrevocable) then, by 12:00 noon, New York City time, on the redemption date, the Company will deposit irrevocably in trust for the benefit of the Series A Preferred Stock being redeemed funds sufficient to pay the applicable redemption price, plus any accumulated and unpaid distributions, if any, on such shares to the date fixed for redemption, without interest, and will give irrevocable instructions and authority to pay such redemption price and any accumulated and unpaid distributions, if any, on such shares to the holders of the

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Series A Preferred Stock upon surrender of the Series A Preferred Stock by such holders at the place designated in the notice of redemption. On and after the date of redemption, distributions will cease to accumulate on the Series A Preferred Stock or portions thereof called for redemption, unless the Company defaults in the payment thereof. If any date fixed for redemption of Series A Preferred Stock is not a Business Day, then payment of the redemption price payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date fixed for redemption. If payment of the redemption price or any accumulated or unpaid distributions in respect of the Series A Preferred Stock is improperly withheld or refused and not paid by the Company, distributions on such Series A Preferred Stock will continue to accumulate from the original redemption date to the date of payment, in which case the actual payment date will be considered the date fixed for redemption for purposes of calculating the applicable redemption price and any accumulated and unpaid distributions.

(e) Status of Redeemed Stock. Any Series A Preferred Stock that shall at any time have been redeemed shall after such redemption, have the status of authorized but unissued Preferred Stock, without designation as to class or series until such shares are once more designated as part of a particular class or series by the Board of Directors.

Section 6. Voting Rights. (a) General. Holders of the Series A Preferred Stock will not have any voting rights, except as set forth below.

(b) Right to Elect Directors. If at any time full distributions shall not have been timely made on any Series A Preferred Stock with respect to any six (6) prior quarterly distribution periods, whether or not consecutive, (a “Preferred Distribution Default”), the holders such Series A Preferred Stock, voting together as a single class with the holders of each class or series of Parity Preferred Stock upon which like voting rights have been conferred and are exercisable, will have the right to elect two additional directors to serve on the Company’s Board of Directors (the “Preferred Stock Directors”) at a special meeting called by the holders of record of at least 10% of the outstanding shares of Series A Preferred Stock or any such class or series of Parity Preferred Stock or at the next annual meeting of stockholders, and at each subsequent annual meeting of stockholders or special meeting held in place thereof, until all such distributions in arrears and distributions for the current quarterly period on the Series A Preferred Stock and each such class or series of Parity Preferred Stock have been paid in full. A distribution in respect of Series A Preferred Stock shall be considered timely made if made within two (2) Business Days after the applicable Preferred Stock Distribution Payment Date if at time of such late payment there shall not be any prior quarterly distribution periods in respect of which full distributions were not timely made at the applicable Preferred Stock Distribution Date. If and when all accumulated distributions and the distribution for the current distribution period on the Series A Preferred Stock shall have been paid in full or set aside for payment in full, the holders of the Series A Preferred Stock shall be divested of the voting rights set forth in Section 6(b) herein (subject to revesting in the event of each and every Preferred Distribution Default) and, if all distributions in arrears and the distributions for the current distribution period have been paid in full or set aside for payment in full on all other classes or series of Parity Preferred Stock upon which like voting rights have been conferred and are exercisable, the term

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and office of each Preferred Stock Director so elected shall terminate. Any Preferred Stock Director may be removed at any time with or without cause by the vote of, and shall not be removed otherwise than by the vote of, the holders of record of a majority of the outstanding Series A Preferred Stock when they have the voting rights set forth in Section 6(b) (voting separately as a single class with all other classes or series of Parity Preferred Stock upon which like voting rights have been conferred and are exercisable). So long as a Preferred Distribution Default shall continue, any vacancy in the office of a Preferred Stock Director may be filled by written consent of the Preferred Stock Director remaining in office, or if none remains in office, by a vote of the holders of record of a majority of the outstanding Series A Preferred Stock when they have the voting rights set forth in Section 6(b) (voting separately as a single class with all other classes or series of Parity Preferred Stock upon which like voting rights have been conferred and are exercisable). The Preferred Stock Director shall each be entitled to one vote per director on any manner.

(c) Certain Voting Rights. So long as any Series A Preferred Stock remains outstanding, the Company shall not, without the affirmative vote of the holders of at least two-thirds of the Series A Preferred Stock outstanding at the time (i) designate or create, or increase the authorized or issued amount of, any class or series of shares ranking prior to the Series A Preferred Stock with respect to payment of distributions or rights upon liquidation, dissolution or winding-up or reclassify any authorized shares of the Company into any such shares, or create, authorize or issue any obligations or security convertible into or evidencing the right to purchase any such shares, (ii) designate or create, or increase the authorized or issued amount of, any Parity Preferred Stock or reclassify any authorized shares of the Company into any such shares, or create, authorize or issue any obligations or security convertible into or evidencing the right to purchase any such shares, but only to the extent such Parity Preferred Stock is issued to a an affiliate of the Company, or (iii) either (A) consolidate, merge into or with, or convey, transfer or lease its assets substantially as an entirety, to any corporation or other entity, or (B) amend, alter or repeal the provisions of the Company’s Charter (including these Articles Supplementary) or By-laws, whether by merger, consolidation or otherwise, in each case that would materially and adversely affect the powers, special rights, preferences, privileges or voting power of the Series A Preferred Stock or the holders thereof; provided, however, that with respect to the occurrence of any event set forth in (iii) above, so long as (a) the Company is the surviving entity and the Series A Preferred Stock remains outstanding with the terms thereof unchanged, or (b) the resulting, surviving or transferee entity is a corporation organized under the laws of any state and substitutes the Series A Preferred Stock for other preferred stock having substantially the same terms and same rights as the Series A Preferred Stock, including with respect to distributions, voting rights and rights upon liquidation, dissolution or winding-up, then the occurrence of any such event shall not be deemed materially and adversely affect such rights, privileges or voting powers of the holders of the Series A Preferred Stock and provided further that any increase in the amount of authorized Preferred Stock or the creation or issuance of any other class or series of Preferred Stock, or any increase in an amount of authorized shares of each class or series, in each case ranking either (a) junior to the Series A Preferred Stock with respect to payment of distributions or the distribution of assets upon liquidation, dissolution or winding-up, or (b) on a parity with the Series A Preferred Stock with respect to payment of distributions or the distribution of assets upon liquidation, dissolution or winding-up to the extent such Preferred Stock is not issued to a affiliate of the Company, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.

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Section 7. Restrictions on Ownership and Transfer to Preserve Tax Benefit.

(a) Definitions. for the purposes of this Section 7 of these Articles Supplementary, the following terms shall have the following meanings:

“Beneficial Ownership” shall mean ownership of Series A Preferred Stock by a Person who is or would be treated as an owner of such Series A Preferred Stock either actually or constructively through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms “Beneficial Owner,” “Beneficially Owns” and “Beneficially Owned” shall have the correlative meanings.

“Beneficial Ownership Limit” shall mean 7.0% (by value) of the outstanding shares capital stock the Company.

“Charitable Beneficiary” shall mean one or more beneficiaries of a Trust, as determined pursuant to Section 7(c)(vi) of these Articles Supplementary, each of which shall be an organization described in Sections 170(b)(1)(A), 170(c)(2) or 501(c)(3) of the Code.

“Code” shall mean the Internal Revenue Code of 1986, as amended. All section references to the Code shall include any successor provisions thereof as may be adopted from time to time.

“Constructive Ownership” shall mean ownership of Series A Preferred Stock by a Person who is or would be treated as an owner of such Series A Preferred Stock either actually or constructively through the application of Section 318 of the Code, as modified by Section 856(d)(5) of the Code. The terms “Constructive Owner,” “Constructively Owns” and “Constructively Owned” shall have the correlative meanings.

“Constructive Ownership Limit” shall mean 9.8% (by value) of the outstanding shares of capital stock the Company.

“IRS” means the United States Internal Revenue Service.

“Market Price” shall mean the last reported sales price reported on the New York Stock Exchange of the Series A Preferred Stock on the trading day immediately preceding the relevant date, or if the Series A Preferred Stock is not then traded on the New York Stock Exchange, the last reported sales price of the Series A Preferred Stock on the trading day immediately preceding the relevant date as reported on any exchange or quotation system over which the Series A Preferred Stock may be traded, or if the Series A Preferred Stock is not then traded over any exchange or quotation system, then the market price of the Series A Preferred Stock on the relevant date as determined in good faith by the Board of Directors of the Company.

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“MGCL” shall mean the Maryland General Corporation Law, as amended from time to time, and any successor statute hereafter enacted.

“Operating Partnership” shall mean Kilroy Realty, L.P., a Delaware limited partnership.

“Partnership Agreement” shall mean the Agreement of Limited Partnership of the Operating Partnership, as such agreement may be amended from time to time.

“Person” shall mean an individual, corporation, partnership, limited liability company, estate, trust (including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity; but does not include an underwriter acting in a capacity as such in a public offering of shares of Series A Preferred Stock provided that the ownership of such shares of Series A Preferred Stock by such underwriter would not result in the Company being “closely held” within the meaning of Section 856(h) of the Code, or otherwise result in the Company failing to qualify as a REIT.

“Purported Beneficial Transferee” shall mean, with respect to any purported Transfer (or other event) which results in a transfer to a Trust, as provided in Section 7(b)(ii) of these Articles Supplementary, the Purported Record Transferee, unless the Purported Record Transferee would have acquired or owned shares of Series A Preferred Stock for another Person who is the beneficial transferee or owner of such shares, in which case the Purported Beneficial Transferee shall be such Person.

“Purported Record Transferee” shall mean, with respect to any purported Transfer (or other event) which results in a transfer to a Trust, as provided in Section 7(b)(ii) of these Articles Supplementary, the record holder of the Series A Preferred Stock if such Transfer had been valid under Section 7(b)(i) of these Articles Supplementary.

“REIT” shall mean a real estate investment trust under Sections 856 through 860 of the Code and, for purposes of taxation of the Company under applicable state law, comparable provisions of the law of such state.

“Restriction Termination Date” shall mean the first day after the date hereof on which the Board of Directors of the Company determines that it is no longer in the best interests of the Company to attempt to, or continue to, qualify as a REIT.

“Transfer” shall mean any sale, transfer, gift, assignment, devise or other disposition of Series A Preferred Stock, (including (i) the granting of any option or entering into any agreement for the sale, transfer or other disposition of Series

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A Preferred Stock or (ii) the sale, transfer, assignment or other disposition of any securities (or rights convertible into or exchangeable for Series A Preferred Stock), whether voluntary or involuntary, whether such transfer has occurred of record or beneficially or Beneficially or Constructively (including but not limited to transfers of interests in other entities which results in changes in Beneficial or Constructive Ownership of Series A Preferred Stock), and whether such transfer has occurred by operation of law or otherwise.

“Trust” shall mean each of the trusts provided for in Section 7(c) of these Articles Supplementary.

“Trustee” shall mean any Person unaffiliated with the Company, or a Purported Beneficial Transferee, or a Purported Record Transferee, that is appointed by the Company to serve as trustee of a Trust.

(b) Restriction on Ownership and Transfers.

(i) Prior to the Restriction Termination Date:

(A) except as provided in Section 7(i) of these Articles Supplementary, no Person shall Beneficially Own Series A Preferred Stock which, taking into account any other capital stock of the Company Beneficially Owned by such Person, would cause such ownership to exceed the Beneficial Ownership Limit;

(B) except as provided in Section 7(i) of these Articles Supplementary, no Person shall Constructively Own Series A Preferred Stock which, taking into account any other capital stock of the Company Constructively Owned by such Person, would cause such ownership to exceed the Constructive Ownership Limit;

(C) no Person shall Beneficially or Constructively Own Series A Preferred Stock which, taking into account any other capital stock of the Company Beneficially or Constructively Owned by such Person, would result in the Company being “closely held” within the meaning of Section 856(h) of the Code, or otherwise failing to qualify as a REIT (including but not limited to Beneficial or Constructive Ownership that would result in the Company owning (actually or Constructively) an interest in a tenant that is described in Section 856(d)(2)(B) of the Code if the income derived by the Company (either directly or indirectly through one or more partnerships) from such tenant would cause the Company to fail to satisfy any of the gross income requirements of Section 856(c) of the Code or comparable provisions of state law).

(ii) If, prior to the Restriction Termination Date, any Transfer (whether or not such Transfer is the result of a transaction entered into through the facilities of the New York Stock Exchange (“NYSE”)) or other event occurs that, if effective, would result in any Person Beneficially or Constructively Owning Series A Preferred Stock in violation of Section

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7(b)(i) of these Articles Supplementary, (1) then that number of shares of Series A Preferred Stock that otherwise would cause such Person to violate Section 7(b)(i) of these Articles Supplementary (rounded up to the nearest whole share) shall be automatically transferred to a Trust for the benefit of a Charitable Beneficiary, as described in Section 7(c), effective as of the close of business on the business day prior to the date of such Transfer or other event, and such Purported Beneficial Transferee shall thereafter have no rights in such shares or (2) if, for any reason, the transfer to the Trust described in clause (1) of this sentence is not automatically effective as provided therein to prevent any Person from Beneficially or Constructively Owning Series A Preferred Stock in violation of Section 7(b)(i) of these Articles Supplementary, then the Transfer of that number of shares of Series A Preferred Stock that otherwise would cause any Person to violate Section 7(b)(1) shall be void ab initio, and the Purported Beneficial Transferee shall have no rights in such shares.

(iii) Notwithstanding any other provisions contained herein, prior to the Restriction Termination Date, any Transfer of Series A Preferred Stock (whether or not such Transfer is the result of a transaction entered into through the facilities of the NYSE) that, if effective, would result in the capital stock of the Company being beneficially owned by less than 100 Persons (determined without reference to any rules of attribution) shall be void ab initio, and the intended transferee shall acquire no rights in such Series A Preferred Stock.

(iv) It is expressly intended that the restrictions on ownership and Transfer described in this Section 7(b) shall apply to the exchange rights provided in Section 16.7 of the Partnership Agreement. Notwithstanding any of the provisions of the Partnership Agreement to the contrary, a partner of the Operating Partnership shall not be entitled to effect an exchange of an interest in the Operating Partnership for Series A Preferred Stock if the actual or beneficial or Beneficial or Constructive Ownership of Series A Preferred Stock would be prohibited under the provisions of this Section 7.

(c) Transfers of Series A Preferred Stock in Trust.

(i) Upon any purported Transfer or other event described in Section 7(b)(ii) of these Articles Supplementary, such Series A Preferred Stock shall be deemed to have been transferred to the Trustee in his capacity as trustee of a Trust for the exclusive benefit of one or more Charitable Beneficiaries. Such transfer to the Trustee shall be deemed to be effective as of the close of business on the business day prior to the purported Transfer or other event that results in a transfer to the Trust pursuant to Section 7(b)(ii). The Trustee shall be appointed by the Company and shall be a Person unaffiliated with the Company, any Purported Beneficial Transferee, or any Purported Record Transferee. Each Charitable Beneficiary shall be designated by the Company as provided in Section 7(c)(vi) of these Articles Supplementary.

(ii) Series A Preferred Stock held by the Trustee shall be issued and outstanding Series A Preferred Stock of the Company. The Purported Beneficial Transferee or Purported Record Transferee shall have no rights in the shares of Series A Preferred Stock held by the Trustee. The Purported Beneficial Transferee or Purported Record Transferee shall not benefit economically from ownership of any shares held in trust by the Trustee, shall have no rights to dividends and shall not possess any rights to vote or other rights attributable to the shares of Series A Preferred Stock held in the Trust.

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(iii) The Trustee shall have all voting rights and rights to dividends with respect to Series A Preferred Stock held in the Trust, which rights shall be exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend or distribution paid prior to the discovery by the Company that shares of Series A Preferred Stock have been transferred to the Trustee shall be paid to the Trustee upon demand, and any dividend or distribution declared but unpaid shall be paid when due to the Trustee with respect to such Series A Preferred Stock. Any dividends or distribution so paid over to the Trustee shall be held in trust for the Charitable Beneficiary.

The Purported Record Transferee and Purported Beneficial Transferee shall have no voting rights with respect to the Series A Preferred Stock held in the Trust and, subject to Maryland law, effective as of the date the Series A Preferred Stock has been transferred to the Trustee, the Trustee shall have the authority (at the Trustee’s sole discretion) (i) to rescind as void any vote cast by a Purported Record Transferee with respect to such Series A Preferred Stock prior to the discovery by the Company that the Series A Preferred Stock has been transferred to the Trustee and (ii) to recast such vote in accordance with the desires of the Trustee acting for the benefit of the Charitable Beneficiary; provided, however, that if the Company has already taken irreversible corporate action, then the Trustee shall not have the authority to rescind and recast such vote. Notwithstanding any other provision of these Articles Supplementary to the contrary, until the Company has received notification that the Series A Preferred Stock has been transferred into a Trust, the Company shall be entitled to rely on its share transfer and other stockholder records for purposes of preparing lists of stockholders entitled to vote at meetings, determining the validity and authority of proxies and otherwise conducting votes to stockholders.

(iv) Within 20 days of receiving notice from the Company that shares of Series A Preferred Stock have been transferred to the Trust, the Trustee of the Trust shall sell the shares of Series A Preferred Stock held in the Trust to a Person, designated by the Trustee, whose ownership of the shares of Series A Preferred Stock will not violate the ownership limitations set forth in Section 7(b)(i). Upon such sale, the interest of the Charitable beneficiary in the shares of Series A Preferred Stock sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Purported Record Transferee and to the Charitable Beneficiary as provided in this Section 7(c)(iv). The Purported Record Transferee shall receive the lesser of (1) the price paid by the Purported Record Transferee for the shares of Series A Preferred Stock in the transaction that resulted in such transfer to the Trust (or, if the event which resulted in the transfer to the Trust did not involve a purchase of such shares of Series A Preferred Stock at Market Price, the Market Price of such shares of Series A Preferred Stock on the day of the event which resulted in the transfer of such shares of Series A Preferred Stock to the Trust) and (2) the price per share received by the Trustee (net of any commissions and other expenses of sale) from the sale or other disposition of the shares of Series A Preferred Stock held in the Trust. Any net sales proceeds in excess of the amount payable to the Purported Record Transferee shall be immediately paid to the Charitable Beneficiary together with any dividends or other distributions thereon. If, prior to the discovery by the Company that shares of such Series A Preferred Stock have been transferred to the Trustee, such shares of Series A Preferred Stock are sold by a Purported Record Transferee then (i) such shares of Series A Preferred Stock shall be deemed to have been sold on behalf of the Trust and (ii) to the extent that the Purported Record Transferee received an amount for such shares of Series A Preferred Stock that exceeds the amount that

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such Purported Record Transferee was entitled to receive pursuant to this Section 7(c)(iv), such excess shall be paid to the Trustee upon demand.

(v) Series A Preferred Stock transferred to the Trustee shall be deemed to have been offered for sale to the Company, or its designee, at a price per share equal to the lesser of (i) the price paid by the Purported Record Transferee for the shares of Series A Preferred Stock in the transaction that resulted in such transfer to the Trust (or, if the event which resulted in the transfer to the Trust did not involve a purchase of such shares of Series A Preferred Stock at Market Price, the Market Price of such shares of Series A Preferred Stock on the day of the event which resulted in the transfer of such shares of Series A Preferred Stock to the Trust) and (ii) the Market Price on the date the Company, or its designee, accepts such offer. The Company shall have the right to accept such offer until the Trustee has sold the shares of Series A Preferred Stock held in the Trust pursuant to Section 7(c)(iv). Upon such a sale to the Company, the interest of the Charitable Beneficiary in the shares of Series A Preferred Stock sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Purported Record Transferee and any dividends or other distributions held by the Trustee with respect to such Series A Preferred Stock shall thereupon be paid to the Charitable Beneficiary.

(vi) By written notice to the Trustee, the Company shall designate one or more nonprofit organizations to be the Charitable beneficiary of the interest in the Trust such that (i) the Series A Preferred Stock held in the Trust would not violate the restrictions set forth in Section 7(b)(i) in the hands of such Charitable Beneficiary and (ii) each charitable Beneficiary is an organization described in Sections 170(l)(A), 170(c)(2) or 501(c)(3) of the Code.

(d) Remedies For Breach. If the Board of Directors or a committee thereof or other designees if permitted by the MGCL shall at any time determine in good faith that a Transfer or other event has taken place in violation of Section 7(b) of these Articles Supplementary or that a Person intends to acquire, has attempted to acquire or may acquire beneficial ownership (determined without reference to any rules of attribution), Beneficial Ownership or Constructive Ownership of any shares of Series A Preferred Stock of the Company in violation of Section 7(b) of these Articles Supplementary, the Board of Directors or a committee thereof or other designees if permitted by the MGCL shall take such action as it deems advisable to refuse to give effect or to prevent such Transfer, including, but not limited to, causing the Company to redeem shares of Series A Preferred Stock, refusing to give effect to such Transfer on the books of the Company or instituting proceedings to enjoin such transfer; provided, however, that any Transfers (or, in the case of events other than a Transfer, ownership or Constructive Ownership or Beneficial Ownership) in violation of Section 7(b)(i) of these Articles Supplementary, shall automatically result in the transfer to a Trust as described in Section 7(b)(ii) and any Transfer in violation of Section 7(b)(iii) shall automatically be void ab initio irrespective of any action (or non-action) by the Board of Directors.

(e) Notice of Restricted Transfer. Any Person who acquires or attempts to acquire shares of Series A Preferred Stock in violation of Section 7(b) of these Articles Supplementary, or any Person who is a Purported Beneficial Transferee such that an automatic transfer to a Trust results under Section 7(b)(ii) of these Articles Supplementary, shall immediately give written notice to the Company of such event and shall provide to the Company

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such other information as the Company may request in order to determine the effect, if any, of such Transfer or attempted Transfer on the Company’s status as a REIT.

(f) Owners Required To Provide Information. Prior to the Restriction Termination date each Person who is a beneficial owner or Beneficial Owner or Constructive Owner of Series A Preferred Stock and each Person (including the shareholder of record) who is holding Series A Preferred Stock for a beneficial owner or Beneficial Owner or Constructive Owner shall provide to the Company such information that the Company may request, in good faith, in order to determine the Company’s status as a REIT.

(g) Remedies Not Limited. Nothing contained in these Articles Supplementary (but subject to Section 7(n) of these Articles Supplementary) shall limit the authority of the Board of Directors to take such other action as it deems necessary or advisable to protect the Company and the interests of its shareholders by preservation of the Company’s status as a REIT.

(h) Ambiguity. In the case of an ambiguity in the application of any of the provisions of this Section 7 of these Articles Supplementary, including any definition contained in Section 7(a), the Board of Directors shall have the power to determine the application of the provisions of this Section 7 with respect to any situation based on the facts known to it (subject, however, to the provision of Section 7(n) of these Articles Supplementary). In the event Section 7 requires an action by the Board of Directors and these Articles Supplementary fail to provide specific guidance with respect to such action, the Board of Directors shall have the power to determine the action to be taken so long as such action is not contrary to the provisions of Section 7. Absent a decision to the contrary by the Board of Directors (which the Board of Directors may make in its sole and absolute discretion), if a Person would have (but for the remedies set forth in Section 7(b)) acquired Beneficial or Constructive Ownership of Series A Preferred Stock in violation of Section 7(b)(i), such remedies (as applicable) shall apply first to the shares of Series A Preferred Stock which, but for such remedies, would have been actually owned by such Person, and second to shares of Series A Preferred Stock, which, but for such remedies, would have been Beneficially Owned or Constructively Owned (but not actually owned) by such Person, pro rata among the Persons who actually own such shares of Series A Preferred Stock based upon the relative number of the shares of Series A Preferred Stock held by each such Person.

(i) Exceptions.

(i) Subject to Section 7(b)(i)(C), the Board of Directors, in its sole discretion, may exempt a Person from the limitation on a Person Beneficially Owning shares of Series A Preferred Stock in violation of Section 7(b)(i)(A) if the Board of Directors obtains such representations and undertakings from such Person as are reasonably necessary to ascertain that no individual’s Beneficial Ownership of such shares of Series A Preferred Stock will violate Section 7(b)(i)(A) or that any such violation will not cause the Company to fail to qualify as a REIT under the Code, and agrees that any violation of such representations or undertakings (or other action which is contrary to the restrictions contained in Section 7(b) of these Articles Supplementary) or attempted violation will result in such Series A Preferred Stock being transferred to a Trust in accordance with Section 7(b)(ii) of these Articles Supplementary.

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(ii) Subject to Section 7(b)(i)(C), the Board of Directors, in its sole discretion, may exempt a Person from the limitation on a Person Constructively Owning Series A Preferred Stock in violation of Section 7(b)(i)(B), if such Person does not and represents that it will not own, actually or Constructively, an interest in a tenant of the Company (or a tenant of any entity owned in whole or in part by the Company) that would cause the Company to own, actually or Constructively more than a 9.8% interest (as set forth in Section 856(d)(2)(B) of the Code) in such tenant and the Company obtains such representations and undertakings from such Person as are reasonably necessary to ascertain this fact and agrees that any violation or attempted violation will result in such Series A Preferred Stock being transferred to a Trust in accordance with Section 7(b)(ii) of these Articles Supplementary. Notwithstanding the foregoing, the inability of a Person to make the certification described in this Section 7(i)(ii) shall not prevent the Board of Directors, in its sole discretion, from exempting such Person from the limitation on a Person Constructively Owning Series A Preferred Stock in violation of Section 7(b)(i)(B) if the Board of Directors determines that the resulting application of Section 856(d)(2)(B) of the Code and comparable provisions of applicable state law would affect the characterization of less than 0.5% of the gross income (as such term is used in Section 856(c)(2) of the Code) of the Company in any taxable year, after taking into account the effect of this sentence with respect to all other capital stock of the Company to which this sentence applies.

(iii) Prior to granting any exception pursuant to Section 7(i)(i) or (ii) of these Articles Supplementary, the Board of Directors may require a ruling from the internal Revenue Service, or an opinion of counsel, in either case in form and substance satisfactory to the Board of Directors in its sole discretion, as it may deem necessary or advisable in order to determine or ensure the Company’s status as a REIT.

(j) Legends. Each certificate for Series A Preferred Stock shall bear the following legends:

Class of Stock

“THE COMPANY IS AUTHORIZED TO ISSUE CAPITAL STOCK OF MORE THAN ONE CLASS, CONSISTING OF COMMON STOCK AND ONE OR MORE CLASSES OF PREFERRED STOCK. THE BOARD OF DIRECTORS IS AUTHORIZED TO DETERMINE THE PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF ANY CLASS OF THE PREFERRED STOCK BEFORE THE ISSUANCE OF SHARES OF SUCH CLASS OF PREFERRED STOCK. THE COMPANY WILL FURNISH, WITHOUT CHARGE, TO ANY STOCKHOLDER MAKING A WRITTEN REQUEST THEREFOR, A COPY OF THE COMPANY’S CHARTER AND A WRITTEN STATEMENT OF THE DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES, CONVERSION OR OTHER RIGHTS, VOTING POWERS, RESTRICTIONS, LIMITATIONS AS TO DIVIDENDS AND OTHER DISTRIBUTIONS, QUALIFICATIONS AND TERMS AND CONDITIONS OF REDEMPTION OF THE STOCK OF EACH CLASS WHICH THE COMPANY HAS THE AUTHORITY TO ISSUE AND, IF THE COMPANY IS AUTHORIZED TO ISSUE ANY PREFERRED OR SPECIAL CLASS AND SERIES, (i) THE DIFFERENCES IN THE RELATIVE RIGHTS AND PREFERENCES BETWEEN THE SHARES OF EACH SERIES

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TO THE EXTENT SET, AND (ii) THE AUTHORITY OF THE BOARD OF DIRECTORS TO SET SUCH RIGHTS AND PREFERENCES OF SUBSEQUENT SERIES. REQUESTS FOR SUCH WRITTEN STATEMENT MAY BE DIRECTED TO THE SECRETARY OF THE COMPANY AT ITS PRINCIPAL OFFICE.”

Restrictions on Ownership and Transfer

“THE SHARES OF SERIES A PREFERRED STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON BENEFICIAL AND CONSTRUCTIVE OWNERSHIP AND TRANSFER FOR THE PURPOSE OF THE COMPANY’S MAINTENANCE OF ITS STATUS AS A REAL ESTATE INVESTMENT TRUST UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE “CODE”). SUBJECT TO CERTAIN FURTHER RESTRICTIONS AND EXCEPT AS EXPRESSLY PROVIDED IN THE ARTICLES SUPPLEMENTARY FOR THE SERIES A PREFERRED STOCK, (i) NO PERSON MAY BENEFICIALLY OWN SHARES OF THE COMPANY’S SERIES A PREFERRED STOCK WHICH, TAKING INTO ACCOUNT ANY OTHER CAPITAL STOCK OF THE COMPANY BENEFICIALLY OWNED BY SUCH PERSON, WOULD CAUSE SUCH OWNERSHIP TO EXCEED THE BENEFICIAL OWNERSHIP LIMIT OF 7%; (ii) NO PERSON MAY CONSTRUCTIVELY OWN SHARES OF THE COMPANY’S SERIES A PREFERRED STOCK WHICH, TAKING INTO ACCOUNT ANY OTHER CAPITAL STOCK OF THE COMPANY CONSTRUCTIVELY OWNED BY SUCH PERSON, WOULD CAUSE SUCH OWNERSHIP TO EXCEED THE CONSTRUCTIVE OWNERSHIP LIMIT OF 9.8%; (iii) NO PERSON MAY BENEFICIALLY OR CONSTRUCTIVELY OWN SERIES A PREFERRED STOCK THAT, TAKING INTO ACCOUNT ANY OTHER CAPITAL STOCK OF THE COMPANY BENEFICIALLY OR CONSTRUCTIVELY OWNED BY SUCH PERSON, WOULD RESULT IN THE COMPANY BEING “CLOSELY HELD” UNDER SECTION 856(h) OF THE CODE OR OTHERWISE CAUSE THE COMPANY TO FAIL TO QUALIFY AS A REIT; AND (iv) NO PERSON MAY TRANSFER SERIES A PREFERRED STOCK IF SUCH TRANSFER WOULD RESULT IN THE CAPITAL STOCK OF THE COMPANY BEING OWNED BY FEWER THAN 100 PERSONS. ANY PERSON WHO BENEFICIALLY OR CONSTRUCTIVELY OWNS OR ATTEMPTS TO BENEFICIALLY OR CONSTRUCTIVELY OWN SERIES A PREFERRED STOCK WHICH CAUSES OR WILL CAUSE A PERSON TO BENEFICIALLY OR CONSTRUCTIVELY OWN SERIES A PREFERRED STOCK IN EXCESS OF THE ABOVE LIMITATIONS MUST IMMEDIATELY NOTIFY THE COMPANY. IF ANY OF THE RESTRICTIONS ON TRANSFER OR OWNERSHIP ARE VIOLATED, THE SERIES A PREFERRED STOCK REPRESENTED HEREBY WILL BE AUTOMATICALLY TRANSFERRED TO THE TRUSTEE OF A TRUST FOR THE BENEFIT OF ONE OR MORE CHARITABLE BENEFICIARIES. IN ADDITION, THE COMPANY MAY REDEEM SHARES UPON THE TERMS AND CONDITIONS SPECIFIED BY

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THE BOARD OF DIRECTORS IN ITS SOLE DISCRETION IF THE BOARD OF DIRECTORS DETERMINES THAT OWNERSHIP OR A TRANSFER OR OTHER EVENT MAY VIOLATE THE RESTRICTIONS DESCRIBED ABOVE. FURTHERMORE, UPON THE OCCURRENCE OF CERTAIN EVENTS, ATTEMPTED TRANSFERS IN VIOLATION OF THE RESTRICTIONS DESCRIBED ABOVE MAY BE VOID AB INITIO. ALL TERMS IN THIS LEGEND DEFINED IN THE ARTICLES SUPPLEMENTARY FOR THE SERIES A PREFERRED STOCK SHALL HAVE THE MEANINGS ASCRIBED TO THEM IN THE ARTICLES SUPPLEMENTARY FOR THE SERIES A PREFERRED STOCK AS THE SAME MAY BE AMENDED FROM TIME TO TIME, A COPY OF WHICH, INCLUDING THE RESTRICTIONS ON TRANSFER AND OWNERSHIP, WILL BE FURNISHED TO EACH HOLDER OF SERIES A PREFERRED STOCK ON REQUEST AND WITHOUT CHARGE. REQUESTS FOR SUCH A COPY MAY BE DIRECTED TO THE SECRETARY OF THE COMPANY AT ITS PRINCIPAL OFFICE.”

(k) Exchange of Series A Preferred Units. So long as the Company remains the general partner of the Operating Partnership, the Board of Directors of the Company is hereby expressly vested with authority (subject to the restrictions on ownership, transfer and redemption of Series A Preferred Stock set forth in this Section 7) to issue, and shall issue to the extent provided in the Partnership Agreement, Series A Preferred Stock in exchange for Series A Preferred Units (as defined in the Partnership Agreement) (the “Series A Preferred Units”).

(l) Reservation of Shares. Pursuant to the obligations of the Company under the Partnership Agreement to issue Series A Preferred Stock in exchange for Series A Preferred Units, the Board of Directors is hereby required to reserve and authorize for issuance a number of authorized but unissued shares of Series A Preferred Stock not less than the number of Series A Preferred Units issued to permit the Company to issue Series A Preferred Stock in exchange for Series A Preferred Units that may be exchanged for or converted into Series A Preferred Stock as provided in the Partnership Agreement.

(m) Severability. If any provision of this Section 7 or any application of any such provision is determined to be invalid by any Federal or state court having jurisdiction over the issues, the validity of the remaining provisions shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court.

(n) NYSE. Nothing in this Section 7 shall preclude the settlement of any transaction entered into through the facilities of the NYSE. The shares of Series A preferred Stock that are the subject of such transaction shall continue to be subject to the provisions of this Section 7 after such settlement.

(o) Applicability of Section 7. The provisions set forth in this Section 7 shall apply to the Series A Preferred Stock notwithstanding any contrary provisions of the Series A Preferred Stock provided for elsewhere in these Articles Supplementary.

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Section 8. No Conversion Rights. The holders of the Series A Preferred Stock shall not have any rights to convert such shares into shares of any other class or series of stock or into any other securities of, or interest in, the Company.

Section 9. No Sinking Fund. No sinking fund shall be established for the retirement or redemption of Series A Preferred Stock.

Section 10. No Preemptive Rights. No holder of the Series A Preferred Stock of the Company shall, as such holder, have any preemptive rights to purchase or subscribe for additional shares of stock of the Company or any other security of the Company which it may issue or sell.

FIFTH: The Series A Preferred Stock have been classified and designated by the Board of Directors under the authority contained in the Charter.

SIXTH: These Articles Supplementary have been approved by the Board of Directors in the manner and by the vote required by law.

SEVENTH: The undersigned Vice President of the Company acknowledges these Articles Supplementary to be the corporate act of the Company and, as to all matters or facts required to be verified under oath, the undersigned Vice President acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury.

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IN WITNESS WHEREOF, the Company has caused these Articles Supplementary to be executed under seal in its name and on its behalf by its Senior Vice President and attested to by its Secretary on this 5^th day of March, 2004.

KILROY REALTY CORPORATION
By:	/s/ Tyler H. Rose
	Name:	Tyler H. Rose
	Title:	Senior Vice President

[SEAL]

ATTEST:

/s/ Richard E. Moran Jr.

Richard E. Moran Jr.

Secretary

[SIGNATURE PAGE FOR ARTICLES SUPPLEMENTARY]

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EX-4.3

Exhibit 4.3

SECOND AMENDED AND RESTATED

REGISTRATION RIGHTS AGREEMENT

THIS SECOND AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT, dated as of March 5, 2004 (this “Agreement”), is entered into by and among Kilroy Realty Corporation, a Maryland corporation (the “Company” or the “REIT”), Kilroy Realty, L.P., a Delaware limited partnership (the “Operating Partnership”), and the unit holders whose names are set forth on the signature pages hereto (each, a “Unit Holder” and collectively, the “Unit Holders”).

RECITALS

WHEREAS, in connection with the offering of 1,200,000 8.075% Series A Cumulative Redeemable Preferred Units of the Operating Partnership, Belair Capital Fund LLC, a Massachusetts limited liability company (the “Contributor”), contributed to the Operating Partnership cash in return for such units on terms and conditions set forth in the Contribution Agreement, dated February 6, 1998 (the “February Contribution Agreement”), by and among the Company, the Operating Partnership and the Contributor;

WHEREAS, in connection with the offering of 300,000 8.075% Series A Cumulative Redeemable Preferred Units of the Operating Partnership, the Contributor contributed to the Operating Partnership cash in return for such units on terms and conditions set forth in the Contribution Agreement, dated April 20, 1998 (the “April Contribution Agreement”), by and among the Company, the Operating Partnership and the Contributor;

WHEREAS, the Contributor received such units in exchange for cash contributed to Operating Partnership;

WHEREAS, in order to induce the Unit Holders to amend the Partnership Agreement (as defined below), concurrently with the execution of this Agreement, the Unit Holders, being the current holders of all of the 8.075% Series A Cumulative Redeemable Preferred Units of the Operating Partnership issued in connection with the February Contribution Agreement and the April Contribution Agreement, have entered into an amendment to the February Contribution Agreement and the April Contribution Agreement in connection with the reclassifications of such units as 7.45% Series A Cumulative Redeemable Preferred Units and of the corresponding preferred stock of the Company as “7.45% Series A Cumulative Redeemable Preferred Stock”;

WHEREAS, pursuant to the Partnership Agreement, the OP Units (as defined below) owned by the Unit Holders will be redeemable for cash or exchangeable for shares of the Company’s 7.45% Series A Cumulative Redeemable Preferred Stock (the “Preferred Stock”) upon the terms and subject to the conditions contained therein; and

WHEREAS, in order to induce the Unit Holders to amend the Partnership Agreement, the Company and the Operating Partnership have agreed to amend and restate this Agreement and to provide the registration rights set forth herein to the Unit Holders and any subsequent holder or holders of the OP Units.

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NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE I

DEFINITIONS

SECTION 1.1. Definitions. In addition to the definitions set forth above, the following terms, as used herein, shall have the following meanings:

“Affiliate” of any Person means any other Person directly or indirectly controlling or controlled by or under common control with such Person. For the purposes of this definition, “control” when used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“Agreement” means this Registration Rights Agreement, as it may be amended, supplemented or restated from time to time.

“April Contribution Agreement” means the Contribution Agreement, dated April 20, 1998, by and among the Company, the Operating Partnership and the Contributor.

“Articles of Incorporation” means the Articles of Amendment and Restatement of the Company, as the same may be amended, modified or restated from time to time.

“Business Day” means any day except a Saturday, Sunday or other day on which commercial banks in New York, New York or Los Angeles, California are authorized by law to close.

“Code” means the Internal Revenue Code of 1986, as amended from time to time or any successor statute thereto, as interpreted by the applicable regulations thereunder.

“Commission” means the Securities and Exchange Commission.

“Company” means Kilroy Realty Corporation, a Maryland corporation.

“Contributor” means Belair Capital Fund LLC, a Massachusetts limited liability company.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder.

“Exchangeable OP Units” means OP Units which may be redeemable for cash pursuant to Section 16.4 of the Partnership Agreement or exchangeable for Preferred Stock or redeemable for cash pursuant to Section 16.7 of the Partnership Agreement; (without regard to any limitations on the exercise of such exchange right as a result of the Ownership Limit Provisions, as defined below).

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“February Contribution Agreement” means the Contribution Agreement, dated February 6, 1998, by and among the Company, the Operating Partnership and the Contributor.

“General Partner” means the Company or its successors as general partner of the Operating Partnership.

“Holder” means any Unit Holder who is the record or beneficial owner of any Registrable Security or any assignee or transferee of such Registrable Security (including assignments or transfers of Registrable Securities to such assignees or transferees as a result of the foreclosure on any loans secured by such Registrable Securities) unless such Registrable Security is acquired in a public distribution pursuant to a registration statement under the Securities Act or pursuant to transactions exempt from registration under the Securities Act, in each such case where securities sold in such transaction may be resold without subsequent registration under the Securities Act.

“Incapacitated” shall have the meaning set forth in the Partnership Agreement.

“Indemnified Party” shall have the meaning set forth in Section 2.8 hereof.

“Indemnifying Party” shall have the meaning set forth in Section 2.8 hereof.

“Inspectors” shall have the meaning set forth in Section 2.4(g).

“Operating Partnership” means Kilroy Realty, L.P., a Delaware limited partnership.

“OP Units” means 7.45% Series A Cumulative Redeemable Preferred Units of the Operating Partnership.

“Ownership Limit Provisions” mean the various provisions of the Articles of Incorporation currently set forth in Article IV thereof, among other things, restricting the ownership of Preferred Stock by certain Persons to specified percentages of the outstanding Preferred Stock.

“Partnership Agreement” means the Fifth Amended and Restated Agreement of Limited Partnership of the Operating Partnership dated as of March 5, 2004, as the same may be amended, modified or restated from time to time.

“Person” means an individual or a corporation, partnership, limited liability company, association, trust, or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

“Piggy-Back Registration” shall have the meaning set forth in Section 2.2 hereof.

“Primary Registration” shall have the meaning set forth in Section 2.2 hereof.

“Preferred Stock” means the Company’s 7.45% Series A Cumulative Redeemable Preferred Stock.

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“REIT” means a real estate investment trust under Section 856 through Section 860 of the Code.

“Registrable Securities” means shares of Preferred Stock at any time owned, either of record or beneficially, by any Holder and no matter how acquired (including, without limitation, shares of Preferred Stock issued or issuable upon exchange of Exchangeable OP Units or issued or issuable by way of stock dividend or stock split, or in connection with a merger, consolidation, combination of shares, recapitalization or other reorganization and any other securities issued pursuant to any other distribution with respect to the Preferred Shares or in exchange for or replacement of such Preferred Shares) until (i) a registration statement covering such securities has been declared effective by the Commission and such shares have been sold or transferred pursuant to such effective registration statement, (ii) such shares are sold under circumstances in which all of the applicable conditions of Rule 144 under the Securities Act (or any similar provisions then in force) under the Securities Act are met or under which such shares may be sold pursuant to Rule 144(k) under the Securities Act or (iii) such shares have been otherwise transferred in a transaction that would constitute a sale thereof under the Securities Act, the Company has delivered a new certificate or other evidence of ownership for such shares not bearing the Securities Act restricted stock legend and such shares may be resold without subsequent registration under the Securities Act.

“Registration Expenses” shall have the meaning set forth in Section 2.5 hereof.

“Rule 144” means Rule 144 promulgated under the Securities Act, as such rule may be amended from time to time, or any similar rule (other than Rule 144A) or regulation hereafter adopted by the SEC providing for offers and sales of securities made in compliance therewith resulting in offers and sales by subsequent holders that are not affiliates of the Company of such securities being free of the registration and prospectus delivery requirements of the Securities Act.

“Rule 144A” means Rule 144A promulgated under the Securities Act, as such rule may be amended from time to time, or any similar rule (other than Rule 144) or regulation hereafter adopted by the SEC.

“Rule 415” means Rule 415 promulgated under the Securities Act, as such rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC.

“Secondary Registration” shall have the meaning set forth in Section 2.2 hereof.

“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder.

“Selling Holder” means a Holder who is selling Registrable Securities pursuant to a registration statement under the Securities Act pursuant to this Agreement.

“Shelf Registration” shall have the meaning set forth in Section 2.1 hereof.

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“Shelf Registration Statement” means any registration statement relating to a Shelf Registration that covers any of the Preferred Stock of the Company filed with the Commission under the Securities Act, including the Prospectus, amendments and supplements to such registration statement, including post-effective amendments, all exhibits and all material incorporated by reference or deemed to be incorporated by reference in such registration statement.

“Underwriter” means a securities dealer who purchases any Registrable Securities as principal and not as part of such dealer’s market-making activities.

“Unit Holder(s)” shall have the meaning set forth in the introductory paragraphs hereto.

ARTICLE II

REGISTRATION RIGHTS

SECTION 2.1. Shelf Registration.

The Company shall prepare and file a “shelf” registration statement (the “Shelf Registration Statement”) with respect to the Registrable Securities covering the resale thereof by the Holders on an appropriate form for an offering to be made on a continuous or delayed basis pursuant to Rule 415 (the “Shelf Registration”) within 60 days after the date the OP Units are exchanged for shares of Preferred Stock and shall use its best efforts to cause the Shelf Registration Statement to be declared effective within 120 days after the date of such exchange. The Company shall use its best efforts to keep such Shelf Registration Statement continuously effective until the earliest of (A) 24 months following the effective date of the Shelf Registration Statement, (B) such time as all of the Registrable Securities have been sold pursuant to the Shelf Registration Statement or Rule 144 and (C) the date on which the Registrable Securities may be sold without volume restrictions in accordance with Rule 144.

SECTION 2.2. Piggy-Back Registration.

(a) If the Company proposes to file a registration statement under the Securities Act with respect to an offering by the Company for its own account (a “Primary Registration”) or for the account of any of its respective securityholders (other than (i) any registration statement filed by the Company under the Securities Act relating to an offering of capital stock for its own account as a result of the exercise of the exchange rights set forth in Section 8.6 of the Partnership Agreement, and covering the resale by the Holders of the shares of capital stock received in such exchange, or (ii) a registration statement on Form S-4 or S-8 (or any substitute form that may be adopted by the Commission) or filed in connection with an exchange offer or offering of securities solely to the Company’s existing securityholders) (a “Secondary Registration”), then the Company shall give written notice of such proposed filing to the Holders of Registrable Securities as soon as practicable (but in no event less than ten (10) days before the anticipated filing date), and such notice shall offer such Holders the opportunity to register such number of shares of Registrable Securities as each such Holder may request (a “Piggy-Back Registration”). The Company shall use its commercially reasonable efforts to cause the managing Underwriter or Underwriters of a proposed underwritten offering to permit

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the Registrable Securities requested to be included in a Piggy-Back Registration to be included on the same terms and conditions as any similar securities of the Company included therein.

(b) Withdrawal from Registration. Any Holder requesting inclusion of Registrable Securities pursuant to this Section 2.2 may, at any time prior to the effective date of the registration statement relating to such registration, revoke such request by delivering written notice of such revocation to the Company; provided, however, that if the Company, in consultation with its financial and legal advisors, determines that such revocation would materially delay the registration or otherwise require a recirculation of the prospectus contained in the registration statement, then such Holder shall have no such right to revoke its request. If the withdrawal of any Registrable Securities would allow, within the marketing limitations set forth above, the inclusion in the underwriting of a greater number of shares of Registrable Securities, then, to the extent practicable and without delaying the underwriting, the Company shall offer to the Holders an opportunity to include additional shares of Registrable Securities in the proportions discussed in Section 2.3 below.

(c) Termination or Withdrawal by the Company. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 2.2 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration.

SECTION 2.3. Reduction of Offering. Notwithstanding anything contained herein, if the managing Underwriter or Underwriters of an offering described in Section 2.2 hereof are of the opinion that (i) the size of the offering that the Holders, the Company and/or such other persons intend to make or (ii) the kind of securities that the Holders, the Company and/or any other persons or entities intend to include in such offering are such that the success of the offering would be materially and adversely affected by inclusion of the Registrable Securities requested to be included, then (A) if the size of the offering is the basis of such Underwriter’s opinion, the amount of securities to be offered for the accounts of Holders shall be reduced pro rata (according to the Registrable Securities proposed for registration) to the extent necessary to reduce the total amount of securities to be included in such offering to the amount recommended by such managing Underwriter or Underwriters; provided that if securities are being offered for the account of other persons or entities as well as the Company, then (1) in the case of a Primary Registration, the reduction in the amount of securities requested to be offered shall be made first pro rata among securities offered for the accounts of Holders and such other persons or entities, and (2) in the case of a Secondary Registration, the reduction in the amount of securities requested to be offered shall be made in accordance with the terms of the registration rights agreement pursuant to which such Secondary Registration is made, provided that if any such registration rights agreement is silent with respect to reductions in shares being registered thereunder, then with respect to the Registrable Securities intended to be offered by Holders, the proportion by which the amount of such class of securities intended to be offered by Holders is reduced shall not exceed the proportion by which the amount of such class of securities intended to be offered by such other persons or entities is reduced and (B) if the combination of securities to be offered is the basis of such Underwriter’s opinion, (x) the Registrable Securities to be included in such offering shall be reduced as described in clause (A) above (subject to the proviso in clause (A)) or, (y) if the actions described in clause (x) would, in the judgment of the managing Underwriter, be insufficient to substantially eliminate the adverse

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effect that inclusion of the Registrable Securities requested to be included would have on such offering, such Registrable Securities will be excluded from such offering.

SECTION 2.4. Registration Procedures; Filings; Information. In connection with any Shelf Registration Statement under Section 2.1 hereof, the Company will use its best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof as quickly as practicable (and in any event within the periods referred to in Section 2.1), and in connection with any such request:

(a) As provided in Section 2.1 hereof, the Company will as expeditiously as possible prepare and file with the Commission a registration statement on any form for which the Company then qualifies or which counsel for the Company shall deem appropriate and which form shall be available for the sale by the Selling Holders of the Registrable Securities to be registered thereunder in accordance with the intended method of distribution thereof and which shall comply as to form in all material respects with the requirements of the applicable form and include or incorporate by reference all financial statements required by the Commission to be filed therewith, and use its best efforts to cause such filed registration statement to become and remain effective.

(b) The Company will, if requested, prior to filing a registration statement or prospectus or any amendment or supplement thereto, notify each Holder of Registrable Securities that a Shelf Registration Statement is being filed and advise such Holder that an offering of Registrable Securities will be made in accordance with the method elected (which method may also include an underwritten offering) by the Holders of a majority of the Registrable Securities, furnish to each Selling Holder and each Underwriter, if any, of the Registrable Securities covered by such registration statement or prospectus copies of such registration statement or prospectus or any amendment or supplement thereto as proposed to be filed, and thereafter furnish to such Selling Holder and Underwriter, if any, such number of conformed copies of such registration statement, each amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein), the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such Selling Holder or Underwriter may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Selling Holder.

(c) The Company will notify each Holder of Registrable Securities and counsel for such Holder promptly and, if requested by such Holder or counsel, confirm such advice in writing promptly (i) when a registration statement has become effective and when any post-effective amendments and supplements thereto become effective, (ii) of any request by the Commission or any state securities authority for post-effective amendments and supplements to a registration statement has become effective, (iii) of the issuance by the Commission or any state securities authority of any stop order suspending the effectiveness of a registration statement or the initiation of any proceedings for that purpose, (iv) if, during the period a registration statement is effective, the representations and warranties of the Company contained in any underwriting agreement, securities sales agreement or other similar agreement, if any, relating to such offering cease to be true and correct in all material respects, (v) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such

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purpose, and (vi) of any determination by the Company that a post-effective amendment to a registration statement would be appropriate.

(d) The Company will use its best efforts to (i) register or qualify the Registrable Securities under such other securities or blue sky laws of such jurisdictions in the United States (where an exemption is not available) as any Selling Holder or managing Underwriter or Underwriters, if any, reasonably (in light of such Selling Holder’s intended plan of distribution) requests by the time the registration statement relating thereto is declared effective by the Commission and (ii) cause such Registrable Securities to be registered with or approved by such other governmental agencies or authorities, including the National Association of Securities Dealers (“NASD”), as may be necessary by virtue of the business and operations of the Company and do any and all other acts and things that may be reasonably necessary or advisable to enable such Selling Holder to consummate the disposition of the Registrable Securities owned by such Selling Holder; provided that the Company will not be required to (A) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph (d), (B) subject itself to taxation in any such jurisdiction or (C) consent to general service of process in any such jurisdiction except as may be required by the Securities Act.

(e) The Company will immediately notify each Selling Holder or Underwriter of such Registrable Securities, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the occurrence of an event requiring the preparation of a supplement or amendment to such prospectus and shall file with the Commission such amendments and supplements to such prospectus and deliver copies of the same to the Selling Holders or Underwriters, as the case may be, so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances then existing, not misleading and promptly make available to each Selling Holder a reasonable number of copies of any such supplement or amendment.

(f) The Company will enter into customary agreements (including an underwriting agreement or securities sale agreement, if any, in customary form) containing such representations and warranties to the Holders of such Registrable Securities and the Underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in similar underwritten offerings as may be reasonably requested by them and take such other actions as are reasonably required in order to expedite or facilitate the disposition of such Registrable Securities.

(g) The Company will make available for inspection by any Selling Holder of such Registrable Securities, any Underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other professional retained by any such Selling Holder or Underwriter (collectively, the “Inspectors”), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the “Records”) as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company’s officers, directors and employees to supply all information reasonably requested by any Inspectors in connection with such registration

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statement. Records which the Company determines, in good faith, to be confidential and which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in such registration statement or (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction. Each Selling Holder of such Registrable Securities agrees that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the company or its Affiliates or otherwise disclosed by it unless and until such is made generally available to the public. Each Selling Holder of such Registrable Securities further agrees that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential.

(h) The Company will furnish to each Selling Holder and to each Underwriter, if any, a signed counterpart, addressed to such Selling Holder or Underwriter, of (i) an opinion or opinions of counsel to the Company and (ii) a comfort letter or comfort letters from the Company’s independent public accountants (to the extent permitted by the standards of the American Institute of Certified Public Accountants), each in customary form and covering such matters of the type customarily covered by opinions or comfort letters, as the case may be, as the Holders of a majority of the Registrable Securities included in such offering or the managing Underwriter or Underwriters therefor reasonably request.

(i) The Company will otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its securityholders, as soon as reasonably practicable, an earnings statement covering a period of twelve (12) months, beginning within three (3) months after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 of the Commission promulgated thereunder (or any successor rule or regulation hereafter adopted by the Commission).

(j) The Company will use its best efforts to cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed.

(k) The Company will use its best efforts to obtain CUSIP numbers for the Preferred Stock not later than the effective date of the Shelf Registration Statement.

The Company may require, as a condition precedent to the obligations of the Company under the Agreement, each Selling Holder of Registrable Securities to promptly furnish in writing to the Company such information regarding such Selling Holder, the Registrable Securities held by it and the intended method of distribution of the Registrable Securities as the Company may from time to time reasonably request and such other information as may be legally required in connection with such registration.

Each Selling Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 2.4(e) hereof, such Selling Holder will forthwith discontinue disposition of Registrable Securities pursuant to the registration

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statement and prospectus covering such Registrable Securities until such Selling Holder’s receipt of the copies of the supplemented or amended prospectus contemplated by Section 2.4(e) hereof, and, if so directed by the Company, such Selling Holder will deliver to the Company all copies, other than permanent file copies then in such Selling Holder’s possession, of the most recent prospectus covering such Registrable Securities at the time of receipt of such notice. Each Selling Holder of Registrable Securities agrees that it will immediately notify the Company at any time when a prospectus relating to the registration of such Registrable securities is required to be delivered under the Securities Act of the happening of an event as a result of which information previously furnished by such Selling Holder to the Company in writing for inclusion in such prospectus contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. In the event the Company shall give such notice, the Company shall extend the period during which such registration statement shall be maintained effective (including the period referred to in Section 2.4(a) hereof) by the number of days during the period from and including the date of the giving of notice pursuant to Section 2.4(e) hereof to the date when the Company shall make available to the Selling Holders of Registrable Securities covered by such registration statement a prospectus supplemented or amended to conform with the requirements of Section 2.4(e) hereof.

SECTION 2.5. Registration Expenses. In connection with any registration statement required to be filed hereunder, the Company shall pay the following registration expenses incurred in connection with the registration hereunder (the “Registration Expenses”): (i) all Commission, stock exchange, NASD or other registration and filing fees, (ii) fees and expenses of compliance with securities or blue sky laws and compliance with the rules of the NASD (including reasonable fees and disbursements of U.S. and local counsel for any Underwriters and Holders in connection with blue sky qualifications of the Registrable Securities), (iii) printing expenses of any persons in preparing and distributing any Shelf Registration Statement, any prospectus, any amendments or supplements thereto, any underwriting agreements, securities sales agreements, certificates representing the Preferred Stock and any other document relating to the performance of, and compliance with, this Agreement, (iv) internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), (v) the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange, (vi) reasonable fees and disbursements of counsel for the Company and customary fees and expenses for independent certified public accountants retained by the Company (including the expenses of any special audits or comfort letters or costs associated with compliance with such special audits or with the delivery by independent certified public accountants of a comfort letter or comfort letters requested pursuant to Section 2.4(h) hereof), (vii) the reasonable fees and expenses of any special experts retained by the Company in connection with such registration, and (viii) reasonable fees and expenses of one counsel (who shall be reasonably acceptable to the Company) for the Selling Holders. Except as expressly provided in the preceding sentence, the Company shall have no obligation to pay any underwriting fees, discounts or commissions attributable to the sale of Registrable Securities, or any out-of-pocket expenses of the Holders (or the agents who manage their accounts) or any transfer taxes relating to the registration or sale of the Registrable Securities.

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SECTION 2.6. Indemnification by the Company. The Company agrees to indemnify and hold harmless each Selling Holder of Registrable Securities, its officers, directors and agents, and each Person, if any, who controls such Selling Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages, expenses and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus relating to the Registrable Securities (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information furnished in writing to the Company by such Selling Holder or on such Selling Holder’s behalf expressly for inclusion therein. The Company also agrees to indemnify any Underwriters of the Registrable Securities, their officers and directors and each Person who controls such Underwriters within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act on substantially the same basis as that of the indemnification of the Selling Holders provided in this Section 2.6, provided that the foregoing indemnity with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter of the Registrable Securities from whom the person asserting any such losses, claims, damages or liabilities purchased the Registrable Securities which are the subject thereof if (i) such person did not receive a copy of the prospectus (or the prospectus as supplemented) at or prior to the confirmation of the sale of such Registrable Securities to such person in any case where such delivery is required by the Securities Act and the untrue statement or omission of a material fact contained in such preliminary prospectus was corrected in the prospectus (or the prospectus as supplemented), provided that such Underwriter received prior notice that such prospectus (or the prospectus as supplemented) corrected such untrue statement or omission of a material fact; or (ii) such person received a prospectus at or prior to the confirmation of the sale of such Registrable Securities to such person during the period when the use of such prospectus has been suspended in accordance with Section 2.4, provided that such Underwriter received prior notice of such suspension.

SECTION 2.7. Indemnification by Holders of Registrable Securities. Each Selling Holder agrees, severally but not jointly, to indemnify and hold harmless the Company, its officers, directors and agents and each Person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to such Selling Holder, but only with respect to information relating to such Selling Holder furnished in writing by such Selling Holder or on such Selling Holder’s behalf expressly for use in any registration statement or prospectus relating to the Registrable Securities, or any amendment or supplement thereto, or any preliminary prospectus. In case any action or proceeding shall be brought against the Company or its officers, directors or agents or any such controlling person, in respect of which indemnity may be sought against such Selling Holder, such Selling Holder shall have the rights and duties given to the Company, and the Company or its officers, directors or agents or such controlling person shall have the rights and duties given to such Selling Holder, by Section 2.6 hereof.

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SECTION 2.8. Conduct of Indemnification Proceedings. In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Sections 2.6 or 2.7 hereof, such person (an “Indemnified Party”) shall promptly notify the person against whom such indemnity may be sought (an “Indemnifying Party”) in writing and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Party, and shall assume the payment of all fees and expenses. In any such proceeding, any Indemnified Party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the Indemnified Party and the Indemnifying Party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the Indemnifying Party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) at any time for all such Indemnified Parties, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Indemnified Parties, such firm shall be designated in writing by (i) in the case of Persons indemnified pursuant to Section 2.6 hereof, by the Selling Holders which owned a majority of the Registrable Securities sold under the applicable registration statement and (ii) in the case of Persons indemnified pursuant to Section 2.7 hereof, the Company. The Indemnifying Party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent, or if there be a final judgment for the plaintiff, the Indemnifying Party shall indemnify and hold harmless such Indemnified Parties from and against any loss or liability (to the extent stated above) by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an Indemnified Party shall have requested an Indemnifying Party to reimburse the Indemnified Party for fees and expenses of counsel as contemplated by the third sentence of this paragraph, the Indemnifying Party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than thirty (30) Business Days after receipt by such Indemnifying Party of the aforesaid request and (ii) such Indemnifying Party shall not have reimbursed the Indemnified Party in accordance with such request prior to the date of such settlement. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending or threatened proceeding in which any Indemnified Party is or could have been a party and indemnity could have been sought hereunder by such Indemnified Party, unless such settlement includes an unconditional release of such Indemnified Party from all liability arising out of such proceeding.

SECTION 2.9. Contribution. If the indemnification provided for in Sections 2.6 or 2.7 hereof is unavailable to an Indemnified Party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each such Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities (i) as between the Company and the Selling Holders on the one hand and the Underwriters on the other, in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Holders on the one hand and the Underwriters on the other from the offering of the securities, or if such allocation is not permitted by applicable law, in such proportion as is

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appropriate to reflect not only the relative benefits but also the relative fault of the Company and the Selling Holders on the one hand and of the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations and (ii) as between the Company on the one hand and each Selling Holder on the other, in such proportion as is appropriate to reflect the relative fault of the Company and of each Selling Holder in connection with such statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Holders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company and the Selling Holders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the prospectus. The relative fault of the Company and the Selling Holders on the one hand and of the Underwriters on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and the Selling Holders or by the Underwriters. The relative fault of the Company on the one hand and of each Selling Holder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or such Selling Holder, and the Company’s and the Selling Holder’s relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

The Company and the Selling Holders agree that it would not be just and equitable if contribution pursuant to this Section 2.9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages or liabilities referred to in Sections 2.6 and 2.7 hereof shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 2.9, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and no Selling Holder shall be required to contribute any amount in excess of the amount by which the total price at which the securities of such Selling Holder were offered to the public exceeds the amount of any damages which such Selling Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Selling Holder’s obligations to contribute pursuant to this Section 2.9 are several in the proportion that the proceeds of the offering received by such Selling Holder bears to the total proceeds of the offering received by all the Selling Holders and not joint.

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SECTION 2.10. Participation in Underwritten Registrations. No Person may participate in any underwritten registration hereunder unless such Person (a) agrees to sell such Person’s securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents in customary form and reasonably required under the terms of such underwriting arrangements and these registration rights provided for in this Article II.

SECTION 2.11. Rule 144. The Company covenants that it will file any reports required to be filed by it under the Securities Act and the Exchange Act and that it will take such further action as any Holder may reasonably request, all to the extent required from time to time to enable Holders to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the Commission. Upon the request of any Holder, the Company will deliver to such Holder a written statement as to whether it has complied with such requirements.

SECTION 2.12. Holdback Agreements.

(a) Restrictions on Public Sale by Holder of Registrable Securities. To the extent not inconsistent with applicable law, each Holder whose securities are included in a registration statement pursuant to Section 2.2 agrees, upon receipt of prior written notice from the Company received not later than 17 days prior to the effective date of such registration statement, not to effect any sale or distribution of the issue being registered or a similar security of the Company, or any securities convertible into or exchangeable or exercisable for such securities, including a “broker’s transaction” pursuant to Rule 144, but excluding any private sale made in reliance on Section 4(2) of the Securities Act, during the 14 days prior to, and during the 90-day period beginning on, the effective date of such registration statement (except as part of such registration), if and to the extent requested in writing by the Company in the case of a non-underwritten public offering or if and to the extent requested in writing by the managing Underwriter or Underwriters in the case of an underwritten public offering.

(b) If the Company determines in its good faith judgment that the filing of the Shelf Registration Statement under Section 2.1 hereof or the use of any related prospectus would require the disclosure of non-public material information that the Company has a bona fide business purpose for preserving as confidential or the disclosure of which would impede the Company’s ability to consummate a material transaction, and that the Company is not otherwise required by applicable securities laws or regulations to disclose, upon written notice of such determination by the Company, the rights of the Holders to offer, sell or distribute any Registrable Securities pursuant to the Shelf Registration Statement or to require the Company to take action with respect to the registration or sale of any Registrable Securities pursuant to the Shelf Registration Statement shall be suspended until the earlier of (i) the date upon which the Company notifies the Holders in writing that suspension of such rights for the grounds set forth in this Section 2.12(b) is no longer necessary and (ii) 180 days. The Company agrees to give such notice as promptly as practicable following the date that such suspension of rights is no longer necessary.

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(c) If all reports required to be filed by the Company pursuant to the Exchange Act have not been filed by the required date without regard to any extension, or if the consummation of any business combination by the Company has occurred or is probable for purposes of Rule 3-05 or Article 11 of Regulation S-X under the Act, upon written notice thereof by the Company to the Holders, the rights of the Holders to offer, sell or distribute any Registrable Securities pursuant to the Shelf Registration Statement or to require the Company to take action with respect to the registration or sale of any Registrable Securities pursuant to the Shelf Registration Statement shall be suspended until the date on which the Company has filed such reports or obtained and filed the financial information required by Rule 3-05 or Article 11 of Regulation S-X to be included or incorporated by reference, as applicable, in the Shelf Registration Statement, and the Company shall notify the Holders as promptly as practicable when such suspension is no longer required.

ARTICLE III

MISCELLANEOUS

SECTION 3.1. Remedies. In addition to being entitled to exercise all rights provided herein and granted by law, including recovery of damages, the Holders shall be entitled to specific performance of the rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate.

SECTION 3.2. Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given without the prior written consent of the Company and the Holders or any such Holder’s representative if any such Holder is Incapacitated. No failure or delay by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon any breach thereof shall constitute a waiver of any such breach or any other covenant, duty, agreement or condition.

SECTION 3.3. Notices. All notices and other communications in connection with this Agreement shall be made in writing by hand delivery, registered first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery:

(1) if to any Unit Holder:

c/o Eaton Vance Management

The Eaton Vance Building

255 State Street

Boston, Massachusetts 02109

Attn: Alan Dynner

Facsimile Number: (617) 598-0432

with a copy to:

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John L. Opar

Shearman & Sterling

599 Lexington Avenue

New York, NY 10022

Facsimile Number: (646) 848-7697

(2) if to the Company or the Operating Partnership:

12200 West Olympic Boulevard

Suite 200

Los Angeles, California 90064

Attention: President and Chief Executive Officer

Facsimile Number: (310) 481-6580

or to such other address as the Company may hereafter specify in writing.

All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; when received if deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and on the next business day, if timely delivered to an air courier guaranteeing overnight delivery.

SECTION 3.4. Successors and Assigns. Except as expressly provided in this Agreement, the rights and obligations of the Holders under this Agreement shall not be assignable by any Holder to any Person that is not a Holder. This Agreement shall be binding upon the parties hereto and their respective successors and assigns.

SECTION 3.5. Counterparts; Facsimile Signatures. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Each party shall become bound by this Agreement immediately upon affixing its signature hereto, which may be an original signature or facsimile thereof.

SECTION 3.6. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California without regard to the choice of law provisions thereof.

SECTION 3.7. Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby.

SECTION 3.8. Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive

16

statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted by the Company with respect to the Registrable Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter.

SECTION 3.9. Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

SECTION 3.10. No Third Party Beneficiaries. Nothing express or implied herein is intended or shall be construed to confer upon any person or entity, other than the parties hereto and their respective successors and assigns, any rights, remedies or other benefits under or by reason of this Agreement.

(Signature Pages Follow)

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

KILROY REALTY CORPORATION, a Maryland corporation
By:	/s/    TYLER ROSE
	Name: Tyler Rose
	Title: Senior Vice President and Treasurer
By:	/s/    RICHARD E. MORAN JR.
	Name: Richard E. Moran Jr.
	Title: Executive Vice President and             Chief Financial Officer

KILROY REALTY, L.P., a Delaware limited partnership
By:	KILROY REALTY CORPORATION, its general partner
	By:	/s/    TYLER ROSE
		Name: Tyler Rose
		Title: Senior Vice President and Treasurer
	By:	/s/    RICHARD E. MORAN JR.
		Name: Richard E. Moran Jr.
		Title: Executive Vice President and             Chief Financial Officer

BELAIR REAL ESTATE CORPORATION
By:	/s/    WILLIAM R. CROSS
	Name: William R. Cross
	Title: Vice President

BELROSE REALTY CORPORATION
By:	/s/    WILLIAM R. CROSS
	Name: William R. Cross
	Title: Vice President

BELSHIRE REALTY CORPORATION
By:	/s/    WILLIAM R. CROSS
	Name: William R. Cross
	Title: Vice President

MONTEBELLO REALTY CORP. 2002
By:	/s/    J. TIMOTHY FORD
	Name: J. Timothy Ford
	Title: President

EX-10.1

Exhibit 10.1

FIFTH AMENDED AND RESTATED

AGREEMENT OF LIMITED PARTNERSHIP

OF

KILROY REALTY, L.P.

TABLE OF CONTENTS

ARTICLE 1. DEFINED TERMS		1
Section 1.1.	Definitions.	1
ARTICLE 2. ORGANIZATIONAL MATTERS		20
Section 2.1.	Organization	20
Section 2.2.	Name	20
Section 2.3.	Resident Agent; Principal Office	21
Section 2.4.	Power of Attorney	21
Section 2.5.	Term	22
Section 2.6.	Number of Partners	22
ARTICLE 3. PURPOSE		23
Section 3.1.	Purpose and Business	23
Section 3.2.	Powers	23
Section 3.3.	Partnership Only for Purposes Specified	24
Section 3.4.	Representations and Warranties by the Parties	24
ARTICLE 4. CAPITAL CONTRIBUTIONS		26
Section 4.1.	Capital Contributions of the Partners	26
Section 4.2.	Loans by Third Parties	26
Section 4.3.	Additional Funding and Capital Contributions	26
Section 4.4.	Stock Incentive Plan	29
Section 4.5.	Other Contribution Provisions	29
Section 4.6.	No Preemptive Rights	29
ARTICLE 5. DISTRIBUTIONS		30
Section 5.1.	Requirement and Characterization of Distributions	30
Section 5.2.	Distributions in Kind	30
Section 5.3.	Distributions Upon Liquidation	30
Section 5.4.	Distributions to Reflect Issuance of Additional Partnership Interests	31
ARTICLE 6. ALLOCATIONS		31
Section 6.1.	Timing and Amount of Allocations of Net Income and Net Loss	31
Section 6.2.	General Allocations	31
Section 6.3.	Additional Allocation Provisions	33
Section 6.4.	Tax Allocations	35
ARTICLE 7. MANAGEMENT AND OPERATIONS OF BUSINESS		36
Section 7.1.	Management	36
Section 7.2.	Certificate of Limited Partnership	40
Section 7.3.	Restrictions on General Partner’s Authority	40
Section 7.4.	Reimbursement of the General Partner	43

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Section 7.5.	Outside Activities of the General Partner	44
Section 7.6.	Contracts with Affiliates	45
Section 7.7.	Indemnification	45
Section 7.8.	Liability of the General Partner	47
Section 7.9.	Other Matters Concerning the General Partner	48
Section 7.10.	Title to Partnership Assets	49
Section 7.11.	Reliance by Third Parties	49
ARTICLE 8. RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS		50
Section 8.1.	Limitation of Liability	50
Section 8.2.	Management of Business	50
Section 8.3.	Outside Activities of Limited Partners	50
Section 8.4.	Return of Capital	51
Section 8.5.	Rights of Limited Partners Relating to the Partnership	51
Section 8.6.	Common Limited Partner Redemption Rights	52
ARTICLE 9. BOOKS, RECORDS, ACCOUNTING AND REPORTS		54
Section 9.1.	Records and Accounting	54
Section 9.2.	Fiscal Year	55
Section 9.3.	Reports	55
Section 9.4.	Nondisclosure of Certain Information	55
ARTICLE 10. TAX MATTERS		56
Section 10.1.	Preparation of Tax Returns	56
Section 10.2.	Tax Elections	56
Section 10.3.	Tax Matters Partner	56
Section 10.4.	Organizational Expenses	57
Section 10.5.	Withholding	58
ARTICLE 11. TRANSFERS AND WITHDRAWALS		58
Section 11.1.	Transfer	58
Section 11.2.	Transfer of General Partner’s Partnership Interest	59
Section 11.3.	Limited Partners’ Rights to Transfer	61
Section 11.4.	Substituted Limited Partners	63
Section 11.5.	Assignees	63
Section 11.6.	General Provisions	64
Section 11.7.	Transfer of Pledged Partnership Units	66
ARTICLE 12. ADMISSION OF PARTNERS		67
Section 12.1.	Admission of Successor General Partner	67
Section 12.2.	Admission of Additional Limited Partners	67
Section 12.3.	Amendment of Agreement and Certificate of Limited Partnership	68

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ARTICLE 13. DISSOLUTION AND LIQUIDATION		68
Section 13.1.	Dissolution	68
Section 13.2.	Winding Up	69
Section 13.3.	Compliance with Timing Requirements of Regulations	70
Section 13.4.	Deemed Distribution and Recontribution	71
Section 13.5.	Rights of Limited Partners	71
Section 13.6.	Notice of Dissolution	71
Section 13.7.	Cancellation of Certificate of Limited Partnership	71
Section 13.8.	Reasonable Time for Winding-Up	72
Section 13.9.	Waiver of Partition	72
ARTICLE 14. AMENDMENT OF PARTNERSHIP AGREEMENT; CONSENTS		72
Section 14.1.	Amendments	72
Section 14.2.	Action by the Partners	72
ARTICLE 15. GENERAL PROVISIONS		74
Section 15.1.	Addresses and Notice	74
Section 15.2.	Titles and Captions	74
Section 15.3.	Pronouns and Plurals	74
Section 15.4.	Further Action	74
Section 15.5.	Binding Effect	74
Section 15.6.	Creditors	74
Section 15.7.	Waiver	75
Section 15.8.	Counterparts	75
Section 15.9.	Applicable Law	75
Section 15.10.	Invalidity of Provisions	75
Section 15.11.	Limitation to Preserve REIT Status	75
Section 15.12.	Entire Agreement	76
Section 15.13.	No Rights as Stockholders	76
ARTICLE 16. SERIES A PREFERRED UNITS		76
Section 16.1.	Designation and Number	76
Section 16.2.	Distributions	77
Section 16.3.	Liquidation Proceeds	79
Section 16.4.	Redemption	79
Section 16.5.	Voting Rights	82
Section 16.6.	Transfer Restrictions	83
Section 16.7.	Exchange Rights	84
Section 16.8.	No Conversion Rights	88
Section 16.9.	No Sinking Fund	88

iii

ARTICLE 17. [INTENTIONALLY OMITTED]		88
ARTICLE 18. RIGHTS OF CERTAIN LIMITED PARTNERS		89
Section 18.1.	Limited Partner Consent	89
Section 18.2.	Redemption Rights	89
Section 18.3.	Activities of Investors	90
Section 18.4.	Sale of Allen Properties	90
Section 18.5.	Transfer of Partnership Units	90
Section 18.6.	Distributions and Allocations	91
Section 18.7.	Admission of Additional Investors	91
ARTICLE 19. SERIES D PREFERRED UNITS		91
Section 19.1.	Definition	91
Section 19.2.	Designation and Number	92
Section 19.3.	Distributions	92
Section 19.4.	Intentionally Omitted	94
Section 19.5.	Liquidation Proceeds	94
Section 19.6.	Optional Redemption	94
Section 19.7.	Voting Rights	96
Section 19.8.	Transfer Restrictions	98
Section 19.9.	Exchange Rights	98
Section 19.10.	No Exchange Rights	102
Section 19.11.	No Sinking Fund	102
ARTICLE 20. SERIES E PREFERRED UNITS		102
Section 20.1.	Designation and Number	102
Section 20.2.	Distributions	102
Section 20.3.	Liquidation Proceeds	104
Section 20.4.	Redemption	105
Section 20.5.	Ranking	106
Section 20.6.	Voting Rights	106
Section 20.7.	Transfer Restrictions	106
Section 20.8.	No Conversion Rights	106
Section 20.9.	No Sinking Fund	106

iv

EXECUTION COPY

FIFTH AMENDED AND RESTATED

AGREEMENT OF LIMITED PARTNERSHIP

OF

KILROY REALTY, L.P.

THIS FIFTH AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP, dated as of March 5, 2004, is entered into by and among Kilroy Realty Corporation, a Maryland corporation (the “Company”), as the General Partner and the Persons whose names are set forth on Exhibit A attached hereto, as the Limited Partners, together with any other Persons who become Partners in the Partnership as provided herein.

ARTICLE 1.

DEFINED TERMS

WHEREAS, the General Partner and the Limited Partners are parties to that certain Fourth Amended and Restated Agreement of Limited Partnership, dated November 24, 1998, as amended;

WHEREAS, by virtue of the execution of this Agreement by the Company and a Majority in Interest of the Limited Partners (as defined herein), the Company and such Limited Partners hereby consent to the amendment and restatement of the Fourth Amended and Restated Agreement of Limited Partnership effective as of the date hereof.

NOW, THEREFORE, BE IT RESOLVED, that for good and adequate consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows:

Section 1.1. Definitions.

The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement.

“Act” means the Delaware Revised Uniform Limited Partnership Act, as it may be amended from time to time, and any successor to such statute.

“Additional Funds” shall have the meaning set forth in Section 4.3.A.

“Additional Limited Partner” means a Person admitted to the Partnership as a Limited Partner pursuant to Section 12.2 hereof and who is shown as such on the books and records of the Partnership.

“Adjusted Capital Account Deficit” means, with respect to any Partner, the deficit balance, if any, in such Partner’s Capital Account as of the end of the relevant fiscal year, after giving effect to the following adjustments:

(i) decrease such deficit by any amounts which such Partner is obligated to restore pursuant to this Agreement or is deemed to be obligated to restore

pursuant to Regulations Section 1.704-1(b)(2)(ii)(c) or the penultimate sentence of each of Regulations Sections 1.704-2(i)(5) and 1.704-2(g); and

(ii) increase such deficit by the items described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6).

The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.

“Adjustment Date” shall have the meaning set forth in Section 4.3.E.

“Affiliate” means, with respect to any Person, any Person directly or indirectly controlling, controlled by or under common control with such Person.

“Agreed Value” means (i) in the case of any Contributed Property set forth in Exhibit A and as of the time of its contribution to the Partnership, the Agreed Value of such property as set forth in Exhibit A; (ii) in the case of any Contributed Property not set forth in Exhibit A and as of the time of its contribution to the Partnership, the fair market value of such property or other consideration as determined by the General Partner, reduced by any liabilities either assumed by the Partnership upon such contribution or to which such property is subject when contributed; and (iii) in the case of any property distributed to a Partner by the Partnership, the fair market value of such property as determined by the General Partner at the time such property is distributed, reduced by any indebtedness either assumed by such Partner upon such distribution or to which such property is subject at the time of the distribution as determined under Section 752 of the Code and the Regulations thereunder.

“Agreement” means this Fifth Amended and Restated Agreement of Limited Partnership, as it may be amended, modified, supplemented or restated from time to time.

“Appraisal” means with respect to any assets, the opinion of an independent third party experienced in the valuation of similar assets, selected by the General Partner in good faith; such opinion may be in the form of an opinion by such independent third party that the value for such asset as set by the General Partner is fair, from a financial point of view, to the Partnership.

“Assignee” means a Person to whom one or more Partnership Units have been transferred in a manner permitted under this Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5.

“Available Cash” means, with respect to any period for which such calculation is being made, (i) the sum of:

a. the Partnership’s Net Income or Net Loss (as the case may be) for such period,

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b. Depreciation and all other noncash charges deducted in determining Net Income or Net Loss for such period,

c. the amount of any reduction in reserves of the Partnership referred to in clause (ii)(f) below (including, without limitation, reductions resulting because the General Partner determines such amounts are no longer necessary),

d. the excess of the net proceeds from the sale, exchange, disposition, or refinancing of Partnership property for such period over the gain (or loss, as the case may be) recognized from any such sale, exchange, disposition, or refinancing during such period (excluding Terminating Capital Transactions), and

e. all other cash received by the Partnership for such period that was not included in determining Net Income or Net Loss for such period;

(ii) less the sum of:

a. all principal debt payments made during such period by the Partnership,

b. capital expenditures made by the Partnership during such period,

c. investments in any entity (including loans made thereto) to the extent that such investments are not otherwise described in clauses (ii)(a) or (b),

d. all other expenditures and payments not deducted in determining Net Income or Net Loss for such period,

e. any amount included in determining Net Income or Net Loss for such period that was not received by the Partnership during such period,

f. the amount of any increase in reserves established during such period which the General Partner determines are necessary or appropriate in its sole and absolute discretion, and

g. the amount of any working capital accounts and other cash or similar balances which the General Partner determines to be necessary or appropriate in its sole and absolute discretion.

Notwithstanding the foregoing, Available Cash shall not include any cash received or reductions in reserves, or take into account any disbursements made or reserves established, after commencement of the dissolution and liquidation of the Partnership.

“Board of Directors” means the Board of Directors of the General Partner.

3

“Business Day” shall mean each day, other than a Saturday or a Sunday, which is not a day on which banking institutions in Los Angeles, California, or New York, New York are authorized or required by law, regulation or executive order to close.

“Capital Account” means, with respect to any Partner, the Capital Account maintained for such Partner in accordance with the following provisions:

(a) To each Partner’s Capital Account there shall be added such Partner’s Capital Contributions, such Partner’s share of Net Income and any items in the nature of income or gain which are specially allocated pursuant to Section 6.3, and the amount of any Partnership liabilities assumed by such Partner or which are secured by any property distributed to such Partner.

(b) From each Partner’s Capital Account there shall be subtracted the amount of cash and the Gross Asset Value of any property distributed to such Partner pursuant to any provision of this Agreement, such Partner’s distributive share of Net Losses and any items in the nature of expenses or losses which are specially allocated pursuant to Section 6.3 hereof, and the amount of any liabilities of such Partner assumed by the Partnership or which are secured by any property contributed by such Partner to the Partnership.

(c) In the event any interest in the Partnership is transferred in accordance with the terms of this Agreement the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred interest.

(d) In determining the amount of any liability for purposes of subsections (a) and (b) hereof, there shall be taken into account Code section 752(c) and any other applicable provisions of the Code and Regulations.

(e) The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Sections 1.704-1(b) and 1.704-2, and shall be interpreted and applied in a manner consistent with such Regulations. In the event the General Partner shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Partnership, the General Partner, or the Limited Partners) are computed in order to comply with such Regulations, the General Partner may make such modification, provided, that it is not likely to have a material effect on the amounts distributable to any Person pursuant to Article 13 of this Agreement upon the dissolution of the Partnership. The General Partner also shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Partners and the amount of Partnership capital reflected on the Partnership’s balance sheet, as computed for book purposes, in accordance with Regulations Section 1.704-1(b)(2)(iv)(q), and (ii) make any

4

appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b) or Section 1.704-2.

“Capital Contribution” means, with respect to any Partner, the amount of money and the initial Gross Asset Value of any property (other than money) contributed to the Partnership by such Partner.

“Cash Amount” means, with respect to any Partnership Units subject to a Redemption, an amount of cash equal to the Deemed Partnership Interest Value attributable to such Partnership Units.

“Certificate” means the Certificate of Limited Partnership relating to the Partnership filed in the office of the Secretary of State of Delaware, as amended from time to time in accordance with the terms hereof and the Act.

“Charter” means the Articles of Incorporation of the General Partner filed with the Maryland State Department of Assessments and Taxation on September 13, 1996, as amended or restated from time to time.

“Code” means the Internal Revenue Code of 1986, as amended from time to time or any successor statute thereto, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of future law.

“Common Limited Partner” means any Person holding Common Units, and named as a Common Limited Partner in Exhibit A attached hereto, as such Exhibit may be amended from time to time, or any Substituted Limited Partner or Additional Limited Partner, in such Person’s capacity as a Common Limited Partner in the Partnership.

“Common Unit” means a Partnership Unit representing a Partnership Interest that is without preference as to distributions and allocations.

“Company” shall have the meaning set forth in the preamble to this Agreement.

“Consent” means the consent to, approval of, or vote on a proposed action by a Partner given in accordance with Article 14 hereof.

“Consent of the Limited Partners” means the Consent of a Majority in Interest of the Limited Partners, other than the Preferred Limited Partners, which Consent shall be obtained prior to the taking of any action for which it is required by this Agreement and may be given or withheld by a Majority in Interest of the Limited Partners, unless otherwise expressly provided herein, in their sole and absolute discretion.

“Consent of the Partners” means the Consent of Partners, other than the Preferred Limited Partners, holding Percentage Interests that in the aggregate are equal to or greater than

5

60% of the aggregate Percentage Interests of all Partners, other than the Preferred Limited Partners, which Consent shall be obtained prior to the taking of any action for which it is required by this Agreement and may be given or withheld by such Partners, in their sole and absolute discretion.

“Constructively Own” means ownership under the constructive ownership rules described in Exhibit G.

“Contributed Property” means each property or other asset, in such form as may be permitted by the Act, but excluding cash, contributed or deemed contributed to the Partnership (or, to the extent provided in applicable regulations, deemed contributed by the Partnership on termination and reconstitution thereof pursuant to Section 708 of the Code).

“Debt” means, as to any Person, as of any date of determination, (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services; (ii) all amounts owed by such Person to banks or other Persons in respect of reimbursement obligations under letters of credit, surety bonds and other similar instruments guaranteeing payment or other performance of obligations by such Person; (iii) all indebtedness for borrowed money or for the deferred purchase price of property or services secured by any lien on any property owned by such Person, to the extent attributable to such Person’s interest in such property, even though such Person has not assumed or become liable for the payment thereof; and (iv) lease obligations of such Person which, in accordance with generally accepted accounting principles, should be capitalized.

“Deemed Partnership Interest Value” means, as of any date with respect to any class of Partnership Interests, the Deemed Value of the Partnership Interests of such class multiplied by the applicable Partner’s Percentage Interest of such class.

“Deemed Value of the Partnership Interests” means, as of any date with respect to any class or series of Partnership Interests (i) the total number of Partnership Units of the General Partner in such class of Partnership Interests (as provided for in Sections 4.1 and 4.3.C) issued and outstanding as of the close of business on such date multiplied by the Fair Market Value of a share of capital stock of the General Partner which corresponds to such class or series of Partnership Interests on such date (as adjusted pursuant to Section 7.5 (in the event the General Partner acquires material assets, other than on behalf of the Partnership) and for stock dividends and distributions, stock splits and subdivisions, reverse stock splits and combinations, distributions of rights, warrants or options, and distributions of evidences of indebtedness or assets relating to assets not received by the General Partner pursuant to a pro rata distribution by the Partnership); divided by (ii) the Percentage Interest of the General Partner in such class or series of Partnership Interests on such date; provided, that, if no outstanding shares of capital stock of the General Partner correspond to a class of series of Partnership Interests, the Deemed Value of Partnership Interests with respect to such class or series shall be equal to an amount reasonably determined by the General Partner. Without limiting the generality of the foregoing, the Deemed Value of the Partnership Interests referenced in the preceding sentence shall be

6

adjusted for the issuance, distribution and triggering of exercisability of the Rights (which adjustment shall be made as necessary to equitably reflect the dilution in REIT Shares resulting from the issuance and exercise of the Rights, in each case taking into account any increase pursuant to Section 4.5.B in the number of Partnership Units held by the Limited Partners).

“Depreciation” means, for each fiscal year or other period, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the General Partner.

“Effective Date” means the date of closing of the initial public offering of REIT Shares upon which date contributions set forth on Exhibit A shall become effective.

“Excess Units” shall have the meaning set forth in Section 16.7.A(iii).

“Exchange Notice” shall have the meaning set forth in Section 16.7.B.

“Exchange Price” shall have the meaning set forth in Section 16.7.A(i).

“Fair Market Value” means, with respect to any security of the General Partner, the average of the daily market price for the ten (10) consecutive trading days immediately preceding the date with respect to which “Fair Market Value” must be determined hereunder or, if such date is not a Business Day, the immediately preceding Business Day. The market price for each such trading day shall be: (i) if such security is listed or admitted to trading on any securities exchange or the Nasdaq National Market, the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day, (ii) if such security is not listed or admitted to trading on any securities exchange or the Nasdaq National Market, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or (iii) if such security is not listed or admitted to trading on any securities exchange or the Nasdaq National Market and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than 10 days prior to the date in question) for which prices have been so reported; provided, that if there are no bid and asked prices reported during the 10 days prior to the date in question, the Fair Market Value of such security shall be determined by the General Partner acting in good faith on the

7

basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. In the event the REIT Shares Amount for shares of common stock includes rights that a holder of such shares would be entitled to receive, then the Fair Market Value of such rights shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate; provided, that in connection with determining the Deemed Value of the Partnership Interests for purposes of determining the number of additional Partnership Units issuable upon a Capital Contribution funded by an underwritten public offering of shares of capital stock of the General Partner, the Fair Market Value of such shares shall be the public offering price per share of such class of capital stock sold; and, provided further, that the Fair Market Value of any rights issued pursuant to the Rights Agreement shall be deemed to have no value unless a “triggering event” (as defined in the Rights Agreement) shall have occurred (i.e., if the Rights issued pursuant thereto are no longer “attached” to the REIT Shares and are able to trade independently). Notwithstanding the foregoing, the General Partner in its reasonable discretion may use a different “Fair Market Value” for purposes of making the determinations under subparagraph (ii) of the definition of “Gross Asset Value” and Section 4.3.E. in connection with the contribution of Property to the Partnership by a third-party, provided such value shall be based upon the value per REIT Share (or per Partnership Unit) agreed upon by the General Partner and such third-party for purposes of such contribution.

“Funding Debt” means the incurrence of any Debt by or on behalf of the General Partner for the purpose of providing funds to the Partnership.

“General Partner” means the Company or its successors as general partner of the Partnership.

“General Partner Interest” means a Partnership Interest held by the General Partner. A General Partner Interest may be expressed as a number of Partnership Units.

“General Partner Loan” shall have the meaning set forth in Section 4.3.B.

“General Partner Payment” shall have the meaning set forth in Section 15.11.

“Gross Asset Value” means, with respect to any asset, the asset’s adjusted basis for federal income tax purposes, except as follows:

(a) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset, as determined by the contributing Partner and the General Partner (as set forth on Exhibit A attached hereto, as such Exhibit may be amended from time to time); provided, that if the contributing Partner is the General Partner then, except with respect to the General Partner’s initial Capital Contribution which shall be determined as set forth on Exhibit A, or capital contributions of cash, REIT Shares or other shares of capital stock of the General Partner, the determination of the fair market value of the contributed asset shall be determined by (i) the price paid by the General Partner if the asset is

8

acquired by the General Partner contemporaneously with its contribution to the Partnership, or (ii) by Appraisal if otherwise acquired by the General Partner.

(b) Immediately prior to the times listed below, the Gross Asset Values of all Partnership assets shall be adjusted to equal their respective gross fair market values, as determined by the General Partner using such reasonable method of valuation as it may adopt, provided however, that for such purpose, the net value of all of the Partnership assets, in the aggregate, shall be equal to the Deemed Value of the Partnership Interests of all classes of Partnership Interests then outstanding, regardless of the method of valuation adopted by the General Partner:

(i) the acquisition of an additional interest in the Partnership by a new or existing Partner in exchange for more than a de minimis Capital Contribution, if the General Partner reasonably determines that such adjustment is necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership;

(ii) the distribution by the Partnership to a Partner of more than a de minimis amount of Partnership property as consideration for an interest in the Partnership if the General Partner reasonably determines that such adjustment is necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership;

(iii) the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); and

(iv) at such other times as the General Partner shall reasonably determine necessary or advisable in order to comply with Regulations Sections 1.704-1(b) and 1.704-2.

(c) The Gross Asset Value of any Partnership asset distributed to a Partner shall be the gross fair market value of such asset on the date of distribution as determined by the distributee and the General Partner; provided, that if the distributee is the General Partner, or if the distributee and the General Partner cannot agree on such a determination, by Appraisal.

(d) The Gross Asset Values of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m); provided, however, that Gross Asset Values shall not be adjusted pursuant to this subparagraph (d) to the extent that the General Partner reasonably determines that an adjustment pursuant to subparagraph (b) is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this subparagraph (d).

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(e) If the Gross Asset Value of a Partnership asset has been determined or adjusted pursuant to subparagraph (a), (b) or (d), such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Net Income and Net Losses.

“Holder” means either the Partner or Assignee owning a Partnership Unit.

“Immediate Family” means, with respect to any natural Person, such natural Person’s estate or heirs or current spouse or former spouse, parents, parents-in-law, children, siblings and grandchildren and any trust or estate, all of the beneficiaries of which consist of such Person or such Person’s spouse, former spouse, parents, parents-in-law, children, siblings or grandchildren.

“Incapacity” or “Incapacitated” means, (i) as to any individual Partner, death, total physical disability or entry by a court of competent jurisdiction adjudicating him or her incompetent to manage his or her Person or his or her estate; (ii) as to any corporation which is a Partner, the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its charter; (iii) as to any partnership which is a Partner, the dissolution and commencement of winding up of the partnership; (iv) as to any estate which is a Partner, the distribution by the fiduciary of the estate’s entire interest in the Partnership; (v) as to any trustee of a trust which is a Partner, the termination of the trust (but not the substitution of a new trustee); or (vi) as to any Partner, the bankruptcy of such Partner. For purposes of this definition, bankruptcy of a Partner shall be deemed to have occurred when (a) the Partner commences a voluntary proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect, (b) the Partner is adjudged as bankrupt or insolvent, or a final and nonappealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect has been entered against the Partner, (c) the Partner executes and delivers a general assignment for the benefit of the Partner’s creditors, (d) the Partner files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Partner in any proceeding of the nature described in clause (b) above, (e) the Partner seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator for the Partner or for all or any substantial part of the Partner’s properties, (f) any proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect has not been dismissed within 120 days after the commencement thereof, (g) the appointment without the Partner’s consent or acquiescence of a trustee, receiver or liquidator has not been vacated or stayed within 90 days of such appointment, or (h) an appointment referred to in clause (g) is not vacated within 90 days after the expiration of any such stay.

“Indemnitee” means (i) any Person subject to a claim or demand or made or threatened to be made a party to, or involved or threatened to be involved in, an action, suit or proceeding by reason of his or her status as (A) the General Partner or (B) a director, officer, employee or agent of the Partnership or the General Partner, and (ii) such other Persons

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(including Affiliates of the General Partner or the Partnership) as the General Partner may designate from time to time, in its sole and absolute discretion.

“IRS” means the Internal Revenue Service, which administers the internal revenue laws of the United States.

“Junior Units” means Partnership Units representing any class or series of Partnership Interest ranking, as to distributions and voluntary or involuntary liquidation, dissolution or winding up of the Partnership, junior to the Series A Preferred Units, the Series D Preferred Units and the Series E Preferred Units, including, without limitation, the Series B Preferred Units, if any.

“Limited Partner” means each Preferred Limited Partner or Common Limited Partner.

“Limited Partnership Interest” means a Partnership Interest of a Limited Partner representing a fractional part of the Partnership Interests of all Limited Partners and includes any and all benefits to which the Holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Limited Partnership Interest may be expressed as a number of Partnership Units.

“Liquidating Events” shall have the meaning set forth in Section 13.1.

“Liquidator” shall have the meaning set forth in Section 13.2.A.

“Majority in Interest of the Limited Partners” means Limited Partners (other than the General Partner, any Limited Partner 50% or more of whose equity is owned, directly or indirectly, by the General Partner and any Preferred Limited Partner) holding Percentage Interests that in the aggregate are greater than fifty percent (50%) of the aggregate Percentage Interests of all Limited Partners (other than the General Partner, any Limited Partner 50% or more of whose equity is owned, directly or indirectly, by the General Partner and any Preferred Limited Partner).

“Majority in Interest of Partners” means Partners (other than Preferred Limited Partners) holding Percentage Interests that are greater than fifty percent (50%) of the aggregate Percentage Interests of all Partners (other than Preferred Limited Partners).

“Net Income” or “Net Loss” means for each fiscal year of the Partnership, an amount equal to the Partnership’s taxable income or loss for such fiscal year, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments:

(a) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Net Income or Net Loss pursuant to this definition of Net Income or Net Loss shall be added to such taxable income or loss;

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(b) Any expenditures of the Partnership described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Net Income or Net Loss pursuant to this definition of Net Income or Net Loss shall be subtracted from such taxable income or loss;

(c) In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to subparagraph (b) or subparagraph (c) of the definition of Gross Asset Value, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Net Income or Net Loss;

(d) Gain or loss resulting from any disposition of property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value;

(e) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year;

(f) To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is required pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(4) to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Partner’s interest in the Partnership, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis of the asset) from the disposition of the asset and shall be taken into account for purposes of computing Net Income or Net Loss; and

(g) Notwithstanding any other provision of this definition of Net Income or Net Loss, any items which are specially allocated pursuant to Section 6.3 hereof shall not be taken into account in computing Net Income or Net Loss. The amounts of the items of Partnership income, gain, loss, or deduction available to be specially allocated pursuant to Section 6.3 hereof shall be determined by applying rules analogous to those set forth in this definition of Net Income or Net Loss.

Solely for purposes of allocating Net Income or Net Loss in any Fiscal Year to the Holders of the Series A Preferred Units and the Series D Preferred Units pursuant to Sections 6.2.B.1(c) and (e), and Section 6.2.B.2(b), items of Net Income and Net Loss, as the case may be, shall not include Depreciation with respect to properties that are “ceiling limited” in respect of Preferred Limited

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Partners. For purposes of the preceding sentence, Partnership property shall be considered ceiling limited in respect of a Preferred Limited Partner if Depreciation attributable to such Partnership property which would otherwise be allocable to such Partner, without regard to this paragraph, exceeded depreciation determined for federal income tax purposes attributable to such Partnership property which would otherwise be allocable to such Partner by more than 5%.

“New Securities” means (i) any rights, options, warrants or convertible or exchangeable securities having the right to subscribe for or purchase REIT Shares or other shares of capital stock of the General Partner, excluding grants under any Stock Incentive Plan, or (ii) any Debt issued by the General Partner that provides any of the rights described in clause (i).

“Nonrecourse Deductions” shall have the meaning set forth in Regulations Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for a Partnership Year shall be determined in accordance with the rules of Regulations Section 1.704-2(c).

“Nonrecourse Liability” shall have the meaning set forth in Regulations Section 1.752-1(a)(2).

“Notice of Redemption” means the Notice of Redemption substantially in the form of Exhibit B to this Agreement.

“Original Limited Partner” means the Limited Partners of the Partnership, listed on Schedule A hereto, as of January 31, 1997.

“Parity Preferred Unit” means any class or series of Partnership Interests of the Partnership now or hereafter authorized, issued or outstanding expressly designated by the Partnership to rank on a parity with the Series A Preferred Units, the Series D Preferred Units and the Series E Preferred Units with respect to distributions or rights upon voluntary or involuntary liquidation, winding up or dissolution of the Partnership, or both, as the context may require.

“Partner” means a General Partner or a Limited Partner, and “Partners” means the General Partner and the Limited Partners.

“Partner Minimum Gain” means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i)(3).

“Partner Nonrecourse Debt” shall have the meaning set forth in Regulations Section 1.704-2(b)(4).

“Partner Nonrecourse Deductions” shall have the meaning set forth in Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with respect to a

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Partner Nonrecourse Debt for a Partnership Year shall be determined in accordance with the rules of Regulations Section 1.704-2(i)(2).

“Partnership” means the limited partnership formed under the Act and pursuant to this Agreement, and any successor thereto.

“Partnership Interest” means, an ownership interest in the Partnership of either a Limited Partner or the General Partner and includes any and all benefits to which the Holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. There may be one or more classes of Partnership Interests as provided in Section 4.3. A Partnership Interest may be expressed as a number of Partnership Units. Unless otherwise expressly provided for by the General Partner at the time of the original issuance of any Partnership Interests, all Partnership Interests (whether of a Limited Partner or a General Partner) shall be of the same class. The Partnership Interests represented by the Common Units, the Series A Preferred Units, the Series D Preferred Units and the Series E Preferred Units are the only Partnership Interests and each such type of unit is a separate class of Partnership Interest for all purposes of this Agreement.

“Partnership Minimum Gain” shall have the meaning set forth in Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in Partnership Minimum Gain, for a Partnership Year shall be determined in accordance with the rules of Regulations Section 1.704-2(d).

“Partnership Record Date” means the record date established by the General Partner for the distribution of Available Cash with respect to Common Units pursuant to Section 5.1 hereof which record date shall be the same as the record date established by the General Partner for a distribution to its stockholders of some or all of its portion of such distribution.

“Partnership Unit” means, with respect to any class of Partnership Interest, a fractional, undivided share of such class of Partnership Interest issued pursuant to Sections 4.1 and 4.3. The ownership of Partnership Units may be evidenced by a certificate for units substantially in the form of Exhibit D hereto or as the General Partner may determine with respect to any class of Partnership Units issued from time to time under Sections 4.1 and 4.3.

“Partnership Year” means the fiscal year of the Partnership, which shall be the calendar year.

“Percentage Interest” means, as to a Partner holding a class of Partnership Interests, its interest in the Partnership as determined by dividing the Partnership Units of such class owned by such Partner by the total number of Partnership Units of such class then outstanding as specified in Exhibit A attached hereto, as such Exhibit may be amended from time to time. If the Partnership issues more than one class of Partnership Interest, the interest in the Partnership among the classes of Partnership Interests shall be determined as set forth in the

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amendment to the Partnership Agreement setting forth the rights and privileges of such additional classes of Partnership Interest, if any, as contemplated by Section 4.3.C hereof.

“Person” means an individual or a corporation, partnership, limited liability company, trust, unincorporated organization, association or other entity.

“Pledge” shall have the meaning set forth in Section 11.3.A.

“Pledge Agreement” means the Pledge Agreement dated as of January 31, 1997 among the Company, as agent, and the Pledgors, as same may be amended, modified or supplemented from time to time in accordance with its terms.

“Pledgors” means Kilroy Industries, a California corporation, John B. Kilroy, Sr. and John B. Kilroy, Jr.

“Preferred Distribution Shortfall” means, with respect to any Partnership Interests that are entitled to any preference in distributions of Available Cash pursuant to this Agreement, the aggregate amount of the required distributions for such outstanding Partnership Interests for all prior distribution periods minus the aggregate amount of the distributions made with respect to such outstanding Partnership Interests pursuant to this Agreement.

“Preferred Limited Partner” means any Person holding a Preferred Unit, and named as a Preferred Limited Partner in Exhibit A attached hereto, as such Exhibit may be amended from time to time, or any Substitute Limited Partner or Additional Limited Partner, in such Person’s capacity as a Preferred Limited Partner in the Partnership.

“Preferred Share” means a share of the General Partner’s preferred stock, par value $.01 per share, with such rights, priorities and preferences as shall be designated by the Board of Directors in accordance with the General Partner’s Charter.

“Preferred Unit” means a Partnership Unit representing a Limited Partnership Interest, with such preferential rights and priorities as shall be designated by the General Partner pursuant to Section 4.3.C hereof, including, without limitation, the Series A Preferred Units, the Series D Preferred Units and the Series E Preferred Units.

“Preferred Unit Partnership Record Date” shall have the meaning set forth in Section 16.2.A hereof.

“Preferred Unit Distribution Payment Date” shall have the meaning set forth in Section 16.2.A hereof.

“Properties” means such interests in real property and personal property including without limitation, fee interests, interests in ground leases, interests in joint ventures, interests in mortgages, and Debt instruments as the Partnership may hold from time to time.

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“PTP” shall have the meaning set forth in Section 16.6 hereof.

“Qualified REIT Subsidiary” means any Subsidiary of the General Partner that is a “qualified REIT subsidiary” within the meaning of Section 856(i) of the Code.

“Qualified Transferee” means an “Accredited Investor” as defined in Rule 501 promulgated under the Securities Act.

“Redemption” shall have the meaning set forth in Section 8.6.A.

“Redemption Notice” shall have the meaning set forth in Section 16.7.B

“Redemption Price” shall have the meaning set forth in Section 16.4.A.

“Regulations” means the Income Tax Regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).

“Regulatory Allocations” shall have the meaning set forth in Section 6.3.A(viii) of this Agreement.

“REIT” means a real estate investment trust under Sections 856 through 860 of the Code.

“REIT Series A Preferred Share” means a share of 7.45% Series A Cumulative Redeemable Preferred Stock, par value $.01 per share, liquidation preference $50 per share, of the General Partner.

“REIT Series B Preferred Share” means a share of Series B Preferred Stock, par value $.01 per share, liquidation preference $25 per share, of the General Partner, issuable upon exercise of the Rights.

“REIT Series D Preferred Share” means a share of 9 1/4% Series D Cumulative Redeemable Preferred Stock, par value $.01 per share, liquidation preference $50 per share, of the General Partner.

“REIT Series E Preferred Share” means a share of 7.80% Series E Cumulative Redeemable Preferred Stock, par value $.01 per share, liquidation preference $25 per share, of the General Partner.

“REIT Requirements” shall have the meaning set forth in Section 5.1.

“REIT Share” means a share of common stock, par value $.01 per share, of the General Partner.

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“REIT Shares Amount” means, as of any date, an aggregate number of REIT Shares equal to the number of Tendered Units, or in the case of Section 11.2.B, all Units, as adjusted pursuant to Section 7.5 (in the event the General Partner acquires material assets, other than on behalf of the Partnership) and for stock dividends and distributions, stock splits and subdivisions, reverse stock splits and combinations, distributions of rights, warrants or options, and distributions of evidences of indebtedness or assets relating to assets not received by the General Partner pursuant to a pro rata distribution by the Partnership. Without limiting the generality of the foregoing, such aggregate number of REIT Shares referenced in the preceding sentence shall be adjusted for the issuance, distribution and triggering of exercisability of the Rights governed by the Rights Agreement (which adjustment shall be satisfied by issuing together with the REIT Shares Amount the aggregate number of Rights (if prior to expiration of the Rights pursuant to the Rights Agreement) or REIT Shares (if subsequent to the triggering of the exercisability of such Rights and subsequent to the expiration of the Rights pursuant to the Rights Agreement) necessary to reflect equitably the dilution in REIT Shares resulting from the issuance and exercise of the Rights, in each case taking into account any increase pursuant to Section 4.5.B in the number of Partnership Units held by the Limited Partners).

“Rights” means the rights issued pursuant to the Rights Agreement.

“Rights Agreement” means the Rights Agreement, dated as of October 2, 1998, by and between the General Partner and ChaseMellon Shareholder Services, L.L.C.

“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder.

“Securities Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder.

“Senior Preferred Unit” shall mean the Series A Preferred Units, the Series D Preferred Units and the Series E Preferred Units, and any class or series of Partnership Interests of the Partnership now or hereafter authorized, issued or outstanding expressly designated by the Partnership to rank on parity with the Series A Preferred Units, the Series D Preferred Units and the Series E Preferred Units with respect to distributions and rights upon voluntary or involuntary liquidation, winding up or dissolution of the Partnership, as the context may require.

“Series A Contributor” means the Belair Capital Fund, LLC, as party to the Contribution Agreement, dated February 6, 1998, and the Contribution Agreement, dated April 20, 1998, and any Affiliate to which the Series A Preferred Units may be assigned in accordance with this Agreement.

“Series A Limited Partner” means any Person holding Series A Preferred Units and named as a Series A Limited Partner in Exhibit A attached hereto, as such Exhibit may be

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amended from time to time, or any Substitute Limited Partner, in such Person’s capacity as a Series A Limited Partner in the Partnership.

“Series A Preferred Capital” means a Capital Account balance equal to the product of (i) the number of Series A Preferred Units then held by the Series A Limited Partners and/or the General Partner multiplied by (ii) the sum of $50 and any Preferred Distribution Shortfall per Series A Preferred Unit.

“Series A Preferred Units” means the Partnership’s 7.45% Series A Cumulative Redeemable Limited Partnership Units, with the rights, priorities and preferences set forth herein.

“Series A Priority Return” shall mean an amount equal to (x) 7.45% per annum at all times on and after March 5, 2004 and (y) 8.075% at all times before and excluding March 5, 2004, in each case determined on the basis of a 360-day year of twelve 30-day months (or actual days for any month which is shorter than a full monthly period), cumulative to the extent not distributed for any given distribution period pursuant to Sections 5.1 and 16.2 hereof, on the stated value of $50 per Series A Preferred Unit, commencing on the date of issuance of such Series A Preferred Unit as set forth on Exhibit A hereto.

“Series B Preferred Units” means the Series B Preferred Units of the Partnership issuable to the General Partner upon contribution of the proceeds from the exercise of the Rights, pursuant to Section 4.5.B hereof.

“Series D Articles Supplementary” shall have the meaning set forth in Section 19.3.C(i).

“Series D Contributor” means Montebello Realty Corp., a Delaware corporation, as a party to that certain Contribution Agreement, dated as of December 9, 1999, and that certain Contribution Agreement, dated as of December 30, 1999, and any Affiliate to which the Series D Preferred Units may be assigned in accordance with this Agreement.”

“Series D Exchange Notice” shall have the meaning set forth in Section 19.9.B(i).

“Series D Exchange Price” shall have the meaning set forth in Section 19.9.A(i).

“Series D Excess Units” shall have the meaning set forth in Section 19.9.A(iii).

“Series D Limited Partner” means any Person holding Series D Preferred Units and named as a Series D Limited Partner in Exhibit A attached hereto, as such Exhibit may be amended from time to time, or any Substitute Limited Partner, in such Person’s capacity as a Series D Limited Partner in the Partnership.

“Series D Preferred Capital” means a Capital Account balance equal to the product of (i) the number of Series D Preferred Units then held by the Series D Limited Partners

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and/or the General Partner multiplied by (ii) the sum of $50 and any Preferred Distribution Shortfall per Series D Preferred Unit.

“Series D Preferred Units” shall have the meaning set forth in Section 19.2.

“Series D Preferred Unit Distribution Payment Date” shall have the meaning set forth in Section 19.3.A.

“Series D Preferred Unit Partnership Record Date” shall have the meaning set forth in Section 19.3.A.

“Series D Redemption Notice” shall have the meaning set forth in Section 19.9.B(i).

“Series D Redemption Price” shall have the meaning set forth in Section 19.6.A.

“Series D Priority Return” shall have the meaning set forth in Section 19.1.

“Series E Articles Supplementary” means the Articles Supplementary of the General Partner in connection with its REIT Series E Preferred Shares, as filed with the Maryland Department of Assessments and Taxation on October 23, 2003.

“Series E Partner” means Kilroy Realty Corporation, a Maryland corporation, as the holder of Series E Preferred Units.

“Series E Preferred Capital” means a Capital Account balance equal to the product of (i) the number of Series E Preferred Units then held by the General Partner multiplied by (ii) the sum of $25 and any Preferred Distribution Shortfall per Series E Preferred Unit.

“Series E Preferred Units” shall have the meaning set forth in Section 20.1.

“Series E Preferred Unit Distribution Payment Date” shall have the meaning set forth in Section 20.2.A.

“Series E Priority Return” shall mean, an amount equal to 7.80% per annum, determined on the basis of a 360-day year consisting of twelve 30-day months (and for any period shorter than a full quarterly period for which distributions are computed, the amount of the distribution payable will be computed based on the ratio of the actual number of days elapsed in such period to ninety (90) days), cumulative to the extent not distributed for any given distribution period pursuant to Section 5.1 hereof, of the stated value of $25 per Series E Preferred Unit, commencing on the date of issuance of such Series E Preferred Unit.

“Specified Redemption Date” means the day of receipt by the General Partner of a Notice of Redemption.

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“Stock Incentive Plan” means any stock incentive plan of the General Partner.

“Subsidiary” shall mean with respect to any person, any corporation, partnership, limited liability company, joint venture or other entity of which a majority of (i) voting power of the voting equity securities or (ii) the outstanding equity interests, is owned, directly or indirectly, by such person.

“Subsidiary Partnership” means any partnership or limited liability company that is a Subsidiary of the Partnership.

“Substituted Limited Partner” means a Person who is admitted as a Limited Partner to the Partnership pursuant to Section 11.4.

“Surviving Partnership” shall have the meaning set forth in Section 11.2.C.

“Tax Items” shall have the meaning set forth in Section 6.4.A.

“Tenant” means any tenant from which the General Partner derives rent either directly or indirectly through partnerships, including the Partnership.

“Tendered Units” shall have the meaning set forth in Section 8.6.A.

“Tendering Partner” shall have the meaning set forth in Section 8.6.A.

“Terminating Capital Transaction” means any sale or other disposition of all or substantially all of the assets of the Partnership or a related series of transactions that, taken together, result in the sale or other disposition of all or substantially all of the assets of the Partnership.

ARTICLE 2.

ORGANIZATIONAL MATTERS

Section 2.1. Organization

The Partnership is a limited partnership formed pursuant to the provisions of the Act and upon the terms and conditions set forth in this Agreement. Except as expressly provided herein, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. The Partnership Interest of each Partner shall be personal property for all purposes.

Section 2.2. Name

The name of the Partnership is Kilroy Realty, L.P. The Partnership’s business may be conducted under any other name or names deemed advisable by the General Partner, including the name of the General Partner or any Affiliate thereof. The words “Limited

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Partnership,” “L.P.,” “Ltd.” or similar words or letters shall be included in the Partnership’s name where necessary for the purposes of complying with the laws of any jurisdiction that so requires. The General Partner in its sole and absolute discretion may change the name of the Partnership at any time and from time to time and shall notify the Limited Partners of such change in the next regular communication to the Limited Partners.

Section 2.3. Resident Agent; Principal Office

The name and address of the resident agent of the Partnership in the State of Delaware is Prentice-Hall Corporation Systems, Inc., 1013 Centre Road, Wilmington, DE 19805. The address of the principal office of the Partnership in the State of Delaware is c/o Prentice-Hall Corporation Systems, Inc., 1013 Centre Road, Wilmington, DE 19805 at such address. The principal office of the Partnership is located at 12200 West Olympic Boulevard, Los Angeles, California 90064, or such other place as the General Partner may from time to time designate by notice to the Limited Partners. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the General Partner deems advisable.

Section 2.4. Power of Attorney

A. Each Limited Partner and each Assignee constitutes and appoints the General Partner, any Liquidator, and authorized officers and attorneys-in-fact of each, and each of those acting singly, in each case with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead to:

(1) execute, swear to, acknowledge, deliver, file and record in the appropriate public offices (a) all certificates, documents and other instruments (including, without limitation, this Agreement and the Certificate and all amendments or restatements thereof) that the General Partner or the Liquidator deems appropriate or necessary to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the Limited Partners have limited liability) in the State of Delaware and in all other jurisdictions in which the Partnership may conduct business or own property; (b) all instruments that the General Partner or any Liquidator deems appropriate or necessary to reflect any amendment, change, modification or restatement of this Agreement in accordance with its terms; (c) all conveyances and other instruments or documents that the General Partner or any Liquidator deems appropriate or necessary to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement, including, without limitation, a certificate of cancellation; (d) all instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to, or other events described in, Articles 11, 12 and 13 hereof or the Capital Contribution of any Partner; and (e) all certificates, documents and other

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instruments relating to the determination of the rights, preferences and privileges of Partnership Interests; and

(2) execute, swear to, acknowledge and file all ballots, consents, approvals, waivers, certificates and other instruments appropriate or necessary, in the sole and absolute discretion of the General Partner or any Liquidator, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action which is made or given by the Partners hereunder or is consistent with the terms of this Agreement or appropriate or necessary, in the sole discretion of the General Partner or any Liquidator, to effectuate the terms or intent of this Agreement.

Nothing contained herein shall be construed as authorizing the General Partner or any Liquidator to amend this Agreement except in accordance with Article 14 hereof or as may be otherwise expressly provided for in this Agreement.

B. The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, in recognition of the fact that each of the Partners will be relying upon the power of the General Partner and any Liquidator to act as contemplated by this Agreement in any filing or other action by it on behalf of the Partnership, and it shall survive and not be affected by the subsequent Incapacity of any Limited Partner or Assignee and the transfer of all or any portion of such Limited Partner’s or Assignee’s Partnership Units and shall extend to such Limited Partner’s or Assignee’s heirs, successors, assigns and personal representatives. Each such Limited Partner or Assignee hereby agrees to be bound by any representation made by the General Partner or any Liquidator, acting in good faith pursuant to such power of attorney; and each such Limited Partner or Assignee hereby waives any and all defenses which may be available to contest, negate or disaffirm the action of the General Partner or any Liquidator, taken in good faith under such power of attorney. Each Limited Partner or Assignee shall execute and deliver to the General Partner or any Liquidator, within 15 days after receipt of the General Partner’s or Liquidator’s request therefor, such further designation, powers of attorney and other instruments as the General Partner or the Liquidator, as the case may be, deems necessary to effectuate this Agreement and the purposes of the Partnership.

Section 2.5. Term

The term of the Partnership commenced on October 2, 1996 and shall continue until December 31, 2095 unless it is dissolved sooner pursuant to the provisions of Article 13 or as otherwise provided by law.

Section 2.6. Number of Partners

The Partnership shall not at any time have more than 100 partners (including as partners those persons indirectly owning an interest in the Partnership through a partnership, limited liability company, S corporation or grantor trust (such entity, a “flow through entity”),

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but only if substantially all of the value of such person’s interest in the flow through entity is attributable to the flow through entity’s interest (direct or indirect) in the Partnership).

ARTICLE 3.

PURPOSE

Section 3.1. Purpose and Business

The purpose and nature of the business to be conducted by the Partnership is (i) to conduct any business that may be lawfully conducted by a limited partnership organized pursuant to the Act, provided, however, that such business shall be limited to and conducted in such a manner as to permit the General Partner at all times to be classified as a REIT for federal income tax purposes, unless the General Partner ceases to qualify as a REIT for reasons other than the conduct of the business of the Partnership, (ii) to enter into any partnership, joint venture or other similar arrangement to engage in any of the foregoing or to own interests in any entity engaged, directly or indirectly, in any of the foregoing and (iii) to do anything necessary or incidental to the foregoing. In connection with the foregoing, and without limiting the General Partner’s right in its sole discretion to cease qualifying as a REIT, the Partners acknowledge that the General Partner’s current status as a REIT inures to the benefit of all the Partners and not solely the General Partner.

Section 3.2. Powers

The Partnership is empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described herein and for the protection and benefit of the Partnership, including, without limitation, full power and authority, directly or through its ownership interest in other entities, to enter into, perform and carry out contracts of any kind, borrow money and issue evidences of indebtedness, whether or not secured by mortgage, deed of trust, pledge or other lien, acquire and develop real property, and manage, lease, sell, transfer and dispose of real property; provided, however, notwithstanding anything to the contrary in this Agreement, the Partnership shall not take, or refrain from taking, any action which, in the judgment of the General Partner, in its sole and absolute discretion, (i) could adversely affect the ability of the General Partner to continue to qualify as a REIT, (ii) absent the consent of the General Partner which may be given or withheld in its sole and absolute discretion, and except with respect to the distribution of Available Cash to the Series A Limited Partners in accordance with Section 16.2, to the Series D Limited Partners in accordance with Section 19.3 and to the Series E Partner in accordance with Section 20.2 could subject the General Partner to any taxes under Section 857 or Section 4981 of the Code, or (iii) could violate any law or regulation of any governmental body or agency having jurisdiction over the General Partner or its securities, unless any such action (or inaction) under (i), (ii) or (iii) shall have been specifically consented to by the General Partner in writing.

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Section 3.3. Partnership Only for Purposes Specified

The Partnership shall be a partnership only for the purposes specified in Section 3.1 hereof, and this Agreement shall not be deemed to create a partnership among the Partners with respect to any activities whatsoever other than the activities within the purposes of the Partnership as specified in Section 3.1 hereof. Except as otherwise provided in this Agreement, no Partner shall have any authority to act for, bind, commit or assume any obligation or responsibility on behalf of the Partnership, its properties or any other Partner. No Partner, in its capacity as a Partner under this Agreement, shall be responsible or liable for any indebtedness or obligation of another Partner, nor shall the Partnership be responsible or liable for any indebtedness or obligation of any Partner, incurred either before or after the execution and delivery of this Agreement by such Partner, except as to those responsibilities, liabilities, indebtedness or obligations incurred pursuant to and as limited by the terms of this Agreement and the Act.

Section 3.4. Representations and Warranties by the Parties

A. Each Partner that is an individual represents and warrants to each other Partner that (i) such Partner has in the case of any Person other than an individual, the power and authority, and in the case of an individual, the legal capacity, to enter into this Agreement and perform such Partner’s obligations hereunder, (ii) the consummation of the transactions contemplated by this Agreement to be performed by such Partner will not result in a breach or violation of, or a default under, any agreement by which such Partner or any of such Partner’s property is or are bound, or any statute, regulation, order or other law to which such Partner is subject, (iii) such Partner is neither a “foreign person” within the meaning of Section 1445(f) of the Code nor a “foreign partner” within the meaning of Section 1446(e) of the Code, and (iv) this Agreement has been duly executed and delivered by such Partner and is binding upon, and enforceable against, such Partner in accordance with its terms.

B. Each Partner that is not an individual represents and warrants to each other Partner that (i) its execution and delivery of this Agreement and all transactions contemplated by this Agreement to be performed by it have been duly authorized by all necessary action, including without limitation, that of its general partner(s), committee(s), trustee(s), beneficiaries, directors and/or stockholder(s), as the case may be, as required, (ii) the consummation of such transactions shall not result in a breach or violation of, or a default under, its certificate of limited partnership, partnership agreement, trust agreement, limited liability company operating agreement, charter or by-laws, as the case may be, any agreement by which such Partner or any of such Partner’s properties or any of its partners, beneficiaries, trustees or stockholders, as the case may be, is or are bound, or any statute, regulation, order or other law to which such Partner or any of its partners, trustees, beneficiaries or stockholders, as the case may be, is or are subject, (iii) such Partner is neither a “foreign person” within the meaning of Section 1445(f) of the Code nor a “foreign partner” within the meaning of Section 1446(e) of the Code, and (iv) this Agreement has been duly executed and delivered by such Partner and is binding upon, and enforceable against, such Partner in accordance with its terms.

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C. Each Partner represents, warrants and agrees that it has acquired and continues to hold its interest in the Partnership for its own account for investment only and not for the purpose of, or with a view toward, the resale or distribution of all or any part thereof, nor with a view toward selling or otherwise distributing such interest or any part thereof at any particular time or under any predetermined circumstances. Each Partner further represents and warrants that it is a sophisticated investor, able and accustomed to handling sophisticated financial matters for itself, particularly real estate investments, and that it has a sufficiently high net worth that it does not anticipate a need for the funds it has invested in the Partnership in what it understands to be a highly speculative and illiquid investment.

D. Each Limited Partner, other than any Limited Partner to whom the General Partner has granted an exception in its sole discretion to this Section 3.4.D (but, with respect to any such Limited Partner, only to the extent of the exception so granted by the General Partner), further represents, warrants and agrees as follows:

(i) At any time a Person actually owns or Constructively Owns a 25% or greater capital interest or profits interest in the Partnership, such Person does not and will not, without the prior written consent of the General Partner, (a) actually own or Constructively Own (1) with respect to any Tenant that is a corporation, any stock of such Tenant and (2) with respect to any Tenant that is not a corporation, any interests in either the assets or net profits of such Tenant; or (b) actually own or Constructively Own any stock in the General Partner, other than any REIT Shares or other shares of capital stock of the General Partner such Person may actually or Constructively acquire (1) as a result of an exchange of Tendered Units pursuant to Section 8.6 or (2) upon the exercise of options granted or delivery of REIT Shares pursuant to any Stock Incentive Plan, in each case subject to the applicable ownership limitations with respect to such shares of capital stock as set forth in the Charter.

(ii) Upon request of the General Partner, such Limited Partner will disclose to the General Partner the amount of REIT Shares or other shares of capital stock of the General Partner that it actually owns or Constructively Owns.

(iii) Such Limited Partner understands that if, for any reason, (a) the representations, warranties or agreements set forth in Section 3.4.D(i) are violated or (b) the Partnership’s actual ownership or Constructive Ownership of REIT Shares or other shares of capital stock of the General Partner violates the limitations set forth in the Charter, then (x) some or all of the redemption or exchange rights of the Limited Partners may become non-exercisable, and (y) some or all of such shares owned by the Limited Partners and/or some or all of the Partnership Units owned by the Limited Partners may be automatically transferred to a trust for the benefit of a charitable beneficiary, as provided in the Charter and Exhibit E of this Agreement, respectively.

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E. The representations and warranties contained in Sections 3.4.A, 3.4.B, 3.4.C and 3.4.D hereof shall survive the execution and delivery of this Agreement by each Partner and the dissolution and winding up of the Partnership.

F. Each Partner hereby acknowledges that no representations as to potential profit, cash flows, funds from operations or yield, if any, in respect of the Partnership or the General Partner have been made by any Partner or any employee or representative or Affiliate of any Partner, and that projections and any other information, including, without limitation, financial and descriptive information and documentation, which may have been in any manner submitted to such Partner shall not constitute any representation or warranty of any kind or nature, express or implied.

ARTICLE 4.

CAPITAL CONTRIBUTIONS

Section 4.1. Capital Contributions of the Partners

At the time of their respective execution of this Agreement, the Partners shall make or shall have made Capital Contributions as set forth in Exhibit A to this Agreement. The Partners shall own Partnership Units of the class and in the amounts set forth in Exhibit A and shall have a Percentage Interest in the Partnership as set forth in Exhibit A, which Percentage Interest shall be adjusted in Exhibit A from time to time by the General Partner to the extent necessary to accurately reflect exchanges, redemptions, Capital Contributions, the issuance of additional Partnership Units or similar events having an effect on a Partner’s Percentage Interest. Except as required by law or as otherwise provided in Sections 4.3, 4.4 and 10.5, no Partner shall be required or permitted to make any additional Capital Contributions or loans to the Partnership. Unless otherwise specified by the General Partner at the time of the creation of any class of Partnership Interests, the corresponding class of capital stock for any Partnership Units issued shall be REIT Shares.

Section 4.2. Loans by Third Parties

Subject to Section 4.3, the Partnership may incur Debt, or enter into other similar credit, guarantee, financing or refinancing arrangements for any purpose (including, without limitation, in connection with any further acquisition of Properties) with any Person that is not the General Partner upon such terms as the General Partner determines appropriate; provided, that the Partnership shall not incur any Debt that is recourse to the General Partner, except to the extent otherwise agreed to by the General Partner in its sole discretion.

Section 4.3. Additional Funding and Capital Contributions

A. General. The General Partner may, at any time and from time to time, determine that the Partnership requires additional funds (“Additional Funds”) for the acquisition of additional Properties or for such other Partnership purposes as the General Partner may

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determine. Additional Funds may be raised by the Partnership, at the election of the General Partner, in any manner provided in, and in accordance with, the terms of this Section 4.3. No Person shall have any preemptive, preferential or similar right or rights to subscribe for or acquire any Partnership Interest, except as set forth in this Section 4.3.

B. General Partner Loans. The General Partner may enter into a Funding Debt, including, without limitation, a Funding Debt that is convertible into REIT Shares, and lend the Additional Funds to the Partnership (a “General Partner Loan”); provided, however, that the General Partner shall not be obligated to lend the net proceeds of any Funding Debt to the Partnership in a manner that would be inconsistent with the General Partner’s ability to remain qualified as a REIT. If the General Partner enters into such a Funding Debt, the General Partner Loan will consist of the net proceeds from such Funding Debt and will be on comparable terms and conditions, including interest rate, repayment schedule and costs and expenses, as shall be applicable with respect to or incurred in connection with such Funding Debt.

C. Issuance of Additional Partnership Interests. The General Partner may raise all or any portion of the Additional Funds by accepting additional Capital Contributions of cash. The General Partner may also accept additional Capital Contributions of real property or any other non-cash assets. In connection with any such additional Capital Contributions (of cash or property), and subject to Sections 16.5 and 19.7 hereof, the General Partner is hereby authorized to cause the Partnership from time to time to issue to Partners (including the General Partner) or other Persons (including, without limitation, in connection with the contribution of property to the Partnership) additional Partnership Units or other Partnership Interests in one or more classes, or one or more series of any of such classes, with such designations, preferences and relative, participating, optional or other special rights, powers, and duties, including rights, powers, and duties senior to then existing Limited Partnership Interests, all as shall be determined by the General Partner in its sole and absolute discretion subject to Delaware law, and as set forth by amendment to this Agreement, including without limitation, (i) the allocations of items of Partnership income, gain, loss, deduction, and credit to such class or series of Partnership Interests; (ii) the right of each such class or series of Partnership Interests to share in Partnership distributions; (iii) the rights of each such class or series of Partnership Interests upon dissolution and liquidation of the Partnership; and (iv) the right to vote, including, without limitation, the limited partner approval rights set forth in Section 11.2.A hereof; provided, that no such additional Partnership Units or other Partnership Interests shall be issued to the General Partner unless either (a) the additional Partnership Interests are issued in connection with the grant, award, or issuance of shares of the General Partner pursuant to Section 4.3.D below, which shares have designations, preferences, and other rights (except voting rights) such that the economic interests attributable to such shares are substantially similar to the designations, preferences and other rights of the additional Partnership Interests issued to the General Partner in accordance with this Section 4.3.C, or (b) the additional Partnership Interests are issued to all Partners holding Partnership Interests in the same class in proportion to their respective Percentage Interests in such class. In the event that the Partnership issues additional Partnership Interests pursuant to this Section 4.3.C, the General Partner shall make such revisions to this

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Agreement (including but not limited to the revisions described in Sections 5.4, 6.2.B, and 8.6) as it determines are necessary to reflect the issuance of such additional Partnership Interests.

D. Issuance of REIT Shares or Other Securities by the General Partner. The General Partner shall not issue any additional REIT Shares (other than REIT Shares issued pursuant to Section 8.6 hereof or pursuant to a dividend or distribution (including any stock split) of REIT Shares issued to all of its common stockholders or other capital stock issued to all of its stockholders who hold a class of stock of the General Partner), other shares of capital stock of the General Partner (other than in connection with the acquisition of Partnership Interests in exchange for capital stock of the General Partner which corresponds in ranking to the Partnership’s Partnership Interests being acquired) or New Securities unless the General Partner shall make a Capital Contribution of the net proceeds (including, without limitation, cash and Properties) from the issuance of such additional REIT Shares, other shares of capital stock or New Securities, as the case may be, and from the exercise of the rights contained in such additional New Securities, as the case may be. The General Partner’s Capital Account shall be increased by the amount of cash or the value of Properties so contributed.

E. Percentage Interest Adjustments in the Case of Capital Contributions for Partnership Units. Upon the acceptance of additional Capital Contributions in exchange for any class or series of Partnership Units, the Percentage Interest related thereto shall be equal to a fraction, the numerator of which is equal to the amount of cash and the Agreed Value of the Properties contributed as of the Business Day immediately preceding the date on which the additional Capital Contributions are made (an “Adjustment Date”) and the denominator of which is equal to the sum of (i) the Deemed Value of the Partnership Interests of such class or series (computed as of the Business Day immediately preceding the Adjustment Date) plus (ii) the aggregate amount of cash and the Agreed Value of the Property contributed to the Partnership on such Adjustment Date in respect of such class or series of Partnership Interests. The Percentage Interest of each other Partner holding Partnership Interests of such class or series not making a full pro rata Capital Contribution shall be adjusted to equal a fraction, the numerator of which is equal to the sum of (i) the Deemed Partnership Interest Value of such Limited Partner in respect of such class or series (computed as of the Business Day immediately preceding the Adjustment Date) and (ii) the amount of cash and the Agreed Value of the Property contributed by such Partner to the Partnership in respect of such class or series as of such Adjustment Date, and the denominator of which is equal to the sum of (i) the Deemed Value of the Partnership Interests of such class (computed as of the Business Day immediately preceding the Adjustment Date), plus (ii) the aggregate amount of cash and the Agreed Value of the Property contributed to the Partnership on such Adjustment Date in respect of such class or series. Notwithstanding the foregoing, solely for purposes of calculating a Partner’s Percentage Interest pursuant to this Section 4.3.E, (i) in the case of cash Capital Contributions by the General Partner, such Capital Contributions will be deemed to equal the cash contributed by the General Partner plus, in the case of cash contributions funded by an offering of REIT Shares or other shares of capital stock of the General Partner, the offering costs attributable to the cash contributed to the Partnership and (ii) in the case of the contribution of Properties (or any portion thereof) by the General Partner which were acquired by the General Partner in exchange for REIT Shares immediately

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prior to such contribution, the General Partner shall be issued a number of Partnership Units equal to the number of REIT Shares issued by the General Partner in exchange for such Properties, the Partnership Units held by the other Partners shall not be adjusted and the Partners’ Percentage Interests shall be adjusted accordingly. The General Partner shall promptly give each Partner written notice of its Percentage Interest, as adjusted.

Section 4.4. Stock Incentive Plan

If at any time or from time to time the General Partner sells or issues REIT Shares pursuant to any Stock Incentive Plan, the General Partner shall contribute any proceeds therefrom to the Partnership as an additional Capital Contribution and shall receive an amount of additional Partnership Units equal to the number of REIT Shares so sold or issued. The General Partner’s Capital Account shall be increased by the amount of cash so contributed.

Section 4.5. Other Contribution Provisions

A. In the event that any Partner is admitted to the Partnership and is given a Capital Account in exchange for services rendered to the Partnership, such transaction shall be treated by the Partnership and the affected Partner as if the Partnership had compensated such Partner in cash, and the Partner had contributed such cash to the capital of the Partnership. In addition, with the consent of the General Partner, one or more Limited Partners may enter into contribution agreements with the Partnership which have the effect of providing a guarantee of certain obligations of the Partnership.

B. Notwithstanding the foregoing provisions of this Article IV, in the event the General Partner has made contributions of cash to the Partnership attributable to the General Partner’s receipt of cash pursuant to the exercise of the Rights, the General Partner shall be issued a number of Partnership Units as a result of such contribution equal to the number of REIT Shares (or the number of Series B Preferred Units equal to the number of REIT Series B Preferred Shares, as the case may be) sold pursuant to such exercise. In such case or in the event the General Partner makes other contributions to the Partnership in connection with the issuance of REIT Shares after the Rights have become exercisable, the number of Partnership Units held by the Limited Partners shall be increased to equitably offset the dilution resulting from such issuance.

Section 4.6. No Preemptive Rights

Except to the extent expressly granted by the Partnership pursuant to another agreement, no Person shall have any preemptive, preferential or other similar right with respect to (i) making additional Capital Contributions or loans to the Partnership or (ii) issuance or sale of any Partnership Units or other Partnership Interests.

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ARTICLE 5.

DISTRIBUTIONS

Section 5.1. Requirement and Characterization of Distributions

The General Partner shall cause the Partnership to distribute all, or such portion as the General Partner may in its discretion determine, Available Cash generated by the Partnership to the Partners who are Partners on the applicable record date with respect to such distribution, (1) first, with respect to any Partnership Interests that are entitled to any preference in distribution, in accordance with the rights of such class of Partnership Interests (and within such class, pro rata in proportion to the respective Percentage Interests on the applicable record date), and, (2) second, with respect to Partnership Interests that are not entitled to any preference in distribution, pro rata to each such class on a quarterly basis and in accordance with the terms of such class to the Partners who are Partners of such class on the Partnership Record Date with respect to such distribution (and within each such class, pro rata in proportion with the respective Percentage Interests on such Partnership Record Date). Unless otherwise expressly provided for herein or in an agreement at the time a new class of Partnership Interests is created in accordance with Article 4 hereof, no Partnership Interest shall be entitled to a distribution in preference to any other Partnership Interest. The General Partner shall take such reasonable efforts, as determined by it in its sole and absolute discretion and consistent with its qualification as a REIT, to cause the Partnership to distribute sufficient amounts to enable the General Partner to pay stockholder dividends that will (a) satisfy the requirements for qualifying as a REIT under the Code and Regulations (“REIT Requirements”), and (b) avoid any federal income or excise tax liability of the General Partner, except to the extent that a distribution pursuant to clause (b) would prevent the Partnership from making a distribution to the Holders of Series A Preferred Units in accordance with Section 16.2, Series D Preferred Units in accordance with Section 19.3 or Series E Preferred Units in accordance with Section 20.2.

Section 5.2. Distributions in Kind

Except as expressly provided herein, no right is given to any Partner to demand and receive property other than cash. The General Partner may determine, in its sole and absolute discretion, to make a distribution in kind to the Partners of Partnership assets, and such assets shall be distributed in such a fashion as to ensure that the fair market value is distributed and allocated in accordance with Articles 5, 6 and 10; provided, however, that, in such case, the General Partners shall distribute only cash to the Series A Limited Partners, the Series D Limited Partners or to the Series E Partner.

Section 5.3. Distributions Upon Liquidation

Proceeds from a Terminating Capital Transaction shall be distributed to the Partners in accordance with Section 13.2.

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Section 5.4. Distributions to Reflect Issuance of Additional Partnership Interests.

In the event that the Partnership issues additional Partnership Interests to the General Partner or any Additional Limited Partner pursuant to Section 4.3.C or 4.4 hereof, the General Partner shall make such revisions to this Article 5 as it determines are necessary to reflect the issuance of such additional Partnership Interests.

ARTICLE 6.

ALLOCATIONS

Section 6.1. Timing and Amount of Allocations of Net Income and Net Loss

Net Income and Net Loss of the Partnership shall be determined and allocated with respect to each fiscal year of the Partnership as of the end of each such year. Subject to the other provisions of this Article 6, an allocation to a Holder of a share of Net Income or Net Loss shall be treated as an allocation of the same share of each item of income, gain, loss or deduction that is taken into account in computing Net Income or Net Loss.

Section 6.2. General Allocations

A. In General. Except as otherwise provided in this Article 6, Net Income and Net Loss allocable with respect to a class of Partnership Interests shall be allocated to each of the Holders holding such class of Partnership Interests in accordance with their respective Percentage Interest of such class.

B.1. Net Income. Except as provided in Section 6.3, Net Income for any Partnership Year shall be allocated in the following manner and order of priority:

(a) First, 100% to the General Partner in an amount equal to the remainder, if any, of the cumulative Net Losses allocated to the General Partner pursuant to Section 6.2.B.2(d) for all prior Partnership Years minus the cumulative Net Income allocated to the General Partner pursuant to this Section 6.2.B.1(a) for all prior Partnership Years;

(b) Second, 100% to each Holder in an amount equal to the remainder, if any, of the cumulative Net Losses allocated to each such Holder pursuant to Section 6.2.B.2(c) for all prior Partnership Years minus the cumulative Net Income allocated to such Holder pursuant to this Section 6.2.B.1(b) for all prior Partnership Years;

(c) Third, 100% to the Holders of Senior Preferred Units in an amount equal to the remainder, if any, of the cumulative Net Losses allocated to such Holder pursuant to Section 6.2.B.2(b) for all prior Partnership Years minus

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the cumulative Net Income allocated to such Holders pursuant to this Section 6.2.B.1(c) for all prior Partnership Years;

(d) Fourth, 100% to the Holders of Common Units in an amount equal to the remainder, if any, of the cumulative Net Losses allocated to each such Holder pursuant to Section 6.2.B.2(a) for all prior Partnership Years minus the cumulative Net Income allocated to each Holder pursuant to this Section 6.2.B.1(d) for all prior Partnership Years;

(e) Fifth, 100% to the Holders of Senior Preferred Units in an amount equal to the sum of (i) in respect of the Series A Preferred Units, an amount equal to the cumulative Series A Priority Return to the last day of the current Partnership Year or to the date of redemption, to the extent Series A Preferred Units are redeemed during such year, over the cumulative Net Income allocated to the Holders of such units pursuant to this Section 6.2.B.1(e) for all prior Partnership Years; (ii) in respect of the Series D Preferred Units, an amount equal to the cumulative Series D Priority Return to the last day of the current Partnership Year or to the date of redemption, to the extent Series D Preferred Units are redeemed during such year, over the cumulative Net Income allocated to the Holders of such units pursuant to this Section 6.2.B.1(e) for all prior Partnership Years; and (iii) in respect of the Series E Preferred Units, an amount equal to the cumulative Series E Priority Return to the last day of the current Partnership Year or to the date of redemption, to the extent Series E Preferred Units are redeemed during such year, over the cumulative Net Income allocated to the Holders of such units pursuant to this Section 6.2.B.1(e) for all prior Partnership Years; and

(f) Sixth, 100% to the Holders of Common Units in accordance with their respective Percentage Interests in the Common Units.

To the extent the allocations of Net Income set forth above in any paragraph of this Section 6.2.B.1 are not sufficient to entirely satisfy the allocation set forth in such paragraph, such allocation shall be made in proportion to the total amount that would have been allocated pursuant to such paragraph without regard to such shortfall.

B.2. Net Losses. Except as provided in Section 6.3, Net Losses for any Partnership Year shall be allocated in the following manner and order of priority:

(a) First, 100% to the Holders of Common Units in accordance with their respective Percentage Interests in the Common Units (to the extent consistent with this Section 6.2.B.2(a)) until the Adjusted Capital Account (ignoring for this purpose any amounts a Holder is obligated to contribute to the capital of the Partnership or is deemed obligated to restore pursuant

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to Regulations Section 1.704-1(b)(2)(ii)(c)(2) and ignoring the Holder’s Series A Preferred Capital, Series D Preferred Capital and Series E Preferred Capital) of each such Holder is zero;

(b) Second, 100% to the Holders of Senior Preferred Units, pro rata to each such Holder’s Adjusted Capital Account (ignoring for this purpose any amounts a Holder is obligated to contribute to the capital of the Partnership or is deemed obligated to contribute pursuant to Regulations Section 1.704-1(b)(2)(ii)(c)(2)), until the Adjusted Capital Account (as so modified) of each such Holder is zero;

(c) Third, 100% to the Holders to the extent of, and in proportion to, the positive balance (if any) in their Adjusted Capital Accounts; and

(d) Fourth, 100% to the General Partner

C. Allocations to Reflect Issuance of Additional Partnership Interests. In the event that the Partnership issues additional Partnership Interests to the General Partner or any Additional Limited Partner pursuant to Section 4.3 or 4.4, the General Partner shall make such revisions to this Section 6.2 or to Section 12.2.B as it determines are necessary to reflect the terms of the issuance of such additional Partnership Interests, including making preferential allocations to certain classes of Partnership Interests, subject to the terms of the Series A Preferred Units, the Series D Preferred Units and the Series E Preferred Units.

Section 6.3. Additional Allocation Provisions

Notwithstanding the foregoing provisions of this Article 6:

A. Regulatory Allocations.

(i) Minimum Gain Chargeback. Except as otherwise provided in Regulations Section 1.704-2(f), notwithstanding the provisions of Section 6.2, or any other provision of this Article 6, if there is a net decrease in Partnership Minimum Gain during any fiscal year, each Holder shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Holder’s share of the net decrease in Partnership Minimum Gain, as determined under Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Holder pursuant thereto. The items to be allocated shall be determined in accordance with Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2). This Section 6.3.A(i) is intended to qualify as a “minimum gain chargeback” within the meaning of Regulation Section 1.704-2(f) which shall be controlling in the event of a conflict between such Regulation and this Section 6.3.A(i).

(ii) Partner Minimum Gain Chargeback. Except as otherwise provided in Regulations Section 1.704-2(i)(4), and notwithstanding the provisions of Section 6.2, or any

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other provision of this Article 6 (except Section 6.3.A(i)), if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any fiscal year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5), shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Holder’s share of the net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Holder pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Sections 1.704-2(i)(4) and 1.704-2(j)(2). This Section 6.3.A(ii) is intended to qualify as a “chargeback of partner nonrecourse debt minimum gain” within the meaning of Regulation Section 1.704-2(i) which shall be controlling in the event of a conflict between such Regulation and this Section 6.3.A(ii).

(iii) Nonrecourse Deductions and Partner Nonrecourse Deductions. Any Nonrecourse Deductions for any fiscal year shall be specially allocated to the Holders in accordance with their respective Percentage Interest in Common Units. Any Partner Nonrecourse Deductions for any fiscal year shall be specially allocated to the Holder(s) who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable, in accordance with Regulations Sections 1.704-2(b)(4) and 1.704-2(i).

(iv) Qualified Income Offset. If any Holder unexpectedly receives an adjustment, allocation or distribution described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Partnership income and gain shall be allocated, in accordance with Regulations Section 1.704-1(b)(2)(ii)(d), to the Holder in an amount and manner sufficient to eliminate, to the extent required by such Regulations, the Adjusted Capital Account Deficit of the Holder as quickly as possible provided that an allocation pursuant to this Section 6.3.A(iv) shall be made if and only to the extent that such Holder would have an Adjusted Capital Account Deficit after all other allocations provided in this Article 6 have been tentatively made as if this Section 6.3.A(iv) were not in the Agreement. It is intended that this Section 6.3.A(iv) qualify and be construed as a “qualified income offset” within the meaning of Regulations 1.704-1(b)(2)(ii)(d), which shall be controlling in the event of a conflict between such Regulations and this Section 6.3.A(iv).

(v) Gross Income Allocation. In the event any Holder has a deficit Capital Account at the end of any fiscal year which is in excess of the sum of (a) the amount (if any) such Holder is obligated to restore to the Partnership, and (b) the amount such Holder is deemed to be obligated to restore pursuant to Regulations Section 1.704-1(b)(2)(ii)(c) or the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), each such Holder shall be specially allocated items of Partnership income and gain in the amount of such excess as quickly as possible, provided, that an allocation pursuant to this Section 6.3.A(v) shall be made if and only to the extent that such Holder would have a deficit Capital Account in excess of such

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sum after all other allocations provided in this Article 6 have been tentatively made as if this Section 6.3.A(v) and Section 6.3.A(iv) were not in the Agreement.

(vi) Limitation on Allocation of Net Loss. To the extent any allocation of Net Loss would cause or increase an Adjusted Capital Account Deficit as to any Holder, such allocation of Net Loss shall be reallocated among the other Holders in accordance with their respective Percentage Interests in Common Units subject to the limitations of this Section 6.3.A(vi).

(vii) Section 754 Adjustment. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(2) or Regulations Section 1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as the result of a distribution to a Holder in complete liquidation of his interest in the Partnership, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Holders in accordance with their interests in the Partnership in the event that Regulations Section 1.704-1(b)(2)(iv)(m)(2) applies, or to the Holders to whom such distribution was made in the event that Regulations Section 1.704-1(b)(2)(iv)(m)(4) applies.

(viii) Curative Allocation. The allocations set forth in Sections 6.3.A(i), (ii), (iii), (iv), (v), (vi), and (vii) (the “Regulatory Allocations”) are intended to comply with certain regulatory requirements, including the requirements of Regulations Sections 1.704-1(b) and 1.704-2. Notwithstanding the provisions of Sections 6.1 and 6.2, the Regulatory Allocations shall be taken into account in allocating other items of income, gain, loss and deduction among the Holders so that, to the extent possible, the net amount of such allocations of other items and the Regulatory Allocations to each Holder shall be equal to the net amount that would have been allocated to each such Holder if the Regulatory Allocations had not occurred.

B. For purposes of determining a Holder’s proportional share of the “excess nonrecourse liabilities” of the Partnership within the meaning of Regulations Section 1.752-3(a)(3), each Holder’s interest in Partnership profits shall be such Holder’s Percentage Interest in Common Units.

Section 6.4. Tax Allocations

A. In General. Except as otherwise provided in this Section 6.4, for income tax purposes each item of income, gain, loss and deduction (collectively, “Tax Items”) shall be allocated among the Holders in the same manner as its correlative item of “book” income, gain, loss or deduction is allocated pursuant to Sections 6.2 and 6.3.

B. Allocations Respecting Section 704(c) Revaluations. Notwithstanding Section 6.4.A, Tax Items with respect to Partnership property that is contributed to the

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Partnership by a Partner shall be shared among the Holders for income tax purposes pursuant to Regulations promulgated under Section 704(c) of the Code, so as to take into account the variation, if any, between the basis of the property to the Partnership and its initial Gross Asset Value. With respect to Partnership property that is initially contributed to the Partnership upon its formation pursuant to Section 4.1, such variation between basis and initial Gross Asset Value shall be taken into account under the “traditional method” as described in Regulations Section 1.704-3(b). With respect to properties subsequently contributed to the Partnership, the Partnership shall account for such variation under any method approved under Section 704(c) of the Code and the applicable regulations as chosen by the General Partner; provided, however, contributions by Kilroy Airport Imperial Company shall be shared among the Partners using the “traditional method” as described in Regulations Section 1.704-3(b)(1). In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to subparagraph (b) of the definition of Gross Asset Value (provided in Article 1), (ii) subsequent allocations of Tax Items with respect to such asset shall take account of the variation, if any, between the adjusted basis of such asset and its Gross Asset Value in the same manner as under Section 704(c) of the Code and the applicable regulations consistent with the requirements of Regulations Section 1.704-1(b)(2)(iv)(g) using any method approved under 704(c) of the Code and the applicable regulations as chosen by the General Partner.

ARTICLE 7.

MANAGEMENT AND OPERATIONS OF BUSINESS

Section 7.1. Management

A. Except as otherwise expressly provided in this Agreement, all management powers over the business and affairs of the Partnership are exclusively vested in the General Partner, and no Limited Partner shall have any right to participate in or exercise control or management power over the business and affairs of the Partnership. The General Partner may not be removed by the Limited Partners with or without cause, except with the consent of the General Partner. In addition to the powers now or hereafter granted a general partner of a limited partnership under the Act and other applicable law or which are granted to the General Partner under any other provision of this Agreement, the General Partner, subject to the other provisions hereof including Section 7.3, shall have full power and authority to do all things deemed necessary or desirable by it to conduct the business of the Partnership, to exercise all powers set forth in Section 3.2 hereof and to effectuate the purposes set forth in Section 3.1 hereof, including, without limitation:

(1) the making of any expenditures, the lending or borrowing of money (including, without limitation, making prepayments on loans and borrowing money to permit the Partnership to make distributions to its Partners in such amounts as will permit the General Partner (for so long as the General Partner has determined to qualify as a REIT) to avoid the payment of any federal income tax (including, for this purpose, any excise

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tax pursuant to Section 4981 of the Code) and to make distributions to its stockholders sufficient to permit the General Partner to maintain REIT status), the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidences of indebtedness (including the securing of same by mortgage, deed of trust or other lien or encumbrance on all or any of the Partnership’s assets) and the incurring of any obligations it deems necessary for the conduct of the activities of the Partnership;

(2) the making of tax, regulatory and other filings, or rendering of periodic or other reports to governmental or other agencies having jurisdiction over the business or assets of the Partnership;

(3) subject to the provisions of Section 7.3.D hereof, the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any assets of the Partnership or the merger or other combination of the Partnership with or into another entity;

(4) the mortgage, pledge, encumbrance or hypothecation of all or any assets of the Partnership, and the use of the assets of the Partnership (including, without limitation, cash on hand) for any purpose consistent with the terms of this Agreement and on any terms it sees fit, including, without limitation, the financing of the conduct or the operations of the General Partner or the Partnership, the lending of funds to other Persons (including, without limitation, the General Partner (if necessary to permit the financing or capitalization of a subsidiary of the General Partner or the Partnership) and any Subsidiaries of the Partnership) and the repayment of obligations of the Partnership, any of its Subsidiaries and any other Person in which it has an equity investment;

(5) the negotiation, execution, and performance of any contracts, leases, conveyances or other instruments that the General Partner considers useful or necessary to the conduct of the Partnership’s operations or the implementation of the General Partner’s powers under this Agreement;

(6) the distribution of Partnership cash or other Partnership assets in accordance with this Agreement;

(7) the selection and dismissal of employees of the Partnership (including, without limitation, employees having titles such as “president,” “vice president,” “secretary” and “treasurer”), and agents, outside attorneys, accountants, consultants and contractors of the Partnership, the determination of their compensation and other terms of employment or

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hiring, including waivers of conflicts of interest and the payment of their expenses and compensation out of the Partnership’s assets;

(8) the maintenance of such insurance for the benefit of the Partnership and the Partners as it deems necessary or appropriate;

(9) the formation of, or acquisition of an interest in, and the contribution of property to, any further limited or general partnerships, joint ventures or other relationships that it deems desirable (including, without limitation, the acquisition of interests in, and the contributions of property to any Subsidiary and any other Person in which it has an equity investment from time to time); provided, that as long as the General Partner has determined to continue to qualify as a REIT, the Partnership may not engage in any such formation, acquisition or contribution that would cause the General Partner to fail to qualify as a REIT;

(10) the control of any matters affecting the rights and obligations of the Partnership, including the conduct of litigation and the incurring of legal expense and the settlement of claims and litigation, and the indemnification of any Person against liabilities and contingencies to the extent permitted by law;

(11) the undertaking of any action in connection with the Partnership’s direct or indirect investment in any Person (including, without limitation, contributing or loaning Partnership funds to, incurring indebtedness on behalf of, or guarantying the obligations of any such Persons);

(12) subject to the other provisions in this Agreement, the determination of the fair market value of any Partnership property distributed in kind using such reasonable method of valuation as it may adopt, provided, that such methods are otherwise consistent with requirements of this Agreement;

(13) the management, operation, leasing, landscaping, repair, alteration, demolition or improvement of any real property or improvements owned by the Partnership or any Subsidiary of the Partnership or any Person in which the Partnership has made a direct or indirect equity investment;

(14) holding, managing, investing and reinvesting cash and other assets of the Partnership;

(15) the collection and receipt of revenues and income of the Partnership;

(16) the exercise, directly or indirectly through any attorney-in-fact acting under a general or limited power of attorney, of any right, including the

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right to vote, appurtenant to any asset or investment held by the Partnership;

(17) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of or in connection with any Subsidiary of the Partnership or any other Person in which the Partnership has a direct or indirect interest, or jointly with any such Subsidiary or other Person;

(18) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of any Person in which the Partnership does not have an interest, pursuant to contractual or other arrangements with such Person; and

(19) the making, execution and delivery of any and all deeds, leases, notes, deeds to secure debt, mortgages, deeds of trust, security agreements, conveyances, contracts, guarantees, warranties, indemnities, waivers, releases or legal instruments or other agreements in writing necessary or appropriate in the judgment of the General Partner for the accomplishment of any of the powers of the General Partner enumerated in this Agreement.

B. Each of the Limited Partners agrees that the General Partner is authorized to execute, deliver and perform the above-mentioned agreements and transactions on behalf of the Partnership without any further act, approval or vote of the partners, notwithstanding any other provisions of this Agreement (except as provided in Section 7.3), the Act or any applicable law, rule or regulation. The execution, delivery or performance by the General Partner or the Partnership of any agreement authorized or permitted under this Agreement shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or any other Persons under this Agreement or of any duty stated or implied by law or equity.

C. At all times from and after the date hereof, the General Partner may cause the Partnership to obtain and maintain (i) casualty, liability and other insurance (including, without limitation, earthquake insurance) on the properties of the Partnership and (ii) liability insurance for the Indemnities hereunder.

D. At all times from and after the date hereof, the General Partner may cause the Partnership to establish and maintain working capital and other reserves in such amounts as the General Partner, in its sole and absolute discretion, deems appropriate and reasonable from time to time.

E. In exercising its authority under this Agreement, the General Partner may, but, other than as set forth in the following sentence, in Section 11.2.D and as expressly set forth in the agreements listed on Exhibit F hereto, shall be under no obligation to, take into account the tax consequences to any Partner (including the General Partner) of any action taken by the

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General Partner. The General Partner, on behalf of the Partnership, shall use commercially reasonable efforts to cooperate with the Common Limited Partners to minimize any taxes payable in connection with any repayment, refinancing, replacement or restructuring of Debt, or any sale, exchange or any other disposition of assets, of the Partnership. The General Partner and the Partnership shall not have liability to a Limited Partner under any circumstances as a result of an income tax liability incurred by such Limited Partner as a result of an action (or inaction) by the General Partner pursuant to its authority under this Agreement.

F. Except as otherwise provided herein, to the extent the duties of the General Partner require expenditures of funds to be paid to third parties, the General Partner shall not have any obligations hereunder except to the extent that Partnership funds are reasonably available to it for the performance of such duties, and nothing herein contained shall be deemed to authorize or require the General Partner, in its capacity as such, to expend its individual funds for payment to third parties or to undertake any individual liability or obligation on behalf of the Partnership.

Section 7.2. Certificate of Limited Partnership

To the extent that such action is determined by the General Partner to be reasonable and necessary or appropriate, the General Partner shall file amendments to and restatements of the Certificate and do all the things to maintain the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware and to maintain the Partnership’s qualification to do business as a foreign limited partnership in each other state, the District of Columbia or other jurisdiction, in which the Partnership may elect to do business or own property. Subject to the terms of Section 8.5.A(4) hereof, the General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate or any amendment thereto to any Limited Partner. The General Partner shall use all reasonable efforts to cause to be filed such other certificates or documents as may be reasonable and necessary or appropriate for the formation, continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware, and any other state, or the District of Columbia or other jurisdiction, in which the Partnership may elect to do business or own property.

Section 7.3. Restrictions on General Partner’s Authority

A. The General Partner may not take any action in contravention of this Agreement, including, without limitation:

(1) take any action that would make it impossible to carry on the ordinary business of the Partnership, except as otherwise provided in this Agreement;

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(2) possess Partnership property, or assign any rights in specific Partnership property, for other than a Partnership purpose except as otherwise provided in this Agreement;

(3) admit a Person as a Partner, except as otherwise provided in this Agreement;

(4) perform any act that would subject a Limited Partner to liability as a general partner in any jurisdiction or any other liability except as provided herein or under the Act; or

(5) enter into any contract, mortgage, loan or other agreement that prohibits or restricts, or has the effect of prohibiting or restricting, the ability of a Limited Partner to exercise its rights to a Redemption in full, except with the written consent of such Limited Partner.

B. The General Partner shall not, without the prior Consent of the Partners, (in addition to any Consent of the Limited Partners required by any other provision hereof) undertake, on behalf of the Partnership, any of the following actions or enter into any transaction which would have the effect of such transactions:

(1) except as provided in Section 7.3.E, amend, modify or terminate this Agreement other than to reflect the admission, substitution, termination or withdrawal of partners pursuant to Article 12 hereof;

(2) make a general assignment for the benefit of creditors or appoint or acquiesce in the appointment of a custodian, receiver or trustee for all or any part of the assets of the Partnership;

(3) institute any proceeding for bankruptcy on behalf of the Partnership; or

(4) confess a judgment against the Partnership.

C. The General Partner shall not, without the prior Consent of the Limited Partners, undertake, on behalf of the Partnership, any of the following actions or enter into any transaction which would have the effect of such transactions:

(1) approve or acquiesce to the transfer of the Partnership Interest of the General Partner to any Person other than the Partnership; or

(2) admit into the Partnership any Additional or Substitute General Partners.

in each case other than incident to a transaction pursuant to Section 11.2.B or Section 11.2.C.

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D. If the aggregate Limited Partnership Interests of all Limited Partners represents 5.0% or more of the aggregate Partnership Interests, the General Partner shall not, without the prior Consent of the Limited Partners, undertake, on behalf of the Partnership, any of the following actions or enter into any transaction which would have the effect of such transactions:

(1) dissolve the Partnership, or

(2) prior to the seventh anniversary of the date of this Agreement, sell any of the property listed on Exhibit C,

in each case other than incident to a transaction pursuant to Section 11.2.B or Section 11.2.C.

E. Notwithstanding Sections 7.3.B, 7.3.C and 7.3.D hereof, but subject to Section 7.3.F hereof, the General Partner shall have the power, without the Consent of the Limited Partners, to amend this Agreement as may be required to facilitate or implement any of the following purposes:

(1) to add to the obligations of the General Partner or surrender any right or power granted to the General Partner or any Affiliate of the General Partner for the benefit of the Limited Partners;

(2) to reflect the issuance of additional Partnership Interests pursuant to Sections 4.3.C and 4.4 or the admission, substitution, termination, or withdrawal of Partners in accordance with this Agreement;

(3) to reflect a change that is of an inconsequential nature and does not adversely affect the Limited Partners in any material respect, or to cure any ambiguity in, correct or supplement any provision in, or make other changes with respect to matters arising under, this Agreement that will not be inconsistent with law or with the provisions of this Agreement;

(4) to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law;

(5) to reflect such changes as are reasonably necessary for the General Partner to maintain its status as a REIT, including changes which may be necessitated due to a change in applicable law (or an authoritative interpretation thereof) or a ruling of the IRS; and

(6) to modify, as set forth in the definition of “Capital Account,” the manner in which Capital Accounts are computed.

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The General Partner will provide notice to the Limited Partners when any action under this Section 7.3.E is taken.

F. Notwithstanding Sections 7.3.B, 7.3.C, 7.3.D and 7.3.E hereof, this Agreement shall not be amended, and no action may be taken by the General Partner, without the Consent of each Common Limited Partner or Preferred Limited Partner adversely affected if such amendment or action would (i) convert a Limited Partner’s interest in the Partnership into a general partner’s interest (except as the result of the General Partner acquiring such interest), (ii) modify the limited liability of a Limited Partner, (iii) alter rights of the Partner to receive distributions pursuant to Article 5, Section 13.2.A(4), Article 16 or Article 19 or the allocations specified in Article 6 (except as permitted pursuant to Section 4.3 and Section 7.3.E(2) hereof), (iv) alter or modify the rights to a Redemption or the REIT Shares Amount as set forth in Section 8.6, and related definitions hereof, (v) alter the redemption or exchange rights as set forth in Sections 16.4, 16.7, 19.6 and 19.9 hereof, as applicable, or (vi) amend this Section 7.3.F. Further, no amendment may alter the restrictions on the General Partner’s authority set forth elsewhere in this Section 7.3 without the Consent specified in such section. In addition, notwithstanding Sections 7.3.B, 7.3.C, 7.3.D and 7.3.E hereof, Section 11.2 of this Agreement shall not be amended, and no action in contravention of Section 11.2 hereof shall be taken, without the Consent of the Limited Partners.

Section 7.4. Reimbursement of the General Partner

A. Except as provided in this Section 7.4 and elsewhere in this Agreement (including the provisions of Articles 5 and 6 regarding distributions, payments and allocations to which it may be entitled), the General Partner shall not be compensated for its services as general partner of the Partnership.

B. Subject to Section 15.11, the General Partner shall be reimbursed on a monthly basis, or such other basis as the General Partner may determine in its sole and absolute discretion, for all expenses it incurs relating to the ownership of interests in and operation of, or for the benefit of, the Partnership. The Limited Partners acknowledge that the General Partner’s sole business is the ownership of interests in and operation of the Partnership and that such expenses are incurred for the benefit of the Partnership; provided, that the General Partner shall not be reimbursed for expenses it incurs relating to the organization of the Partnership and the General Partner or the initial public offering or subsequent public offerings of REIT Shares, other shares of capital stock or Funding Debt by the General Partner, but shall be reimbursed for expenses it incurs with respect to any other issuance of additional Partnership Interests pursuant to the provisions hereof. Such reimbursements shall be in addition to any reimbursement to the General Partner as a result of indemnification pursuant to Section 7.7 hereof.

C. If and to the extent any reimbursements to the General Partner pursuant to this Section 7.4 constitute gross income of the General Partner (as opposed to the repayment of advances made by the General Partner on behalf of the Partnership), such amounts shall constitute guaranteed payments within the meaning of Section 707(c) of the Code, shall be

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treated consistently therewith by the Partnership and all Partners, and shall not be treated as distributions for purposes of computing the Partners’ Capital Accounts.

Section 7.5. Outside Activities of the General Partner

A. Except in connection with a transaction authorized in Section 11.2 hereof, without the Consent of the Limited Partners, the General Partner shall not, directly or indirectly, enter into or conduct any business, other than in connection with the ownership, acquisition and disposition of Partnership Interests as a General Partner and the management of the business of the Partnership, its operation as a public reporting company with a class (or classes) of securities registered under the Securities Exchange Act, its operation as a REIT and such activities as are incidental to the same. Without the Consent of the Limited Partners, the General Partner shall not, directly or indirectly, participate in or otherwise acquire any interest in any real or personal property, except its General Partner Interest, its minority interest in any Subsidiary Partnership(s) (held directly or indirectly through a Qualified REIT Subsidiary) that the General Partner holds in order to maintain such Subsidiary Partnership’s status as a partnership, and such bank accounts, similar instruments or other short-term investments as it deems necessary to carry out its responsibilities contemplated under this Agreement and the Charter. In the event the General Partner desires to contribute cash to any Subsidiary Partnership to acquire or maintain an interest of 1% or less in the capital of such partnership, the General Partner may acquire such cash from the Partnership in exchange for a reduction in the General Partner’s Partnership Units, in an amount equal to the amount of such cash divided by the Fair Market Value of a REIT Share on the day such cash is received by the General Partner. Notwithstanding the foregoing, the General Partner may acquire Properties in exchange for REIT Shares, to the extent such Properties are immediately contributed by the General Partner to the Partnership, pursuant to the terms described in Section 4.3.E. Any Limited Partner Interests acquired by the General Partner, whether pursuant to exercise by a Limited Partner of its right of Redemption, or otherwise, shall be automatically converted into a General Partner Interest comprised of an identical number of Partnership Units with the same rights, priorities and preferences as the class or series so acquired. If, at any time, the General Partner acquires material assets (other than on behalf of the Partnership) the definition of “REIT Shares Amount” shall be adjusted, as reasonably agreed to by the General Partner and the other Limited Partners, to reflect the relative Fair Market Value of a share of capital stock of the General Partner relative to the Deemed Partnership Interest Value of the related Partnership Unit. The General Partner’s General Partner Interest in the Partnership, its minority interest in any Subsidiary Partnership(s) (held directly or indirectly through a Qualified REIT Subsidiary) that the General Partner holds in order to maintain such Subsidiary Partnership’s status as a partnership, and interests in such short-term liquid investments, bank accounts or similar instruments as the General Partner deems necessary to carry out its responsibilities contemplated under this Agreement and the Charter are interests which the General Partner is permitted to acquire and hold for purposes of this Section 7.5.A.

B. In the event the General Partner exercises its rights under the Charter to purchase REIT Shares or Preferred Shares, then the General Partner shall cause the Partnership to redeem from it a number of Partnership Units of the appropriate class as determined based on,

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in the case of REIT Shares the REIT Shares Amount equal to the number of REIT Shares so purchased, or in the case of Preferred Shares an equal number of Preferred Units which correspond in ranking to the Preferred Shares so purchased, in each case on the same terms that the General Partner purchased such REIT Shares or Preferred Shares (as applicable).

Section 7.6. Contracts with Affiliates

A. The Partnership may lend or contribute to Persons in which it has an equity investment, and such Persons may borrow funds from the Partnership, on terms and conditions established in the sole and absolute discretion of the General Partner. The foregoing authority shall not create any right or benefit in favor of any Person.

B. Except as provided in Section 7.5.A, the Partnership may transfer assets to joint ventures, other partnerships, corporations or other business entities in which it is or thereby becomes a participant upon such terms and subject to such conditions consistent with this Agreement and applicable law.

C. The General Partner, in its sole and absolute discretion and without the approval of the Limited Partners, may propose and adopt on behalf of the Partnership employee benefit plans funded by the Partnership for the benefit of employees of the General Partner, the Partnership, Subsidiaries of the Partnership or any Affiliate of any of them in respect of services performed, directly or indirectly, for the benefit of the Partnership, the General Partner, or any of the Partnership’s Subsidiaries. The General Partner also is expressly authorized to cause the Partnership to issue to it Partnership Units corresponding to REIT Shares issued by the General Partner pursuant to its Stock Incentive Plan or any similar or successor plan and to repurchase such Partnership Units from the General Partner to the extent necessary to permit the General Partner to repurchase such REIT Shares in accordance with such plan.

D. The General Partner is expressly authorized to enter into, in the name and on behalf of the Partnership, a right of first opportunity arrangement and other conflict avoidance agreements with various Affiliates of the Partnership and the General Partner, on such terms as the General Partner, in its sole and absolute discretion, believes are advisable.

Section 7.7. Indemnification

A. The Partnership shall indemnify an Indemnitee from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of the Partnership as set forth in this Agreement in which any Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, unless it is established that: (i) the act or omission of the Indemnitee was material to the matter giving rise to the proceeding and either was committed in bad faith or was the result of active and deliberate dishonesty; (ii) the Indemnitee actually received an improper personal benefit in money, property or services;

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or (iii) in the case of any criminal proceeding, the Indemnitee had reasonable cause to believe that the act or omission was unlawful. Without limitation, the foregoing indemnity shall extend to any liability of any Indemnitee, pursuant to a loan guaranty or otherwise, for any indebtedness of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken subject to), and the General Partner is hereby authorized and empowered, on behalf of the Partnership, to enter into one or more indemnity agreements consistent with the provisions of this Section 7.7 in favor of any Indemnitee having or potentially having liability for any such indebtedness. The termination of any proceeding by judgment, order or settlement does not create a presumption that the Indemnitee did not meet the requisite standard of conduct set forth in this Section 7.7.A. The termination of any proceeding by conviction or upon a plea of nolo contendere or its equivalent, or any entry of an order of probation prior to judgment, creates a rebuttable presumption that the Indemnitee acted in a manner contrary to that specified in this Section 7.7.A. Any indemnification pursuant to this Section 7.7 shall be made only out of the assets of the Partnership.

B. Reasonable expenses incurred by an Indemnitee who is a party to a proceeding may be paid or reimbursed by the Partnership in advance of the final disposition of the proceeding upon receipt by the Partnership of (i) a written affirmation by the Indemnitee of the Indemnitee’s good faith belief that the standard of conduct necessary for indemnification by the Partnership as authorized in Section 7.7.A has been met, and (ii) a written undertaking by or on behalf of the Indemnitee to repay the amount if it shall ultimately be determined that the standard of conduct has not been met.

C. The indemnification provided by this Section 7.7 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity.

D. The Partnership may purchase and maintain insurance, on behalf of the Indemnitees and such other Persons as the General Partner shall determine, against any liability that may be asserted against or expenses that may be incurred by any such Person in connection with the Partnership’s activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement.

E. For purposes of this Section 7.7, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by it of its duties to the Partnership also imposes duties on, or otherwise involves services by, it to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute fines within the meaning of Section 7.7; and actions taken or omitted by the Indemnitee with respect to an employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Partnership.

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F. In no event may an Indemnitee subject the Limited Partners to personal liability by reason of the indemnification provisions set forth in this Agreement.

G. An Indemnitee shall not be denied indemnification in whole or in part under this Section 7.7 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement.

H. The provisions of this Section 7.7 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. Any amendment, modification or repeal of this Section 7.7 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the Partnership’s liability to any Indemnitee under this Section 7.7 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.

I. If and to the extent any reimbursements to the General Partner pursuant to this Section 7.7 constitute gross income of the General Partner (as opposed to the repayment of advances made by the General Partner on behalf of the Partnership) such amounts shall constitute guaranteed payments within the meaning of Section 707(c) of the Code, shall be treated consistently therewith by the Partnership and all Partners, and shall not be treated as distributions for purposes of computing the Partners’ Capital Accounts.

J. Any indemnification hereunder is subject to, and limited by, the provisions of Section 17-108 of the Act.

K. In the event the Partnership is made a party to any litigation or otherwise incurs any loss or expense as a result of or in connection with any Partner’s personal obligations or liabilities unrelated to Partnership business, such Partner shall indemnify and reimburse the Partnership for all such loss and expense incurred, including legal fees, and the Partnership Interest of such Partner may be charged therefor. The liability of a Partner under this Section 7.7.K shall not be limited to such Partner’s Partnership Interest, but shall be enforceable against such Partner personally.

Section 7.8. Liability of the General Partner

A. Notwithstanding anything to the contrary set forth in this Agreement, none of the General Partner and any of its officers, directors, agents and employees shall be liable or accountable in damages or otherwise to the Partnership, any Partners or any Assignees, or their successors or assigns, for losses sustained, liabilities incurred or benefits not derived as a result of errors in judgment or mistakes of fact or law or any act or omission if the General Partner acted in good faith.

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B. The Limited Partners expressly acknowledge that the General Partner is acting for the benefit of the Partnership, the Limited Partners and the General Partner’s stockholders collectively, that the General Partner is under no obligation to give priority to the separate interests of the Limited Partners or the General Partner’s stockholders (including, without limitation, the tax consequences to Limited Partners or Assignees or to stockholders) in deciding whether to cause the Partnership to take (or decline to take) any actions and that the General Partner shall not be liable to the Partnership or to any Limited Partner for monetary damages for losses sustained, liabilities incurred, or benefits not derived by Limited Partners in connection with such decisions, provided, that the General Partner has acted in good faith.

C. Subject to its obligations and duties as General Partner set forth in Section 7.1.A hereof, the General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agents. The General Partner shall not be responsible for any misconduct or negligence on the part of any such agent appointed by it in good faith.

D. Any amendment, modification or repeal of this Section 7.8 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the liability of the General Partner and any of its officers, directors, agents and employees to the Partnership and the Limited Partners under this Section 7.8 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.

Section 7.9. Other Matters Concerning the General Partner

A. The General Partner may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties.

B. The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the opinion of such Persons as to matters which such General Partner reasonably believes to be within such Person’s professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion.

C. The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers and a duly appointed attorney or attorneys-in-fact. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform all and every act and duty which is permitted or required to be done by the General Partner hereunder.

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D. Notwithstanding any other provisions of this Agreement or any non-mandatory provision of the Act, any action of the General Partner on behalf of the Partnership or any decision of the General Partner to refrain from acting on behalf of the Partnership, undertaken in the good faith belief that such action or omission is necessary or advisable in order to protect the ability of the General Partner, for so long as the General Partner has determined to qualify as a REIT, to (i) continue to qualify as a REIT or (ii) except with respect to the distribution of Available Cash to the Series A Limited Partners in accordance with Section 16.2, the Series D Limited Partners in accordance with Section 19.3 and the Series E Partner in accordance with Section 20.2, avoid the General Partner incurring any taxes under Section 857 or Section 4981 of the Code, is expressly authorized under this Agreement and is deemed approved by all of the Limited Partners.

Section 7.10. Title to Partnership Assets

Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partners, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General Partner or one or more nominees, as the General Partner may determine, including Affiliates of the General Partner. The General Partner hereby declares and warrants that any Partnership assets for which legal title is held in the name of the General Partner or any nominee or Affiliate of the General Partner shall be deemed held by the General Partner or such nominee or Affiliate for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, however, that the General Partner shall use its best efforts to cause beneficial and record title to such assets to be vested in the Partnership as soon as reasonably practicable. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which legal title to such Partnership assets is held.

Section 7.11. Reliance by Third Parties

Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner has full power and authority to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any contracts on behalf of the Partnership, and such Person shall be entitled to deal with the General Partner as if it were the Partnership’s sole party in interest, both legally and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies which may be available against such Person to contest, negate or disaffirm any action of the General Partner in connection with any such dealing. In no event shall any Person dealing with the General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (i) at the time of the execution and delivery of such certificate, document or instrument, this

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Agreement was in full force and effect, (ii) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership and (iii) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership.

ARTICLE 8.

RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS

Section 8.1. Limitation of Liability

The Limited Partners shall have no liability under this Agreement except as expressly provided in this Agreement or under the Act.

Section 8.2. Management of Business

No Limited Partner or Assignee (other than the General Partner, any of its Affiliates or any officer, director, employee, general partner, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such) shall take part in the operations, management or control (within the meaning of the Act) of the Partnership’s business, transact any business in the Partnership’s name or have the power to sign documents for or otherwise bind the Partnership. The transaction of any such business by the General Partner, any of its Affiliates or any officer, director, employee, general partner, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Limited Partners or Assignees under this Agreement.

Section 8.3. Outside Activities of Limited Partners

Subject to any agreements entered into by a Limited Partner or its Affiliates with the General Partner, Partnership or a Subsidiary, any Limited Partner and any officer, director, employee, agent, trustee, Affiliate or stockholder of any Limited Partner shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities in direct competition with the Partnership or that are enhanced by the activities of the Partnership. Neither the Partnership nor any Partners shall have any rights by virtue of this Agreement in any business ventures of any Limited Partner or Assignee. Subject to such agreements, none of the Limited Partners nor any other Person shall have any rights by virtue of this Agreement or the partnership relationship established hereby in any business ventures of any other Person, other than the Limited Partners benefiting from the business conducted by the General Partner, and such other Person shall have no obligation pursuant to this Agreement to offer any interest in any such business ventures to the Partnership, any Limited Partner or any such other Person, even if such opportunity is of a character which, if presented to the Partnership, any Limited Partner or such other Person, could be taken by such other Person.

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Section 8.4. Return of Capital

Except pursuant to the rights of Redemption set forth in Section 8.6 and the redemption and exchange rights set forth in Sections 16.4, 16.7, 19.6 and 19.9, no Limited Partner shall be entitled to the withdrawal or return of his or her Capital Contribution, except to the extent of distributions made pursuant to this Agreement or upon termination of the Partnership as provided herein. Except as expressly set forth herein with respect to the rights, priorities and preferences of the Preferred Limited Partners holding any series of Preferred Units, no Limited Partner or Assignee shall have priority over any other Limited Partner or Assignee either as to the return of Capital Contributions, or as otherwise expressly provided in this Agreement, as to profits, losses, distributions or credits.

Section 8.5. Rights of Limited Partners Relating to the Partnership

A. In addition to other rights provided by this Agreement or by the Act, and except as limited by Section 8.5.C hereof, each Limited Partner shall have the right, for a purpose reasonably related to such Limited Partner’s interest as a limited partner in the Partnership, upon written demand with a statement of the purpose of such demand and at the Partnership’s expense:

(1) to obtain a copy of the most recent annual and quarterly reports filed with the Securities and Exchange Commission by the General Partner pursuant to the Securities Exchange Act, and each communication sent to the stockholders of the General Partner;

(2) to obtain a copy of the Partnership’s federal, state and local income tax returns for each Partnership Year;

(3) to obtain a current list of the name and last known business, residence or mailing address of each Partner;

(4) to obtain a copy of this Agreement and the Certificate and all amendments thereto, together with executed copies of all powers of attorney pursuant to which this Agreement, the Certificate and all amendments thereto have been executed; and

(5) to obtain true and full information regarding the amount of cash and a description and statement of any other property or services contributed by each Partner and which each Partner has agreed to contribute in the future, and the date on which each became a Partner.

B. The Partnership shall notify each Common Limited Partner in writing of any adjustment made in the calculation of the REIT Shares Amount within 10 Business Days of the date such change becomes effective.

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C. Notwithstanding any other provision of this Section 8.5, the General Partner may keep confidential from the Limited Partners, for such period of time as the General Partner determines in its sole and absolute discretion to be reasonable, any information that (i) the General Partner believes to be in the nature of trade secrets or other information the disclosure of which the General Partner in good faith believes is not in the best interests of the Partnership or (ii) the Partnership or the General Partner is required by law or by agreements with unaffiliated third parties to keep confidential.

Section 8.6. Common Limited Partner Redemption Rights

A. On or after the date two years after the Effective Date or on or after such later date as is expressly provided in an agreement entered into between the Partnership and any Common Limited Partner, each Common Limited Partner shall have the right (subject to the terms and conditions set forth herein and in any other such agreement, as applicable) to require the Partnership to redeem all or a portion of the Common Partnership Units held by such Common Limited Partner (such Partnership Units being hereafter referred to as “Tendered Units”) in exchange for the Cash Amount (a “Redemption”), provided, that the terms of such Common Partnership Units do not provide that such Common Partnership Units are not entitled to a right of Redemption; provided further, that Common Partnership Units subject to the Pledge Agreement shall, to the extent the pledgee thereunder is entitled to exercise remedies thereunder, be subject to redemption prior to the date two years after the Effective Date. Unless otherwise expressly provided in this Agreement or a separate agreement entered into between the Partnership and the Holders of such Partnership Units, all Common Partnership Units shall be entitled to a right of Redemption hereunder. Any Redemption shall be exercised pursuant to a Notice of Redemption delivered to the General Partner by the Common Limited Partner who is exercising the right (the “Tendering Partner”). The Cash Amount shall be delivered as a certified check payable to the Tendering Partner within ten (10) days of the Specified Redemption Date in accordance with the instructions set forth in the Notice of Redemption.

B. Notwithstanding Section 8.6.A above, if a Common Limited Partner has delivered to the General Partner a Notice of Redemption then the General Partner may, in its sole and absolute discretion, (subject to the limitations on ownership and transfer of REIT Shares set forth in Article IV.E of the Charter) elect to acquire some or all of the Tendered Units from the Tendering Partner in exchange for the REIT Shares Amount (as of the Specified Redemption Date) and, if the General Partner so elects, the Tendering Partner shall sell the Tendered Units to the General Partner in exchange for the REIT Shares Amount. In such event, the Tendering Partner shall have no right to cause the Partnership to redeem such Tendered Units. The General Partner shall promptly give such Tendering Partner written notice of its election, and the Tendering Partner may elect to withdraw its redemption request at any time prior to the acceptance of the Cash Amount or REIT Shares Amount by such Tendering Partner. Notwithstanding the foregoing, the General Partner, at the request of a Common Limited Partner that is a corporation or limited liability company, shall be required to issue, and the General Partner agrees to issue, the REIT Shares Amount in exchange for such Common Limited Partner’s Tendered Units, subject to the ownership restrictions applicable to such shares set forth

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in the Charter. In addition, the General Partner agrees to maintain an amount of authorized but unissued REIT Shares equal to the number of REIT Shares issuable upon the exchange of Common Partnership Units owned from time to time by Common Limited Partners that are corporations.

C. The REIT Shares Amount, if applicable, shall be delivered as duly authorized, validly issued, fully paid and nonassessable REIT Shares and, if applicable, free of any pledge, lien, encumbrance or restriction, other than those provided in the Charter, the Bylaws of the General Partner, the Securities Act, relevant state securities or blue sky laws and any applicable registration rights agreement with respect to such REIT Shares entered into by the Tendering Partner. The REIT Shares Amount shall be registered in the name and otherwise delivered as set forth in the Notice of Redemption. Notwithstanding any delay in such delivery (but subject to Section 8.6.E), the Tendering Partner shall be deemed the owner of such REIT Shares for all purposes, including without limitation, rights to vote or consent, and receive dividends, as of the Specified Redemption Date.

D. Each Common Limited Partner covenants and agrees with the General Partner that all Tendered Units shall be delivered to the General Partner free and clear of all liens, claims and encumbrances whatsoever and should any such liens, claims and/or encumbrances exist or arise with respect to such Tendered Units, the General Partner shall be under no obligation to acquire the same. Each Common Limited Partner further agrees that, in the event any state or local property transfer tax is payable as a result of the transfer of its Tendered Units to the General Partner (or its designee), such Common Limited Partner shall assume and pay such transfer tax.

E. Notwithstanding the provisions of Sections 8.6.A, 8.6.B, 8.6.C or any other provision of this Agreement, a Common Limited Partner (i) shall not be entitled to effect a Redemption for cash or an exchange for REIT Shares to the extent the ownership or right to acquire REIT Shares pursuant to such exchange by such Partner on the Specified Redemption Date would cause such Partner or any other Person, or, in the opinion of counsel selected by the General Partner, may cause such Partner or any other Person, to violate the restrictions on ownership and transfer of REIT Shares set forth in Article IV.E of the Charter and (ii) shall have no rights under this Agreement to acquire REIT Shares which would otherwise be prohibited under the Charter. To the extent any attempted Redemption or exchange for REIT Shares would be in violation of this Section 8.6.E, it shall be null and void ab initio and such Common Limited Partner shall not acquire any rights or economic interest in the cash otherwise payable upon such redemption or the REIT Shares otherwise issuable upon such exchange.

F. Notwithstanding anything herein to the contrary (but subject to Section 8.6.E), with respect to any Redemption or exchange for REIT Shares pursuant to this Section 8.6:

(1) All Common Partnership Units acquired by the General Partner pursuant thereto shall automatically, and without further action required, be

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converted into and deemed to be General Partner Interests comprised of the same number and class of Common Partnership Units.

(2) Without the consent of the General Partner, each Common Limited Partner may not effect a Redemption for less than 500 Partnership Units or, if the Common Limited Partner holds less than 500 Partnership Units, all of the Common Partnership Units held by such Common Limited Partner.

(3) Without the consent of the General Partner, each Common Limited Partner may not effect a Redemption during the period after the Partnership Record Date with respect to a distribution and before the record date established by the General Partner for a distribution to its common stockholders of some or all of its portion of such distribution.

(4) The consummation of any Redemption or exchange for REIT Shares shall be subject to the expiration or termination of the applicable waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

(5) Each Tendering Partner shall continue to own all Common Partnership Units subject to any Redemption or exchange for REIT Shares, and be treated as a Common Limited Partner with respect to such Common Partnership Units for all purposes of this Agreement, until such Common Partnership Units are transferred to the General Partner and paid for or exchanged as of the Specified Redemption Date. Until a Specified Redemption Date, the Tendering Partner shall have no rights as a stockholder of the General Partner with respect to such Tendering Partner’s Common Partnership Units.

G. In the event that the Partnership issues additional Partnership Interests to any Additional Limited Partner pursuant to Section 4.3.C hereof, the General Partner shall make such revisions to this Section 8.6 as it determines are necessary to reflect the issuance of such additional Partnership Interests.

ARTICLE 9.

BOOKS, RECORDS, ACCOUNTING AND REPORTS

Section 9.1. Records and Accounting

The General Partner shall keep or cause to be kept at the principal office of the Partnership appropriate books and records with respect to the Partnership’s business, including without limitation, all books and records necessary to provide to the Limited Partners any information, lists and copies of documents required to be provided pursuant to Section 9.3

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hereof. Any records maintained by or on behalf of the Partnership in the regular course of its business may be kept on, or be in the form of, punch cards, magnetic tape, photographs, micrographics or any other information storage device, provided, that the records so maintained are convertible into clearly legible written form within a reasonable period of time. The books of the Partnership shall be maintained, for financial and tax reporting purposes, on an accrual basis in accordance with generally accepted accounting principles.

Section 9.2. Fiscal Year

The fiscal year of the Partnership shall be the calendar year.

Section 9.3. Reports

A. As soon as available, but in no event later than five Business Days following the date on which Company files its annual report in respect of a fiscal year on Form 10-K, or such other applicable form (“Form 10-K”), with the Securities and Exchange Commission (the “Commission”) (or, in the event that Partnership is required under rules and regulations promulgated by the Commission to file with the Commission a Form 10-K separate from Company’s Form 10-K, five business days after the filing of such report by Partnership with the Commission), the General Partner shall cause to be mailed to each Limited Partner a complete copy of Partnership’s audited financial statements for such fiscal year including a balance sheet, income statement and cash flow statement for such fiscal year prepared and audited by an independent certified public accountant in accordance with GAAP; and

B. As soon as available, but in no event later than five Business Days following the date on which Company files its quarterly report in respect of a fiscal quarter on Form 10-Q, or such other applicable form (“Form 10-Q”), with the Commission (or, in the event the Operating Partnership is required under rules and regulations promulgated by the Commission to file with the Commission a Form 10-Q separate from Company’s Form 10-Q, five business days after the filing of such report by Partnership with the Commission), the General Partner shall cause to be mailed to each Limited Partner a complete copy of Partnership’s unaudited quarterly financial statements for such fiscal quarter including a balance sheet, income statement and cash flow statement for such fiscal quarter prepared in accordance with GAAP.

Section 9.4. Nondisclosure of Certain Information

Notwithstanding the provisions of Sections 9.1 and 9.3, the General Partner may keep confidential from the Limited Partners any information that the General Partner believes to be in the nature of trade secrets or other information the disclosure of which the General Partner in good faith believes is not in the best interests of the Partnership or which the Partnership is required by law or by agreements with unaffiliated third parties to keep confidential.

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ARTICLE 10.

TAX MATTERS

Section 10.1. Preparation of Tax Returns

The General Partner shall arrange for the preparation and timely filing of all returns of Partnership income, gains, deductions, losses and other items required of the Partnership for federal and state income tax purposes and shall use all reasonable efforts to furnish, within 90 days of the close of each taxable year, the tax information reasonably required by Limited Partners for federal and state income tax reporting purposes. The Limited Partners shall promptly provide the General Partner with such information relating to any Contributed Property contributed by such Limited Partner to the Partnership.

Section 10.2. Tax Elections

Except as otherwise provided herein, the General Partner shall, in its sole and absolute discretion, determine whether to make any available election pursuant to the Code, including the election under Section 754 of the Code. The General Partner shall have the right to seek to revoke any such election (including without limitation, any election under Section 754 of the Code) upon the General Partner’s determination in its sole and absolute discretion that such revocation is the best interests of the Partners.

Section 10.3. Tax Matters Partner

A. The General Partner shall be the “tax matters partner” of the Partnership for federal income tax purposes. Pursuant to Section 6223(c) of the Code, upon receipt of notice from the IRS of the beginning of an administrative proceeding with respect to the Partnership, the tax matters partner shall furnish the IRS with the name, address and profit interest of each of the Limited Partners and Assignees; provided, however, that such information is provided to the Partnership by the Limited Partners and Assignees.

B. The tax matters partner is authorized, but not required:

(1) to enter into any settlement with the IRS with respect to any administrative or judicial proceedings for the adjustment of Partnership items required to be taken into account by a Partner for income tax purposes (such administrative proceedings being referred to as a “tax audit” and such judicial proceedings being referred to as “judicial review”), and in the settlement agreement the tax matters partner may expressly state that such agreement shall bind all Partners, except that such settlement agreement shall not bind any Partner (i) who (within the time prescribed pursuant to the Code and Regulations) files a statement with the IRS providing that the tax matters partner shall not have the authority to enter into a settlement agreement on behalf of such Partner or (ii) who is a “notice

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partner” (as defined in Section 6231 of the Code) or a member of a “notice group” (as defined in Section 6223(b)(2) of the Code);

(2) in the event that a notice of a final administrative adjustment at the Partnership level of any item required to be taken into account by a Partner for tax purposes (a “final adjustment”) is mailed to the tax matters partner, to seek judicial review of such final adjustment, including the filing of a petition for readjustment with the Tax Court or the United States Claims Court, or the filing of a complaint for refund with the District Court of the United States for the district in which the Partnership’s principal place of business is located;

(3) to intervene in any action brought by any other Partner for judicial review of a final adjustment;

(4) to file a request for an administrative adjustment with the IRS at any time and, if any part of such request is not allowed by the IRS, to file an appropriate pleading (petition or complaint) for judicial review with respect to such request;

(5) to enter into an agreement with the IRS to extend the period for assessing any tax which is attributable to any item required to be taken into account by a Partner for tax purposes, or an item affected by such item; and

(6) to take any other action on behalf of the Partners of the Partnership in connection with any tax audit or judicial review proceeding to the extent permitted by applicable law or regulations.

The taking of any action and the incurring of any expense by the tax matters partner in connection with any such proceeding, except to the extent required by law, is a matter in the sole and absolute discretion of the tax matters partner and the provisions relating to indemnification of the General Partner set forth in Section 7.7 of this Agreement shall be fully applicable to the tax matters partner in its capacity as such.

C. The tax matters partner shall receive no compensation for its services. All third party costs and expenses incurred by the tax matters partner in performing its duties as such (including legal and accounting fees) shall be borne by the Partnership. Nothing herein shall be construed to restrict the Partnership from engaging an accounting firm to assist the tax matters partner in discharging its duties hereunder, so long as the compensation paid by the Partnership for such services is reasonable.

Section 10.4. Organizational Expenses

The Partnership shall elect to deduct expenses, if any, incurred by it in organizing the Partnership ratably over a 60-month period as provided in Section 709 of the Code.

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Section 10.5. Withholding

Each Limited Partner hereby authorizes the Partnership to withhold from or pay on behalf of or with respect to such Limited Partner any amount of federal, state, local, or foreign taxes that the General Partner determines that the Partnership is required to withhold or pay with respect to any amount distributable or allocable to such Limited Partner pursuant to this Agreement, including, without limitation, any taxes required to be withheld or paid by the Partnership pursuant to Sections 1441, 1442, 1445 or 1446 of the Code. Any amount paid on behalf of or with respect to a Limited Partner shall constitute a loan by the Partnership to such Limited Partner, which loan shall be repaid by such Limited Partner within 15 days after notice from the General Partner that such payment must be made unless (i) the Partnership withholds such payment from a distribution which would otherwise be made to the Limited Partner or (ii) the General Partner determines, in its sole and absolute discretion, that such payment may be satisfied out of the available funds of the Partnership which would, but for such payment, be distributed to the Limited Partner. Any amounts withheld pursuant to the foregoing clauses (i) or (ii) shall be treated as having been distributed to such Limited Partner. Each Limited Partner hereby unconditionally and irrevocably grants to the Partnership a security interest in such Limited Partner’s Partnership Interest to secure such Limited Partner’s obligation to pay to the Partnership any amounts required to be paid pursuant to this Section 10.5. In the event that a Limited Partner fails to pay any amounts owed to the Partnership pursuant to this Section 10.5 when due, the General Partner may, in its sole and absolute discretion, elect to make the payment to the Partnership on behalf of such defaulting Limited Partner, and in such event shall be deemed to have loaned such amount to such defaulting Limited Partner and shall succeed to all rights and remedies of the Partnership as against such defaulting Limited Partner (including, without limitation, the right to receive distributions and the holding of a security interest in such Limited Partner’s Partnership Interest). Any amounts payable by a Limited Partner hereunder shall bear interest at the base rate on corporate loans at large United States money center commercial banks, as published from time to time in the Wall Street Journal, plus two percentage points (but not higher than the maximum lawful rate) from the date such amount is due (i.e., 15 days after demand) until such amount is paid in full. Each Limited Partner shall take such actions as the Partnership or the General Partner shall request in order to perfect or enforce the security interest created hereunder.

ARTICLE 11.

TRANSFERS AND WITHDRAWALS

Section 11.1. Transfer

A. The term “transfer,” when used in this Article 11 with respect to a Partnership Interest, shall be deemed to refer to a transaction by which the General Partner purports to assign its General Partner Interest to another Person or by which a Limited Partner purports to assign its Limited Partnership Interest to another Person, and includes a sale, assignment, gift (outright or in trust), pledge, encumbrance, hypothecation, mortgage, exchange

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or any other disposition by law or otherwise. Except to the extent otherwise specified, the term “transfer” when used in this Article 11 does not include any Redemption or exchange for REIT Shares pursuant to Section 8.6. or any exchange for REIT Series A Preferred Shares pursuant to Section 16.7 or REIT Series D Preferred Shares pursuant to Section 19.9. No part of the interest of a Limited Partner shall be subject to the claims of any creditor, any spouse for alimony or support, or to legal process, and may not be voluntarily or involuntarily alienated or encumbered, except as may be specifically provided for in this Agreement.

B. No Partnership Interest shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article 11. Any transfer or purported transfer of a Partnership Interest not made in accordance with this Article 11 shall be null and void ab initio unless otherwise consented to by the General Partner in its sole and absolute discretion.

Section 11.2. Transfer of General Partner’s Partnership Interest

A. The General Partner shall not withdraw from the Partnership and shall not transfer all or any portion of its interest in the Partnership (whether by sale, statutory merger or consolidation, liquidation or otherwise) without the Consent of the Partners, which may be given or withheld by each such Partner in its sole and absolute discretion, and only upon the admission of a successor General Partner pursuant to Section 12.1. Upon any transfer of a Partnership Interest in accordance with the provisions of this Section 11.2, the transferee shall become a substitute General Partner for all purposes herein, and shall be vested with the powers and rights of the transferor General Partner, and shall be liable for all obligations and responsible for all duties of the General Partner, once such transferee has executed such instruments as may be necessary to effectuate such admission and to confirm the agreement of such transferee to be bound by all the terms and provisions of this Agreement with respect to the Partnership Interest so acquired. It is a condition to any transfer otherwise permitted hereunder that the transferee assumes, by operation of law or express agreement, all of the obligations of the transferor General Partner under this Agreement with respect to such transferred Partnership Interest, and no such transfer (other than pursuant to a statutory merger or consolidation wherein all obligations and liabilities of the transferor General Partner are assumed by a successor corporation by operation of law) shall relieve the transferor General Partner of its obligations under this Agreement without the Consent of the Partners, in their reasonable discretion. In the event the General Partner withdraws from the Partnership, in violation of this Agreement or otherwise, or otherwise dissolves or terminates, or upon the Incapacity of the General Partner, a majority in interest of the remaining Partners may elect to continue the Partnership business by selecting a substitute General Partner in accordance with the Act.

B. Without limiting Sections 16.5 and 19.7 of this Agreement, the General Partner shall not engage in any merger, consolidation or other combination with or into another person, sale of all or substantially all of its assets or any reclassification, recapitalization or change of its outstanding equity interests (each, a “Termination Transaction”), unless the Termination Transaction has been approved by a Consent of the Partners and, except as

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otherwise provided in Section 11.2.C, in connection with which all Common Limited Partners either will receive, or will have the right to elect to receive, for each Partnership Unit an amount of cash, securities, or other property equal to the product of the REIT Shares Amount and the greatest amount of cash, securities or other property paid to a holder of one REIT Share in consideration of one REIT Share pursuant to the terms of the Termination Transaction; provided, that if, in connection with the Termination Transaction, a purchase, tender or exchange offer shall have been made to and accepted by the holders of the outstanding REIT Shares, each Holder of Common Partnership Units shall receive, or shall have the right to elect to receive, the greatest amount of cash, securities, or other property which such Holder would have received had it exercised its right to Redemption (as set forth in Section 8.6) and received REIT Shares in exchange for its Partnership Units immediately prior to the expiration of such purchase, tender or exchange offer and had thereupon accepted such purchase, tender or exchange offer and then such Termination Transaction shall have been consummated.

C. Without limiting Sections 16.5 and 19.7 of this Agreement, the General Partner may merge, or otherwise combine its assets, with another entity without satisfying the requirements of Section 11.2.B hereof if: (i) immediately after such merger or other combination, substantially all of the assets directly or indirectly owned by the surviving entity, other than Partnership Units held by such General Partner, are owned directly or indirectly by the Partnership or another limited partnership or limited liability company which is the survivor of a merger, consolidation or combination of assets with the Partnership (in each case, the “Surviving Partnership”); (ii) the Common Limited Partners own a percentage interest of the Surviving Partnership based on the relative fair market value of the net assets of the Partnership (as determined pursuant to Section 11.2.E) and the other net assets of the Surviving Partnership (as determined pursuant to Section 11.2.E) immediately prior to the consummation of such transaction; (iii) the rights preferences and privileges of the Common Limited Partners in the Surviving Partnership are at least as favorable as those in effect immediately prior to the consummation of such transaction and as those applicable to any other limited partners or non-managing members of the Surviving Partnership; and (iv) such rights of the Common Limited Partners include the right to exchange their interests in the Surviving Partnership for at least one of: (a) the consideration available to such Common Limited Partners pursuant to Section 11.2.B or (b) if the ultimate controlling person of the Surviving Partnership has publicly traded common equity securities, such common equity securities, with an exchange ratio based on the relative fair market value of such securities (as determined pursuant to Section 11.2.E) and the REIT Shares.

D. In connection with any transaction permitted by Section 11.2.B or Section 11.2.C hereof, the General Partner shall use its commercially reasonable efforts to structure such Termination Transaction to avoid causing the Common Limited Partners to recognize gain for federal income tax purposes by virtue of the occurrence of or their participation in such Termination Transaction.

E. In connection with any transaction permitted by Section 11.2.B or 11.2.C, the relative fair market values shall be reasonably determined by the General Partner as of the

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time of such transaction and, to the Common extent applicable, shall be no less favorable to the Limited Partners than the relative values reflected in the terms of such transaction.

Section 11.3. Limited Partners’ Rights to Transfer

A. Prior to the second anniversary of the closing of the initial public offering of REIT Shares, no Limited Partner shall transfer all or any portion of its Partnership Interest to any transferee without the consent of the General Partner, which consent may be withheld in its sole and absolute discretion; provided, however, that any Limited Partner may, at any time (whether prior to or after such second anniversary), without the consent of the General Partner, (i) transfer all or any portion of its Partnership Interest to the General Partner, (ii) transfer all or any portion of its Partnership Interest to an Affiliate, another Original Limited Partner or to an Immediate Family member, subject to the provisions of Section 11.6, or in the case of an Original Limited Partner, to such Original Limited Partner’s shareholders, members, partners or beneficiaries, as the case may be, (iii) transfer all or any portion of its Partnership Interest to a trust for the benefit of a charitable beneficiary or to a charitable foundation, subject to the provisions of Section 11.6, and (iv) subject to the provisions of Section 11.6, pledge (a “Pledge”) all or any portion of its Partnership Interest to a lending institution, which is not an Affiliate of such Limited Partner, as collateral or security for a bona fide loan or other extension of credit, and transfer such pledged Partnership Interest to such lending institution in connection with the exercise of remedies under such loan or extension or credit. Each Limited Partner or Assignee (resulting from a transfer made pursuant to clauses (i)-(iv) of the proviso of the preceding sentence) shall have the right to transfer all or any portion of its Partnership Interest, subject to the provisions of Section 11.6 and the satisfaction of each of the following conditions (in addition to the right of each such Limited Partner or Assignee to continue to make any such transfer permitted by clauses (i)-(iv) of such proviso without satisfying either of the following conditions):

(a) General Partner Right of First Refusal. The transferring Partner shall give written notice of the proposed transfer to the General Partner, which notice shall state (i) the identity of the proposed transferee, and (ii) the amount and type of consideration proposed to be received for the transferred Partnership Units. The General Partner shall have ten (10) days upon which to give the transferring Partner notice of its election to acquire the Partnership Units on the proposed terms. If it so elects, it shall purchase the Partnership Units on such terms within ten (10) days after giving notice of such election. If it does not so elect, the transferring Partner may transfer such Partnership Units to a third party, on economic terms no more favorable to the transferee than the proposed terms, subject to the other conditions of this Section 11.3.

(b) Qualified Transferee. Any transfer of a Partnership Interest shall be made only to Qualified Transferees.

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It is a condition to any transfer otherwise permitted hereunder that the transferee assumes by operation of law or express agreement all of the obligations of the transferor Limited Partner under this Agreement with respect to such transferred Partnership Interest and no such transfer (other than pursuant to a statutory merger or consolidation wherein all obligations and liabilities of the transferor Partner are assumed by a successor corporation by operation of law) shall relieve the transferor Partner of its obligations under this Agreement without the approval of the General Partner, in its reasonable discretion. Notwithstanding the foregoing, any transferee of any transferred Partnership Interest shall be subject to any and all ownership limitations contained in the Charter, which may limit or restrict such transferee’s ability to exercise its Redemption rights or the exchange rights set forth in Sections 16.7 and 19.9, and to the representations set forth in Section 3.4.D. Any transferee, whether or not admitted as a Substituted Limited Partner, shall take subject to the obligations of the transferor hereunder. Unless admitted as a Substituted Limited Partner, no transferee, whether by a voluntary transfer, by operation of law or otherwise, shall have any rights hereunder, other than the rights of an Assignee as provided in Section 11.5.

B. If a Limited Partner is subject to Incapacity, the executor, administrator, trustee, committee, guardian, conservator, or receiver of such Limited Partner’s estate shall have all the rights of a Limited Partner, but not more rights than those enjoyed by other Limited Partners, for the purpose of settling or managing the estate, and such power as the Incapacitated Limited Partner possessed to transfer all or any part of his or its interest in the Partnership. The Incapacity of a Limited Partner, in and of itself, shall not dissolve or terminate the Partnership.

C. The General Partner may prohibit any transfer otherwise permitted under Section 11.3 by a Limited Partner of his or her Partnership Units if, in the opinion of legal counsel to the Partnership, such transfer would require the filing of a registration statement under the Securities Act by the Partnership or would otherwise violate any federal or state securities laws or regulations applicable to the Partnership or the Partnership Unit.

D. No transfer by a Limited Partner of his or her Partnership Units (including any Redemption or exchange for REIT Shares pursuant to Section 8.6 and the redemption or exchange rights set forth in Sections 16.4, 16.7, 19.6 and 19.9 or any other acquisition of Common Units, Series A Preferred Units, Series D Preferred Units or Series E Preferred Units by the General Partner or the Partnership) may be made to any person if (i) in the opinion of legal counsel for the Partnership, it could result in the Partnership being treated as an association taxable as a corporation, or (ii) such transfer could be treated as effectuated through an “established securities market” or a “secondary market (or the substantial equivalent thereof)” within the meaning of Section 7704 of the Code.

E. No transfer of any Partnership Units may be made to a lender to the Partnership or any Person who is related (within the meaning of Section 1.752-4(b) of the Regulations) to any lender to the Partnership whose loan constitutes a Nonrecourse Liability, without the consent of the General Partner, in its sole and absolute discretion; provided, that as a condition to such consent, the lender will be required to enter into an arrangement with the

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Partnership and the General Partner to redeem or exchange for the REIT Shares Amount, or the specified amount of REIT Series A Preferred Shares or the specified amount of REIT Series D Preferred Shares, or as the case may be, any Partnership Units in which a security interest is held simultaneously with the time at which such lender would be deemed to be a partner in the Partnership for purposes of allocating liabilities to such lender under Section 752 of the Code.

F. No Limited Partner may withdraw from the Partnership except as a result of transfer, Redemption or exchange of Partnership Units pursuant hereto.

Section 11.4. Substituted Limited Partners

A. No Limited Partner shall have the right to substitute a transferee as a Limited Partner in his or her place (including any transferee permitted by Section 11.3). The General Partner shall, however, have the right to consent to the admission of a permitted transferee of the interest of a Limited Partner, other than a transferee in a transfer permitted by Section 11.3 hereof, as a Substituted Limited Partner, pursuant to this Section 11.4, which consent may be given or withheld by the General Partner in its sole and absolute discretion. The General Partner’s failure or refusal to permit a transferee of any such interests to become a Substituted Limited Partner shall not give rise to any cause of action against the Partnership or any Partner.

B. A transferee who has been admitted as a Substituted Limited Partner in accordance with this Article 11 shall have all the rights and powers and be subject to all the restrictions and liabilities of a Limited Partner under this Agreement. The admission of any transferee as a Substituted Limited Partner shall be subject to the transferee executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement (including without limitation, the provisions of Section 2.4 and such other documents or instruments as may be required to effect the admission, each in form and substance satisfactory to the General Partner) and the acknowledgment by such transferee that each of the representations and warranties set forth in Section 3.4 hereof are true and correct with respect to such transferee as of the date of the transfer of the Partnership Interest to such transferee and will continue to be true to the extent required by such representations and warranties.

C. Upon the admission of a Substituted Limited Partner, the General Partner shall amend Exhibit A to reflect the name, address, number of Partnership Units, and Percentage Interest of such Substituted Limited Partner and to eliminate or adjust, if necessary, the name, address and interest of the predecessor of such Substituted Limited Partner.

Section 11.5. Assignees

If the General Partner, in its sole and absolute discretion, does not consent to the admission of any permitted transferee under Section 11.3 as a Substituted Limited Partner, as described in Section 11.4, such transferee shall be considered an Assignee for purposes of this Agreement. An Assignee shall be entitled to all the rights of an assignee of a limited partnership

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interest under the Act, including the right to receive distributions from the Partnership and the share of Net Income, Net Losses, gain and loss attributable to the Partnership Units assigned to such transferee, the rights to transfer the Partnership Units provided in this Article 11, the right of Redemption provided in Section 8.6, the right of exchange for REIT Series A Preferred Shares set forth in Section 16.7 and the right of exchange for REIT Series D Preferred Shares pursuant to Section 19.9, but shall not be deemed to be a Holder of Partnership Units for any other purpose under this Agreement, and shall not be entitled to effect a Consent with respect to such Partnership Units on any matter presented to the Limited Partners for approval (such Consent remaining with the transferor Limited Partner). In the event any such transferee desires to make a further assignment of any such Partnership Units, such transferee shall be subject to all the provisions of this Article 11 to the same extent and in the same manner as any Limited Partner desiring to make an assignment of Partnership Units. Notwithstanding anything contained in this Agreement to the contrary, as a condition to becoming an Assignee, any prospective Assignee must first execute and deliver to the Partnership an acknowledgment that each of the representations and warranties set forth in Section 3.4 hereof are true and correct with respect to such prospective Assignee as of the date of the prospective assignment of the Partnership Interest to such prospective Assignee and will continue to be true to the extent required by such representations or warranties.

Section 11.6. General Provisions

A. No Limited Partner may withdraw from the Partnership other than as a result of (i) a permitted transfer of all of such Limited Partner’s Partnership Units in accordance with this Article 11 and the transferee(s) of such Units being admitted to the Partnership as a Substituted Limited Partner(s) or (ii) pursuant to the exercise of its right of Redemption of all of such Limited Partner’s Partnership Units under Section 8.6, its right of redemption or exchange of all of such Limited Partner’s Series A Preferred Units under Section 16.7 or its right of redemption or exchange of all of such Limited Partner’s Series D Preferred Units under Section 19.9.

B. Any Limited Partner who shall transfer all of such Limited Partner’s Partnership Units in a transfer permitted pursuant to this Article 11 where such transferee was admitted as a Substituted Limited Partner or pursuant to the exercise of its rights of Redemption of all of such Limited Partner’s Partnership Units under Section 8.6 or its right of redemption, exchange of all of such Limited Partner’s Series A Preferred Units under Section 16.7 or exchange of all of such Limited Partner’s Series D Preferred Units under Section 19.9 shall cease to be a Limited Partner.

C. Transfers pursuant to this Article 11 may only be made on the first day of a fiscal quarter of the Partnership, unless the General Partner otherwise agrees.

D. If any Partnership Interest is transferred, assigned or redeemed during any quarterly segment of the Partnership’s fiscal year in compliance with the provisions of this Article 11 or transferred or redeemed pursuant to Sections 8.6, 16.4, 16.7, 19.6, 19.9 or 20.4 on

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any day other than the first day of a Partnership Year, then Net Income, Net Losses, each item thereof and all other items attributable to such Partnership Interest for such fiscal year shall be divided and allocated between the transferor Partner and the transferee Partner by taking into account their varying interests during the fiscal year in accordance with Section 706(d) of the Code or as otherwise specified in this Agreement or as otherwise determined by the General Partner (to the extent consistent with Section 706(d) of the Code), using the interim closing of the books method. Except as otherwise required by Section 706(d) of the Code, solely for purposes of making such allocations, each of such items for the calendar month in which the transfer, assignment or redemption occurs shall be allocated to the Person who is a Partner as of midnight on the last day of said month and none of such items for the calendar month in which a redemption occurs will be allocated to the redeeming Partner. All distributions of Available Cash with respect to which the Partnership Record Date is before the date of such transfer, assignment or redemption shall be made to the transferor Partner, and all distributions of Available Cash thereafter, in the case of a transfer or assignment other than a redemption, shall be made to the transferee Partner.

E. In addition to any other restrictions on transfer herein contained, including without limitation the provisions of this Article 11 and Section 2.6, in no event may any transfer or assignment of a Partnership Interest by any Partner (including by way of a redemption or exchange for REIT Series A Preferred Shares or REIT Series D Preferred Shares or any other acquisition of Common Units or Series A Preferred Units, Series D Preferred Units and Series E Preferred Units by the Partnership or the General Partner) be made (i) to any person or entity who lacks the legal right, power or capacity to own a Partnership Interest; (ii) in violation of applicable law; (iii) except with the consent of the General Partner, which may be given or withheld in its sole and absolute discretion, of any component portion of a Partnership Interest, such as the Capital Account, or rights to distributions, separate and apart from all other components of a Partnership Interest; (iv) except with the consent of the General Partner, which may be given or withheld in its sole and absolute discretion, if in the opinion of legal counsel to the Partnership such transfer would cause a termination of the Partnership for federal or state income tax purposes (except as a result of the redemption or exchange for REIT Shares, and a redemption or exchange for Preferred Shares or cash pursuant to Sections 16.4, 16.7, 19.6 or 19.9 of all Partnership Units held by all Limited Partners or pursuant to a Termination Transaction expressly permitted under Section 11.2); (v) if in the opinion of counsel to the Partnership such transfer could cause the Partnership to cease to be classified as a partnership for federal or state income tax purposes (except as a result of the redemption or exchange for REIT Shares and a redemption or exchange for Preferred Shares pursuant to Sections 16.4, 16.7, 19.6, 19.9 or 20.4 of all Partnership Units held by all Limited Partners); (vi) if such transfer would cause the Partnership to become, with respect to any employee benefit plan subject to Title I of ERISA, a “party-in-interest” (as defined in Section 3(14) of ERISA) or a “disqualified person” (as defined in Section 4975(c) of the Code); (vii) if such transfer would, in the opinion of counsel to the Partnership, cause any portion of the assets of the Partnership to constitute assets of any employee benefit plan pursuant to Department of Labor Regulations Section 2510.2-101; (viii) if such transfer requires the registration of such Partnership Interest or requires the registration of the exchange of such Partnership Interests for any capital stock of the General Partner for which

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such General Partner Interest may be exchanged pursuant to any applicable federal or state securities laws, (other than pursuant to any applicable registration rights agreement); (ix) if such transfer could be treated as effectuated through an “established securities market” or a “secondary market” (or the substantial equivalent thereof) within the meaning of Section 7704 of the Code or such transfer could cause the Partnership to become a “Publicly Traded Partnership,” as such term is defined in Sections 469(k)(2) or 7704(b) of the Code; (x) if such transfer subjects the Partnership to be regulated under the Investment Company Act of 1940, the Investment Advisors Act of 1940 or the Employee Retirement Income Security Act of 1974, each as amended; (xi) if the transferee or assignee of such Partnership Interest is unable to make the representations set forth in Section 3.4.D or such transfer could otherwise adversely affect the ability of the General Partner to remain qualified as a REIT; or (xii) if in the opinion of legal counsel for the Partnership such transfer could adversely affect the ability of the General Partner to continue to qualify as a REIT or, except with the consent of the General Partner, which may be given or withheld in its sole and absolute discretion, subject the General Partner to any additional taxes under Section 857 or Section 4981 of the Code.

F. The General Partner shall monitor the transfers of interests in the Partnership (including any acquisition of Common Units, Series A Preferred Units, Series D Preferred Units or Series E Preferred Units by the Partnership or the General Partner) to determine (i) if such interests are being traded on an “established securities market” or a “secondary market (or the substantial equivalent thereof)” within the meaning of Section 7704 of the Code, and (ii) whether such transfers of interests would result in the Partnership being unable to qualify for at least one of the “safe harbors” set forth in Regulations Section 1.7704-1 (or such other applicable guidance subsequently published by the IRS setting forth safe harbors under which interests will not be treated as “readily tradable on a secondary market (or the substantial equivalent thereof)” within the meaning of Section 7704 of the Code) including, without limitation, IRS Notice 88-75, to the extent applicable (the “Safe Harbors”). The General Partner shall have authority (but shall not be required to) to take any steps it determines are necessary or appropriate in its sole and absolute discretion to prevent any trading of interests which could cause the Partnership to become a PTP, or any recognition by the Partnership of such transfers, or to insure that at least one of the Safe Harbors is met.

Section 11.7. Transfer of Pledged Partnership Units

A. Notwithstanding anything to the contrary in this Agreement but subject to Section 11.6 hereof, any or all of the Limited Partnership Interests pledged to the Company, as agent on behalf of the pledgees, pursuant to the Pledge Agreement may be transferred, without the consent of any other Partner, to any Person designated by the Company in its sole and absolute discretion in connection with the exercise by the Company of its rights and remedies under the Pledge Agreement. Any such transferee shall be admitted as a Substituted Limited Partner, subject to the provisions of Section 11.4 hereof.

B. Each of the Pledgors hereby constitutes and appoints the Company and authorized officers and attorneys-in-fact of the Company, and each of those acting singly, in each

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case with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead to effect any transfer of Partnership Interests pledged pursuant to the Pledge Agreement referred to in Subparagraph A of this Section 11.7. The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, and it shall survive and not be affected by the subsequent Incapacity of any Pledgor and shall extend to such Pledgor’s heirs, successors, assigns and personal representatives. Each such Pledgor hereby waives any and all defenses which may be available to contest, negate or disaffirm the action of the Company taken in good faith under such power of attorney.

ARTICLE 12.

ADMISSION OF PARTNERS

Section 12.1. Admission of Successor General Partner

A successor to all of the General Partner’s General Partner Interest pursuant to Section 11.2 hereof who is proposed to be admitted as a successor General Partner shall be admitted to the Partnership as the General Partner, effective upon such transfer. Any such transferee shall carry on the business of the Partnership without dissolution. In each case, the admission shall be subject to the successor General Partner executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement and such other documents or instruments as may be required to effect the admission. In the case of such admission on any day other than the first day of a Partnership Year, all items attributable to the General Partner Interest for such Partnership Year shall be allocated between the transferring General Partner and such successor as provided in Article 11 hereof.

Section 12.2. Admission of Additional Limited Partners

A. A Person who makes a Capital Contribution to the Partnership in accordance with this Agreement shall be admitted to the Partnership as an Additional Limited Partner only upon furnishing to the General Partner (i) evidence of acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement, including, without limitation, the power of attorney granted in Section 2.4 hereof and (ii) such other documents or instruments as may be required in the discretion of the General Partner in order to effect such Person’s admission as an Additional Limited Partner.

B. Notwithstanding anything to the contrary in this Section 12.2, no Person shall be admitted as an Additional Limited Partner without the consent of the General Partner, which consent may be given or withheld in the General Partner’s sole and absolute discretion. The admission of any Person as an Additional Limited Partner shall become effective on the date upon which the name of such Person is recorded on the books and records of the Partnership, following the receipt of the Capital Contribution in respect of such Limited Partner, the documents set forth in Paragraph A of this Section 12.2 hereof and the consent of the General Partner to such admission. If any Additional Limited Partner is admitted to the Partnership on

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any day other than the first day of a Partnership Year, then Net Income, Net Losses, each item thereof and all other items allocable among Partners and Assignees for such Partnership Year shall be allocated among such Limited Partner and all other Partners and Assignees by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing books method. Solely for purposes of making such allocations, each of such items for the calendar month in which an admission of an Additional Limited Partner occurs shall be allocated among all the Partners and Assignees, including such Additional Limited Partner, in a reasonable manner determined by the General Partner in its sole discretion.

Section 12.3. Amendment of Agreement and Certificate of Limited Partnership

For the admission to the Partnership of any Partner, the General Partner shall take all steps necessary and appropriate under the Act to amend the records of the Partnership and, if necessary, to prepare as soon as practical an amendment of this Agreement (including an amendment of Exhibit A) and, if required by law, shall prepare and file an amendment to the Certificate and may for this purpose exercise the power of attorney granted pursuant to Section 2.4 hereof.

ARTICLE 13.

DISSOLUTION AND LIQUIDATION

Section 13.1. Dissolution

The Partnership shall not be dissolved by the admission of Substituted Limited Partners or Additional Limited Partners or by the admission of a successor General Partner in accordance with the terms of this Agreement. Upon the withdrawal of the General Partner, any successor General Partner (selected as described in Section 13.1.B below) shall continue the business of the Partnership. The Partnership shall dissolve, and its affairs shall be wound up, upon the first to occur of any of the following (“Liquidating Events”):

A. the expiration of its term as provided in Section 2.5 hereof;

B. an event of withdrawal of the General Partner, as defined in the Act, unless, within 90 days after the withdrawal, all of the remaining Partners agree in writing, in their sole and absolute discretion, to continue the business of the Partnership and to the appointment, effective as of the date of withdrawal, of a substitute General Partner;

C. subject to the provisions of Section 7.3.D(1) hereof, an election to dissolve the Partnership made by the General Partner;

D. entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Act;

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E. the sale of all or substantially all of the assets and properties of the Partnership;

F. the Incapacity of the General Partner, unless a majority in interest of all of the remaining Partners in their sole and absolute discretion agree in writing to continue the business of the Partnership and to the appointment, effective as of a date prior to the date of such Incapacity, of a substitute General Partner; or

G. the Redemption or exchange for REIT Shares or REIT Series A Preferred Shares or REIT Series D Preferred Shares of all Partnership Units (other than those of the General Partner) pursuant to this Agreement.

Section 13.2. Winding Up

A. Upon the occurrence of a Liquidating Event, the Partnership shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Partners. No Partner shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Partnership’s business and affairs. The General Partner (or, in the event there is no remaining General Partner, any Person elected by a Majority in Interest of the Limited Partners (the “Liquidator”)) shall be responsible for overseeing the winding up and dissolution of the Partnership and shall take full account of the Partnership’s liabilities and assets and the Partnership property shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom (which may, to the extent determined by the General Partner, include shares of stock of the General Partner) shall be applied and distributed in the following order:

(1) First, to the payment and discharge of all of the Partnership’s debts and liabilities to creditors other than the Partners;

(2) Second, to the payment and discharge of all of the Partnership’s debts and liabilities to the General Partner;

(3) Third, to the payment and discharge of all of the Partnership’s debts and liabilities to the other Partners; and

(4) The balance, if any, to the Partners in accordance with their Capital Account balances, determined after giving effect to all contributions and distributions for all periods, and after taking into account all Capital Account adjustments for the Partnership taxable year during which the liquidation occurs (other than those made as a result of the liquidating distribution set forth in this Section 13.2.A(4)).

The General Partner shall not receive any additional compensation for any services performed pursuant to this Article 13 other than reimbursement of its expenses as provided in Section 7.4.

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B. Notwithstanding the provisions of Section 13.2.A hereof which require liquidation of the assets of the Partnership, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership the Liquidator determines that an immediate sale of part or all of the Partnership’s assets would be impractical or would cause undue loss to the Partners, the Liquidator may, in its sole and absolute discretion, defer for a reasonable time the liquidation of any assets except those necessary to satisfy liabilities of the Partnership (including to those Partners as creditors) and/or distribute to the Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 13.2.A hereof, undivided interests in such Partnership assets as the Liquidator deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidator, such distributions in kind are in the best interest of the Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidator deems reasonable and equitable and to any agreements governing the operation of such properties at such time. The Liquidator shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt.

C. The Partnership shall be terminated when any notes received in connection with any such sale or disposition referenced in Section 13.1.E above, or in connection with the liquidation of the Partnership have been paid and all of the cash or property available for application and distribution under this Agreement have been applied and distributed in accordance with this Agreement.

Section 13.3. Compliance with Timing Requirements of Regulations

In the event the Partnership is “liquidated” within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this Article 13 to the General Partner and Limited Partners who have positive Capital Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2). If any Partner has a deficit balance in his or her Capital Account (after giving effect to all contributions, distributions and allocations for the taxable years, including the year during which such liquidation occurs), such Partner shall have no obligation to make any contribution to the capital of the Partnership with respect to such deficit, and such deficit shall not be considered a debt owed to the Partnership or to any other Person for any purpose whatsoever, except to the extent otherwise agreed to by such Partner and the General Partner. In the discretion of the Liquidator or the General Partner, a pro rata portion of the distributions that would otherwise be made to the General Partner and Limited Partners pursuant to this Article 13 may be:

A. distributed to a trust established for the benefit of the General Partner and Limited Partners for the purposes of liquidating Partnership assets, collecting amounts owed to the Partnership, and paying any contingent or unforeseen liabilities or obligations of the Partnership or of the General Partner arising out of or in connection with the Partnership. The assets of any such trust shall be distributed to the General Partner and Limited Partners from time to time, in the reasonable discretion of the Liquidator or the General Partner, in the same

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proportions and the amount distributed to such trust by the Partnership would otherwise have been distributed to the General Partner and Limited Partners pursuant to this Agreement; or

B. withheld to establish any reserves deemed necessary or appropriate for any contingent or unforeseen liabilities or obligations of the Partnership; and to reflect the unrealized portion of any installment obligations owed to the Partnership; provided that, such withheld amounts shall be distributed to the General Partner and Limited Partners as soon as practicable.

Section 13.4. Deemed Distribution and Recontribution

Notwithstanding any other provision of this Article 13, in the event the Partnership is liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g) but no Liquidating Event has occurred, the Partnership’s property shall not be liquidated, the Partnership’s liabilities shall not be paid or discharged, and the Partnership’s affairs shall not be wound up. Instead, the Partnership shall be deemed to have distributed the Partnership property in kind to the General Partner and Limited Partners, who shall be deemed to have assumed and taken such property subject to all Partnership liabilities, all in accordance with their respective Capital Accounts. Immediately thereafter, the General Partner and Limited Partners shall be deemed to have recontributed the Partnership property in kind to the Partnership, which shall be deemed to have assumed and taken such property subject to all such liabilities.

Section 13.5. Rights of Limited Partners

Except as otherwise provided in this Agreement, each Limited Partner shall look solely to the assets of the Partnership for the return of his Capital Contribution and shall have no right or power to demand or receive property from the General Partner. Except as expressly set forth herein with respect to the rights, priorities and preferences of the Preferred Limited Partners holding any series of Preferred Units, no Limited Partner shall have priority over any other Limited Partner as to the return of his Capital Contributions, distributions or allocations.

Section 13.6. Notice of Dissolution

In the event a Liquidating Event occurs or an event occurs that would, but for provisions of Section 13.1, result in a dissolution of the Partnership, the General Partner shall, within 30 days thereafter, provide written notice thereof to each of the Partners and to all other parties with whom the Partnership regularly conducts business (as determined in the discretion of the General Partner) and shall publish notice thereof in a newspaper of general circulation in each place in which the Partnership regularly conducts business (as determined in the discretion of the General Partner).

Section 13.7. Cancellation of Certificate of Limited Partnership

Upon the completion of the liquidation of the Partnership cash and property as provided in Section 13.2 hereof, the Partnership shall be terminated and the Certificate and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the

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State of Delaware shall be canceled and such other actions as may be necessary to terminate the Partnership shall be taken.

Section 13.8. Reasonable Time for Winding-Up

A reasonable time shall be allowed for the orderly winding-up of the business and affairs of the Partnership and the liquidation of its assets pursuant to Section 13.2 hereof, in order to minimize any losses otherwise attendant upon such winding-up, and the provisions of this Agreement shall remain in effect between the Partners during the period of liquidation.

Section 13.9. Waiver of Partition

Each Partner hereby waives any right to partition of the Partnership property.

ARTICLE 14.

AMENDMENT OF PARTNERSHIP AGREEMENT; CONSENTS

Section 14.1. Amendments

A. The actions requiring consent or approval of the Partners or of the Limited Partners pursuant to this Agreement, including Sections 7.3, 16.5, and 19.7, or otherwise pursuant to applicable law, are subject to the procedures in this Article 14.

B. Amendments to this Agreement requiring the consent or approval of Limited Partners may be proposed by the General Partner or by any Limited Partner. Following such proposal, the General Partner shall submit any proposed amendment to the Partners or of the Limited Partners, as applicable. The General Partner shall seek the written consent or approval of the Partners or of the Limited Partners on the proposed amendment or shall call a meeting to vote thereon and to transact any other business that it may deem appropriate. For purposes of obtaining a written consent, the General Partner may require a response within a reasonable specified time, but not less than 15 days, and failure to respond in such time period shall constitute a consent which is consistent with the General Partner’s recommendation (if so recommended) with respect to the proposal; provided, that an action shall become effective at such time as requisite consents are received even if prior to such specified time. The Series A Limited Partners and the Series D Limited Partners agree not to object to an amendment proposed after December 31, 1999 to one or more of Sections 2.6, 11.3.D, 11.6.E and 11.6.F that is deemed appropriate or necessary by the General Partner in its sole and absolute discretion.

Section 14.2. Action by the Partners

A. Meetings of the Partners may be called by the General Partner and shall be called upon the receipt by the General Partner of a written request by Common Limited Partners holding 25 percent or more of the Partnership Interests held by Common Limited Partners. The call shall state the nature of the business to be transacted. Notice of any such meeting shall be

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given to all Partners not less than seven days nor more than 30 days prior to the date of such meeting. Partners may vote in person or by proxy at such meeting. Whenever the vote of the Percentage Interests of the Partners, or the Consent of the Partners or Consent of the Limited Partners is permitted or required under this Agreement, such vote or Consent may be given at a meeting of Partners or may be given in accordance with the procedure prescribed in Section 14.1 hereof.

B. Any action required or permitted to be taken at a meeting of the Partners may be taken without a meeting if a written consent setting forth the action so taken is signed by the Percentage Interests as is expressly required by this Agreement for the action in question. Such consent may be in one instrument or in several instruments, and shall have the same force and effect as a vote of the Percentage Interests of the Partners (expressly required by this Agreement). Such consent shall be filed with the General Partner. An action so taken shall be deemed to have been taken at a meeting held on the effective date so certified.

C. Each Limited Partner may authorize any Person or Persons to act for him by proxy on all matters in which a Limited Partner is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Limited Partner or his attorney-in-fact. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Limited Partner executing it.

D. To the extent the Company is entitled to exercise its rights and remedies under the Pledge Agreement, the Company is hereby authorized to act for each Pledgor with respect to such Pledgor’s Partnership Interests pledged pursuant to the Pledge Agreement by proxy on all matters in which such Pledgor is now or hereafter entitled to participate under this Agreement by reason of such pledged Partnership Interests, including waiving notice of any meeting, or voting or participating at a meeting. Notwithstanding anything to the contrary in Subparagraph C of this Section 14.2, the foregoing proxy is irrevocable and coupled with an interest, shall survive and not be affected by the subsequent Incapacity of any Pledgor and shall extend to such Pledgor’s heirs, successors, assigns and personal representatives and shall be valid until such time as all collateral subject to the Pledge Agreement, if any, is returned to the Pledgors pursuant to the terms of the Pledge Agreement.

E. Each meeting of Partners shall be conducted by the General Partner or such other Person as the General Partner may appoint pursuant to such rules for the conduct of the meeting as the General Partner or such other Person deems appropriate.

F. Except as otherwise herein expressly provided, on matters on which Limited Partners are entitled to vote, each Limited Partner shall have a vote equal to the number of Partnership Units held.

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ARTICLE 15.

GENERAL PROVISIONS

Section 15.1. Addresses and Notice

Any notice, demand, request or report required or permitted to be given or made to a Partner or Assignee under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by certified first class United States mail, nationally recognized overnight delivery service or facsimile transmission to the Partner or Assignee at the address set forth in Exhibit A or such other address as the Partners shall notify the General Partner in writing.

Section 15.2. Titles and Captions

All article or section titles or captions in this Agreement are for convenience only. They shall not be deemed part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof. Except as specifically provided otherwise, references to “Articles” and “Sections” are to Articles and Sections of this Agreement.

Section 15.3. Pronouns and Plurals

Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa.

Section 15.4. Further Action

The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement.

Section 15.5. Binding Effect

This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns.

Section 15.6. Creditors

Other than as expressly set forth herein with respect to Indemnitees, none of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Partnership.

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Section 15.7. Waiver

No failure or delay by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon any breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition.

Section 15.8. Counterparts

This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto.

Section 15.9. Applicable Law

This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law.

Section 15.10. Invalidity of Provisions

If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby.

Section 15.11. Limitation to Preserve REIT Status

To the extent that any amount paid or credited to the General Partner or its officers, directors, employees or agents pursuant to Sections 7.4 or 7.7 would constitute gross income to the General Partner for purposes of Sections 856(c)(2) or 856(c)(3) of the Code (a “General Partner Payment”) then, notwithstanding any other provision of this Agreement, the amount of such General Partner Payments for any fiscal year shall not exceed the lesser of:

A. an amount equal to the excess, if any, of (a) 4.17% of the General Partner’s total gross income (but not including the amount of any General Partner Payments) for the fiscal year which is described in subsections (A) through (H) of Section 856(c)(2) of the Code over (b) the amount of gross income (within the meaning of Section 856(c)(2) of the Code) derived by the General Partner from sources other than those described in subsections (A) through (H) of Section 856(c)(2) of the Code (but not including the amount of any General Partner Payments); or

B. an amount equal to the excess, if any, of (a) 25% of the General Partner’s total gross income (but not including the amount of any General Partner Payments) for the fiscal year which is described in subsections (A) through (I) of Section 856(c)(3) of the Code over (b) the amount of gross income (within the meaning of Section 856(c)(3) of the Code) derived by the

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General Partner from sources other than those described in subsections (A) through (I) of Section 856(c)(3) of the Code (but not including the amount of any General Partner Payments);

provided, however, that General Partner Payments in excess of the amounts set forth in subparagraphs (i) and (ii) above may be made if the General Partner, as a condition precedent, obtains an opinion of tax counsel that the receipt of such excess amounts would not adversely affect the General Partner’s ability to qualify as a REIT. To the extent General Partner Payments may not be made in a year due to the foregoing limitations, such General Partner Payments shall carry over and be treated as arising in the following year, provided, however, that such amounts shall not carry over for more than five years, and if not paid within such five year period, shall expire; provided further, that (i) as General Partner Payments are made, such payments shall be applied first to carry over amounts outstanding, if any, and (ii) with respect to carry over amounts for more than one Partnership Year, such payments shall be applied to the earliest Partnership Year first.

Section 15.12. Entire Agreement

This Agreement (together with the agreements listed on Exhibit F hereto as to rights and obligations in respect of the Units held by the Limited Partners who are parties thereto, or their permitted transferees) contains the entire understanding and agreement among the Partners with respect to the subject matter hereof and supersedes any other prior written or oral understandings or agreements among them with respect thereto.

Section 15.13. No Rights as Stockholders

Nothing contained in this Agreement shall be construed as conferring upon the Holders of Partnership Units any rights whatsoever as stockholders of the General Partner, including without limitation any right to receive dividends or other distributions made to stockholders of the General Partner or to vote or to consent or to receive notice as stockholders in respect of any meeting of stockholders for the election of directors of the General Partner or any other matter.

ARTICLE 16.

SERIES A PREFERRED UNITS

Section 16.1. Designation and Number

A series of Partnership Units in the Partnership designated as the 7.45% Series A Cumulative Redeemable Preferred Units (the “Series A Preferred Units”) is hereby established. The number of Series A Preferred Units shall be 1,500,000.

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Section 16.2. Distributions

A. Payment of Distributions. Subject to the rights of Holders of Parity Preferred Units as to the payment of distributions, pursuant to Section 5.1 hereof, Holders of Series A Preferred Units will be entitled to receive, when, as and if declared by the Partnership acting through the General Partner, out of Available Cash, cumulative preferential cash distributions at the rate per annum of (x) 7.45% at all times on and after March 5, 2004 and (y) 8.075% at all times before and excluding March 5, 2004, in each case of the original Capital Contribution per Series A Preferred Unit. Such distributions shall be cumulative, shall accrue from the original date of issuance and will be payable (A) quarterly (such quarterly periods for purposes of payment and accrual will be the quarterly periods ending on the dates specified in this sentence and not calendar year quarters) in arrears, on or before February 15, May 15, August 15 and November 15 of each year and, (B), in the event of (i) an exchange of Series A Preferred Units into REIT Series A Preferred Shares, or (ii) a redemption of Series A Preferred Units, on the exchange date or redemption date, as applicable (each a “Preferred Unit Distribution Payment Date”), commencing (i) in the case of Series A Preferred Units originally issued on February 6, 1998, on May 15, 1998 and (ii) in the case of all other Series A Preferred Units, on the first of such payment dates to occur following their original date of issuance. The amount of the distribution payable for any period will be computed on the basis of a 360-day year of twelve 30-day months and for any period shorter than a full quarterly period for which distributions are computed, the amount of the distribution payable will be computed on the basis of the actual number of days elapsed in such a 30-day month. If any date on which distributions are to be made on the Series A Preferred Units is not a Business Day (as defined herein), then payment of the distribution to be made on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. Distributions on the Series A Preferred Units will be made to the Holders of record of the Series A Preferred Units on the relevant record dates, which will be fifteen (15) days prior to the relevant Preferred Unit Distribution Payment Date (the “Preferred Unit Partnership Record Date”).

B. Distributions Cumulative. Notwithstanding the foregoing, distributions on the Series A Preferred Units will accrue whether or not the terms and provisions of any agreement of the Partnership at any time prohibit the current payment of distributions, whether or not the Partnership has earnings, whether or not there are funds legally available for the payment of such of such distributions and whether or not such distributions are authorized. Accrued but unpaid distributions on the Series A Preferred Units will accumulate as of the Preferred Unit Distribution Payment Date on which they first become payable. Accumulated and unpaid distributions will not bear interest.

C. Priority as to Distributions. (i) So long as any Series A Preferred Units are outstanding, no distribution of cash or other property shall be authorized, declared, paid or set apart for payment on or with respect to any Junior Units, nor shall any cash or other property

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(other than capital stock of the General Partner which corresponds in ranking to the Partnership Interests being acquired) be set aside for or applied to the purchase, redemption or other acquisition for consideration of any Series A Preferred Units, any Parity Preferred Units (including the Series D Preferred Units and the Series E Preferred Units) or any Junior Units, unless, in each case, all distributions accumulated on all Series A Preferred Units and all classes and series of outstanding Parity Preferred Units as to payment of distributions have been paid in full. The foregoing sentence will not prohibit (a) distributions payable solely in Junior Units, (b) the exchange of Junior Units or Parity Preferred Units (including the Series D Preferred Units and the Series E Preferred Units) into Junior Units, or (c) the redemption of Partnership Interests corresponding to REIT Series A Preferred Shares, Parity Preferred Stock with respect to distributions or Junior Stock to be purchased by the General Partner pursuant to the Charter with respect to the General Partner’s common stock and comparable charter provisions with respect to other classes or series of capital stock of the General Partner to preserve the General Partner’s status as a real estate investment trust, provided that such redemption shall be upon the same terms as the corresponding purchase pursuant to Article IV.E. of the Charter or such other comparable provisions.

(ii) So long as distributions have not been paid in full (or a sum sufficient for such full payment is not irrevocably so set apart) upon the Series A Preferred Units, the Series D Preferred Units and the Series E Preferred Units, all distributions authorized and declared on the Series A Preferred Units and all classes or series of outstanding Parity Preferred Units with respect to distributions shall be authorized and declared so that the amount of distributions authorized and declared per Series A Preferred Unit and such other classes or series of Parity Preferred Units shall in all cases bear to each other the same ratio that accrued distributions per Series A Preferred Unit and such other classes or series of Parity Preferred Units (which shall not include any accumulation in respect of unpaid distributions for prior distribution periods if such class or series of Parity Preferred Units do not have cumulative distribution rights) bear to each other.

(iii) Notwithstanding anything to the contrary set forth herein, distributions on Partnership Interests held by either (a) the General Partner or (b) any other Holder of Partnership Interest in the Partnership, in each case ranking junior to or on parity with the Series A Preferred Units, the Series D Preferred Units and the Series E Preferred Units may be made, without preserving the priority of distributions described in Sections 16.2.C(i) and (ii), but only to the extent such distributions are required to preserve the real estate investment trust status of the General Partner and in the case of any Holder other than the General Partner only to the extent required by the Partnership Agreement.

D. No Further Rights. Holders of Series A Preferred Units shall not be entitled to any distributions, whether payable in cash, other property or otherwise, in excess of the full cumulative distributions described herein.

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Section 16.3. Liquidation Proceeds

A. Upon voluntary or involuntary liquidation, dissolution or winding-up of the Partnership, distributions on the Series A Preferred Units shall be made in accordance with Article 13 of the Partnership Agreement.

B. Notice. Written notice of any such voluntary or involuntary liquidation, dissolution or winding-up of the Partnership, stating the payment date or dates when, and the place or places where, the amounts distributable in such circumstances shall be payable, shall be given by (i) fax and (ii) by first class mail, postage pre-paid, not less than 30 and not more that 60 days prior to the payment date stated therein, to each record Holder of the Series A Preferred Units at the respective addresses of such Holders as the same shall appear on the transfer records of the Partnership.

C. No Further Rights. After payment of the full amount of the liquidating distributions to which they are entitled, the Holders of Series A Preferred Units will have no right or claim to any of the remaining assets of the Partnership.

D. Consolidation, Merger or Certain Other Transactions. The consolidation or merger or other business combination of the Partnership with or into any corporation, trust or other entity (or of any corporation, trust or other entity with or into the Partnership) shall not be deemed to constitute a liquidation, dissolution or winding-up of the Partnership.

Section 16.4. Redemption

A. Right of Optional Redemption. The Series A Preferred Units may not be redeemed prior to September 30, 2009. On or after such date, the Partnership shall have the right to redeem the Series A Preferred Units, in whole or in part, at any time or from time to time, upon not less than 30 nor more than 60 days’ written notice, at a redemption price, payable in cash, equal to the Capital Account balance of the Holder of Series A Preferred Units (the “Redemption Price”); provided, however, that no redemption pursuant to this Section 16.4 will be permitted if the Redemption Price does not equal or exceed the original Capital Contribution of such Holder plus the cumulative Priority Return to the redemption date to the extent not previously distributed. If fewer than all of the outstanding Series A Preferred Units are to be redeemed, the Series A Preferred Units to be redeemed shall be selected pro rata (as nearly as practicable without creating fractional units).

B. Limitation on Redemption. (i) The Redemption Price of the Series A Preferred Units (other than the portion thereof consisting of accumulated but unpaid distributions) will be payable solely out of the sale proceeds of capital stock of the General Partner, which will be contributed by the General Partner to the Partnership as additional capital contribution, or out of the sale of limited partner interests in the Partnership and from no other source. For purposes of the preceding sentence, “capital stock” means any equity securities (including Common Stock and Preferred Stock (as such terms are defined in the Charter)),

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shares, participation or other ownership interests (however designated) and any rights (other than debt securities convertible into or exchangeable for equity securities) or options to purchase any of the foregoing.

(ii) The Partnership may not redeem fewer than all of the outstanding Series A Preferred Units unless all accumulated and unpaid distributions have been paid on all Series A Preferred Units for all quarterly distribution periods terminating on or prior to the date of redemption.

C. Redemption at the Option of the Series A Preferred Limited Partners. Notwithstanding any provision herein to the contrary but expressly subject to the limitations set forth in this Section 16.4.C., so long as any Series A Preferred Units remain outstanding, in the event of the occurrence of a Covered Transaction (defined below), the Partnership shall offer to redeem, on the date such Covered Transaction is completed or occurs, all of the Series A Preferred Units outstanding at the Redemption Price, payable in cash, provided, however, that the Company shall only be obligated to effect such redemption if the redemption of the Series A Preferred Units was elected in writing by the holders of not less than a majority of the then outstanding Series A Preferred Units in accordance with this Section 16.4.C. The payment of any portion of the Redemption Price shall be subject to the restrictions or limitations imposed upon such payment by applicable law or otherwise under this Agreement or the terms applicable to any Parity Preferred Units. The Partnership shall give written notice of a Covered Transaction to each of the respective holders of record of the Series A Preferred Units, at their respective addresses as they appear on the transfer records of the Partnership, by the earlier of (i) not less than thirty (30) days prior to the completion or occurrence of a Covered Transaction, if such completion or occurrence is known, or (ii) as soon as practicable after the completion or occurrence of a Covered Transaction. Such notice shall not set forth any non-public information concerning such Covered Transaction. Each of the holders of record of the Series A Preferred Units shall have until 5:00 p.m. (PST) on the fifteenth (15^th) day following receipt of such notice from the Partnership, to give the Partnership notice of such holder’s election that the Series A Preferred Units be redeemed. Notwithstanding any provision herein to the contrary, with respect to a Covered Transaction that arises under clause (c) of the definition of Covered Transaction set forth below, in the event that the Company so fails to qualify as a real estate investment trust for any reason other than an affirmative election by the Company not to qualify, (a) the Partnership shall give notice of the occurrence of a Covered Transaction to each of the holders of record of the Series A Preferred Units within 15 days after discovery of such failure to qualify, (b) each of the holders of record of the Series A Preferred Units shall have until 5:00 p.m. (PST) on the fifteenth (15^th) day following receipt of such notice from the Partnership, to give the Partnership notice of such holder’s election that the Series A Preferred Units be redeemed and (c) if the holders of not less than a majority of the then outstanding Series A Preferred Units have elected to have the Series A Preferred Units redeemed, the Series A Preferred Units shall be redeemed on a date not later than 45 days following the date of discovery of the Company’s failure to qualify.

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For purposes of this Section 16.4.C, the term “Covered Transaction” shall mean (a) the Company’s completion of a “Rule 13e-3 transaction” (as defined in Rule 13e-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) in which, as a result of such transaction, the Company’s common stock is no longer registered under Section 12 of the Exchange Act, except that this clause (a) shall not apply to any involuntary delisting of the Company’s common stock from the New York Stock Exchange or any national securities exchange (as defined in the Exchange Act), (b) the completion of any transaction or series of transactions that would result in a Reorganization Event (defined below) of the Company or the Partnership or (c) the Company’s failure (or election not) to qualify as a real estate investment trust as defined in Section 856 (or any successor section) of the Internal Revenue Code of 1986, as amended.

For purposes of this Section 16.4.C, the term “Reorganization Event” shall mean (x) any sale or other disposition of all or substantially all of the assets of the Partnership or the Company, as the case may be, to an entity that is not an Affiliate of the Company; or (y) any consolidation, amalgamation, merger, business combination, share exchange, reorganization or similar transaction involving the Partnership or the Company, as the case may be, pursuant to which the Partners of the Partnership or the stockholders of the Company, as the case may be, immediately prior to the consummation of such transaction will own less than a majority of the equity interests in the entity surviving such transaction; provided, however, a Reorganization Event shall not include any transaction contemplated by clauses (x) or (y) of this definition if the surviving entity has unsecured debt outstanding which is rated at least the lowest credit rating level established as investment grade by at least two of Standard & Poor’s, Moody’s Investor Service and Fitch Ratings (it being understood that as of the date of this Agreement the lowest investment grade rating of Standard & Poor’s is BBB-, the lowest investment grade rating of Moody’s is Baa3 and the lowest investment grade rating of Fitch Ratings is BBB-) and such rating has been reaffirmed in light of the contemplated transaction.

D. Procedures for Redemption. (i) Notice of redemption will be (i) faxed, and (ii) mailed by the Partnership, by certified mail, postage prepaid, not less than 30 nor more than 60 days prior to the redemption date, addressed to the respective Holders of record of the Series A Preferred Units at their respective addresses as they appear on the records of the Partnership. No failure to give or defect in such notice shall affect the validity of the proceedings for the redemption of any Series A Preferred Units except as to the Holder to whom such notice was defective or not given. In addition to any information required by law, each such notice shall state: (a) the redemption date, (b) the Redemption Price, (c) the aggregate number of Series A Preferred Units to be redeemed and if fewer than all of the outstanding Series A Preferred Units are to be redeemed, the number of Series A Preferred Units to be redeemed held by such Holder, which number shall equal such Holder’s pro rata share (based on the percentage of the aggregate number of outstanding Series A Preferred Units that the total number of Series A Preferred Units held by such Holder represents) of the aggregate number of Series A Preferred Units to be redeemed, (d) the place or places where such Series A Preferred Units are to be surrendered for payment of the Redemption Price, (e) that distributions on the Series A Preferred Units to be redeemed will cease to accumulate on such redemption date and

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(f) that payment of the Redemption Price will be made upon presentation and surrender of such Series A Preferred Units.

(ii) If the Partnership gives a notice of redemption in respect of Series A Preferred Units (which notice will be irrevocable) then, by 12:00 noon, New York City time, on the redemption date, the Partnership will deposit irrevocably in trust for the benefit of the Series A Preferred Units being redeemed funds sufficient to pay the applicable Redemption Price and will give irrevocable instructions and authority to pay such Redemption Price to the Holders of the Series A Preferred Units upon surrender of the Series A Preferred Units by such Holders at the place designated in the notice of redemption. On and after the date of redemption, distributions will cease to accumulate on the Series A Preferred Units or portions thereof called for redemption, unless the Partnership defaults in the payment thereof. If any date fixed for redemption of Series A Preferred Units is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date fixed for redemption. If payment of the Redemption Price is improperly withheld or refused and not paid by the Partnership, distributions on such Series A Preferred Units will continue to accumulate from the original redemption date to the date of payment, in which case the actual payment date will be considered the date fixed for redemption for purposes of calculating the applicable Redemption Price.

Section 16.5. Voting Rights

A. General. Holders of the Series A Preferred Units will not have any voting rights or right to consent to any matter requiring the consent or approval of the Limited Partners, except as set forth below and in Section 7.3.F.

B. Certain Voting Rights. So long as any Series A Preferred Units remains outstanding, the Partnership shall not, without the affirmative vote of the Holders of at least two-thirds of the Series A Preferred Units outstanding at the time (i) authorize or create, or increase the authorized or issued amount of, any class or series of Partnership Interests ranking prior to the Series A Preferred Units with respect to payment of distributions or rights upon liquidation, dissolution or winding-up or reclassify any Partnership Interests of the Partnership into any such Partnership Interest, or create, authorize or issue any obligations or security convertible into or evidencing the right to purchase any such Partnership Interests, (ii) authorize or create, or increase the authorized or issued amount of any Parity Preferred Units or reclassify any Partnership Interest of the Partnership into any such Partnership Interest or create, authorize or issue any obligations or security convertible into or evidencing the right to purchase any such Partnership Interests but only to the extent such Parity Preferred Units are issued to an affiliate of the Partnership, other than the General Partner to the extent the issuance of such interests was to allow the General Partner to issue corresponding preferred stock to persons who are not affiliates of the Partnership or (iii) either consolidate, merge into or with, or convey, transfer or lease its

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assets substantially as an entirety to, any corporation or other entity or amend, alter or repeal the provisions of the Partnership Agreement (including, without limitation, this Article 16), whether by merger, consolidation or otherwise, in each case in a manner that would materially and adversely affect the powers, special rights, preferences, privileges or voting power of the Series A Preferred Units or the Holders thereof; provided, however, that with respect to the occurrence of any event set forth in (iii) above, so long as (a) the Partnership is the surviving entity and the Series A Preferred Units remain outstanding with the terms thereof unchanged, or (b) the resulting, surviving or transferee entity is a partnership, limited liability company or other pass-through entity organized under the laws of any state and substitutes the Series A Preferred Units for other interests in such entity having substantially the same terms and rights as the Series A Preferred Units, including with respect to distributions, voting rights and rights upon liquidation, dissolution or winding-up, then the occurrence of any such event shall not be deemed to materially and adversely affect such rights, privileges or voting powers of the Holders of the Series A Preferred Units; and provided further, that any increase in the amount of Partnership Interests or the creation or issuance of any other class or series of Partnership Interests, in each case ranking (a) junior to the Series A Preferred Units with respect to payment of distributions and the distribution of assets upon liquidation, dissolution or winding-up, or (b) on a parity to the Series A Preferred Units with respect to payment of distributions and the distribution of assets upon liquidation, dissolution or winding-up to the extent such Partnership Interest are not issued to an affiliate of the Partnership, other than the General Partner to the extent the issuance of such interests was to allow the General Partner to issue corresponding preferred stock to persons who are not affiliates of the Partnership, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.

Section 16.6. Transfer Restrictions

The Series A Preferred Units shall be subject to the provisions of Article 11 hereof; provided, however, that the Series A Preferred Units shall not be subject to the right of first refusal of the General Partner as described in Section 11.3 hereof and any Affiliate of the Series A Contributor to whom the Series A Preferred Units are assigned (in whole or in part) in accordance with this Agreement (other than the right of first refusal) shall be admitted to the Partnership as a Substitute Limited Partner. No transfer of Series A Preferred Units is permitted, without the consent of the General Partner which consent may be given or withheld in its sole and absolute discretion, if such transfer would result in more than four partners holding all outstanding Series A Preferred Units within the meaning of Treasury Regulation Section 1.7704-1(h)(3)(i); provided, however, that the General Partner’s consent may not be unreasonably withheld if (a) such transfer would not result in more than ten partners holding all outstanding Series A Preferred Units within the meaning of Treasury Regulation Section 1.7704-1(h)(3)(i) and (b) the General Partner is relying on a provision other than Treasury Regulation Section 1.7704-1(h) to avoid classification of Operating Partnership as a “publicly traded partnership” within the meaning of Code Section 7704 (a “PTP”). In addition, no transfer may be made to any person if such transfer would cause the exchange of the Series A Preferred Units for REIT Series A Preferred Shares, as provided herein, to be required to be registered under the Securities Act of 1933, as amended, or any state securities laws.

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Section 16.7. Exchange Rights

A. Right to Exchange. (i) Series A Preferred Units will be exchangeable in whole but not in part unless expressly otherwise provided herein at anytime on or after September 30, 2015, at the option of 51% of the Holders of all outstanding Series A Preferred Units, for authorized but previously unissued REIT Series A Preferred Shares at an exchange rate of one REIT Series A Preferred Share from the General Partner for one Series A Preferred Unit, subject to adjustment as described below (the “Exchange Price”), provided that the Series A Preferred Units will become exchangeable at any time, in whole but not in part unless expressly otherwise provided herein, at the option of 51% of the Holders of all outstanding Series A Preferred Units for REIT Series A Preferred Shares if (y) at any time full distributions shall not have been timely made on any Series A Preferred Unit with respect to six (6) prior quarterly distribution periods, whether or not consecutive, provided, however, that a distribution in respect of Series A Preferred Units shall be considered timely made if made within two (2) Business Days after the applicable Preferred Unit Distribution Payment Date if at the time of such late payment there shall not be any prior quarterly distribution periods in respect of which full distributions were not timely made or (z) upon receipt by a Holder or Holders of Series A Preferred Units of (A) notice from the General Partner that the General Partner or a Subsidiary of the General Partner has taken the position that the Partnership is, or upon the consummation of an identified event in the immediate future will be, a PTP and (B) an opinion rendered by outside nationally recognized independent counsel familiar with such matters addressed to a Holder or Holders of Series A Preferred Units, that the Partnership is or likely is, or upon the occurrence of a defined event in the immediate future will be or likely will be, a PTP. In addition, the Series A Preferred Units may be exchanged for REIT Series A Preferred Shares, in whole but not in part unless expressly otherwise provided herein, at the option of 51% of the Holders of all outstanding Series A Preferred Units prior to September 30, 2015 and after February 6, 2001 if such Holders of a Series A Preferred Units shall deliver to the General Partner either (i) a private letter ruling addressed to such Holder of Series A Preferred Units or (ii) an opinion of independent counsel reasonably acceptable to the General Partner based on the enactment of temporary or final Treasury Regulations or the publication of a Revenue Ruling, in either case to the effect that an exchange of the Series A Preferred Units at such earlier time would not cause the Series A Preferred Units to be considered “stock and securities” within the meaning of section 351(e) of the Code for purposes of determining whether the Holder of the Series A Preferred Units is an “investment company” under section 721(b) of the Code if an exchange is permitted at such earlier date. Furthermore, the Series A Preferred Units, if the Series A Contributor so determines, may be exchanged in whole but not in part (regardless of whether held by the Series A Contributor) for REIT Series A Preferred Shares (but only if the exchange in whole may be accomplished consistently with the ownership limitations set forth under the Series A Articles Supplementary (as defined herein), taking into account exceptions thereto) if at any time (i) the Partnership takes the position that assets and income of the Partnership are such as would not permit the Partnership to satisfy the income and assets tests of Section 856 of the Code if the Partnership were a real estate investment trust within the meaning of the Code or (ii) any Holder of the Series A Preferred Units shall deliver to the Partnership and the Company an opinion of independent counsel reasonably acceptable to the Company to the effect that the

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assets and income of the Partnership are such as would not permit the Partnership to satisfy the income and assets tests of Section 856 of the Code if the Partnership were a real estate investment trust within the meaning of the Code.

(ii) Notwithstanding anything to the contrary set forth in Section 16.7.A(i), if an Exchange Notice (as defined herein) has been delivered to the General Partner, then the General Partner may, at its option, within ten (10) Business Days after receipt of the Exchange Notice, elect to cause the Partnership to redeem all or a portion of the outstanding Series A Preferred Units for cash in an amount equal to the original Capital Contribution per Series A Preferred Unit and all accrued and unpaid distributions thereon to the date of redemption. If the General Partner elects to redeem fewer than all of the outstanding Series A Preferred Units, the number of Series A Preferred Units held by each Holder to be redeemed shall equal such Holder’s pro rata share (based on the percentage of the aggregate number of outstanding Series A Preferred Units that the total number of Series A Preferred Units held by such Holder represents) of the aggregate number of Series A Preferred Units being redeemed.

(iii) In the event an exchange of all Series A Preferred Units pursuant to Section 16.7.A would violate the provisions on ownership limitation of the General Partner set forth in Section 7 of the Articles Supplementary to the Charter with respect to REIT Series A Preferred Shares (the “Series A Articles Supplementary”), each Holder of Series A Preferred Units shall be entitled to exchange, pursuant to the provisions of Section 16.7.B, a number of Series A Preferred Units which would comply with the provisions on the ownership limitation of the General Partner set forth in such Section 7 of the Series A Articles Supplementary, with respect to such Holder, and any Series A Preferred Units not so exchanged (the “Excess Units”) shall be redeemed by the Partnership for cash in an amount equal to the original Capital Contribution per Excess Unit, plus any accrued and unpaid distributions thereon to the date of redemption subject to any restriction thereon contained in any debt instrument or agreement of the Partnership. In the event an exchange would result in Excess Units, as a condition to such exchange, each Holder of such units agrees to provide representations and covenants reasonably requested by the General Partner relating to (i) the widely held nature of the interests in such Holder, sufficient to assure the General Partner that the Holder’s ownership of stock of the General Partner (without regard to the limits described above) will not cause any individual to own in excess of 6.2% of the stock of the General Partner; and (ii) to the extent such Holder can so represent and covenant without obtaining information from its owners (other than one or more direct or indirect parent corporations, limited liability companies or partnerships and not the holders of any interests in any such parent), the Holder’s ownership of tenants of the Partnership and its affiliates. For purposes of determining the number of Excess Units under this Section 16.7.A(iii), the “Beneficial Ownership Limit” and “Constructive Ownership Limit” set forth in the Series A Articles Supplementary shall be deemed to be 0.8 percentage points less than the limits set forth in the Series A Articles Supplementary. To the extent the General Partner would not be able to pay the cash set forth above in exchange for the Excess Units, and to the extent consistent with the Charter, the General Partner agrees that it will grant to the Holders of the Series A Preferred Units exceptions to the Beneficial Ownership Limit and Constructive Ownership Limit set forth in the Series A Articles Supplementary sufficient to allow such

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Holders to exchange all of their Series A Preferred Units for REIT Series A Preferred Stock, provided such Holders furnish to the General Partner representations acceptable to the General Partner in its sole and absolute discretion which assure the General Partner that such exceptions will not jeopardize the General Partner’s tax status as a REIT for purposes of federal and applicable state law. Notwithstanding any provision of this Agreement to the contrary, no Series A Limited Partner shall be entitled to effect an exchange of Series A Preferred Units for REIT Series A Preferred Shares to the extent that ownership or right to acquire such shares would cause the Partner or any other Person or, in the opinion of counsel selected by the General Partner, may cause the Partner or any other Person, to violate the restrictions on ownership and transfer of REIT Series A Preferred Shares set forth in the Charter. To the extent any such attempted exchange for REIT Series A Preferred Shares would be in violation of the previous sentence, it shall be void ab initio and such Series A Limited Partner shall not acquire any rights or economic interest in the REIT Series A Preferred Shares otherwise issuable upon such exchange.

(iv) The redemption of Series A Preferred Units described in Section 16.7.A(ii) and (iii) shall be subject to the provisions of Section 16.4.B(i) and Section 16.4.D(ii); provided, however, that the term “Redemption Price” in such Sections 16.4.B(i) and 16.4.D(ii) shall be read to mean the original Capital Contribution per Series A Preferred Unit being redeemed as set forth on Exhibit A plus all accrued and unpaid distributions to the redemption date.

B. Procedure for Exchange and/or Redemption of Series A Preferred Units. (i) Any exchange shall be exercised pursuant to a notice of exchange (the “Exchange Notice”) delivered to the General Partner by the Partners representing at least 51% of the outstanding Series A Preferred Units (or by Series A Contributor in the case of an exchange pursuant to the last sentence of Section 16.7.A.(i) hereof) by (a) fax and (b) by certified mail postage prepaid. The General Partner may effect any exchange of Series A Preferred Units, or exercise its option to cause the Partnership to redeem any portion of the Series A Preferred Units for cash pursuant to Section 16.7.A(ii) or redeem Excess Units pursuant to Section 16.7.A(iii), by delivering to each Holder of record of Series A Preferred Units, within ten (10) Business Days following receipt of the Exchange Notice, (a) if the General Partner elects to cause the Partnership to acquire any of the Series A Preferred Units then outstanding, (1) certificates representing the Series A Preferred Shares being issued in exchange for the Series A Preferred Units of such Holder being exchanged and (2) a written notice (a “Redemption Notice”) stating (A) the redemption date, which may be the date of such Redemption Notice or any other date which is not later than sixty (60) days following the receipt of the Exchange Notice, (B) the redemption price, (C) the place or places where the Series A Preferred Units are to be surrendered and (D) that distributions on the Series A Preferred Units will cease to accumulate on such redemption date, or (b) if the General Partner elects to cause the Partnership to redeem all of the Series A Preferred Units then outstanding in exchange for cash, a Redemption Notice. Series A Preferred Units which are redeemed shall be deemed canceled (and any corresponding Partnership Interest represented thereby deemed terminated) on the redemption date. Holders of Series A Preferred Units shall deliver any canceled certificates representing Series A Preferred Units which have

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been exchanged or redeemed to the office of General Partner (which currently is located at 12200 West Olympic Boulevard, Suite 200, Los Angeles, California 90064) within ten (10) Business Days of the exchange or redemption with respect thereto. Notwithstanding anything to the contrary contained herein, any and all Series A Preferred Units to be exchanged for REIT Series A Preferred Stock pursuant to this Section 16.7 shall be so exchanged in a single transaction at one time. As a condition to exchange, the General Partner may require the Holders of Series A Preferred Units to make such representations as may be reasonably necessary for the General Partner to establish that the issuance of REIT Series A Preferred Shares pursuant to the exchange shall not be required to be registered under the Securities Act or any state securities laws. Any Series A Preferred Shares issued pursuant to this Section 16.7 shall be delivered as shares which are duly authorized, validly issued, fully paid and nonassessable, free of any pledge, lien, encumbrance or restriction other than those provided in the Charter, the By-Laws of the General Partner, the Securities Act and relevant state securities or blue sky laws.

The certificates representing the REIT Series A Preferred Shares issued upon exchange of the Series A Preferred Units shall contain the following legend:

THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”) OR (B) IF THE CORPORATION HAS BEEN FURNISHED WITH A SATISFACTORY OPINION OF COUNSEL FOR THE HOLDER OF THE SHARES REPRESENTED HEREBY, OR OTHER EVIDENCE SATISFACTORY TO THE CORPORATION, THAT SUCH TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF THE ACT AND THE RULES AND REGULATIONS THEREUNDER.

(ii) In the event of an exchange of Series A Preferred Units for REIT Series A Preferred Shares, an amount equal to the accrued and unpaid distributions to the date of exchange on any Series A Preferred Units tendered for exchange shall (i) accrue on the REIT Series A Preferred Shares into which such Series A Preferred Units are exchanged, and (ii) continue to accrue on such Series A Preferred Units, which shall remain outstanding following such exchange, with the General Partner as the Holder of such Series A Preferred Units. Notwithstanding anything to the contrary set forth herein, in no event shall a Holder of a Series A Preferred Unit that was validly exchanged for REIT Series A Preferred Shares pursuant to this section (other than the General Partner now holding such Series A Preferred Unit), receive a distribution out of Available Cash of the Partnership, if such Holder, after exchange, is entitled to receive a distribution out of Available Cash with respect to the REIT Series A Preferred Shares for which such Series A Preferred Unit was exchanged or redeemed. Further for purposes of the

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foregoing, in the event of an exchange of Series A Preferred Units for REIT Shares, if the accrued and unpaid distributions per Series A Preferred Unit is not the same for each Series A Preferred Unit, the accrued and unpaid distributions per Series A Preferred Unit for each such Series A Preferred Unit shall be equal to the greatest amount of such accrued and unpaid distributions per Series A Preferred Unit on any such unit.

(iii) Fractional REIT Series A Preferred Shares are not to be issued upon exchange but, in lieu thereof, the General Partner will pay a cash adjustment based upon the fair market value of the REIT Series A Preferred Shares on the day prior to the exchange date as determined in good faith by the Board of Directors of the General Partner.

C. Adjustment of Exchange Price. In case the General Partner shall be a party to any transaction (including, without limitation, a merger, consolidation, statutory share exchange, tender offer for all or substantially all of the General Partner’s capital stock or sale of all or substantially all of the General Partner’s assets), in each case as a result of which the REIT Series A Preferred Shares will be converted into the right to receive shares of capital stock, other securities or other property (including cash or any combination thereof), each Series A Preferred Unit will thereafter be exchangeable into the kind and amount of shares of capital stock and other securities and property receivable (including cash or any combination thereof) upon the consummation of such transaction by a Holder of that number of REIT Series A Preferred Shares or fraction thereof into which one Series A Preferred Unit was exchangeable immediately prior to such transaction. The General Partner may not become a party to any such transaction unless the terms thereof are consistent with the foregoing.

Section 16.8. No Conversion Rights

The Holders of the Series A Preferred Units shall not have any rights to convert such shares into shares of any other class or series of stock or into any other securities of, or interest in, the Partnership.

Section 16.9. No Sinking Fund

No sinking fund shall be established for the retirement or redemption of Series A Preferred Units.

ARTICLE 17.

[INTENTIONALLY OMITTED]

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ARTICLE 18.

RIGHTS OF CERTAIN LIMITED PARTNERS

Section 18.1. Limited Partner Consent

With respect to matters requiring by the terms of this Agreement the consent or approval of the Limited Partners of the Partnership, including any amendments to, or waivers of, the provisions of this Agreement, each of the investors set forth on Schedule 1 (each an “Investor,” and collectively the “Investors”), other than those set forth on Schedule 2, hereby agrees that it shall vote (which term shall include the giving of any written consent or approval) all of its Partnership Units, and all of its Partnership Units shall be deemed to have been voted, in the same proportion and in the same manner as the Partnership Units held and voted by John B. Kilroy, Jr., or, in the event of his death, by his legal representative; provided, however, that with respect to any matter requiring the consent or approval of the Limited Partners that would amend the preferences, rights or privileges of such Investor’s Partnership Units under the provisions of the Partnership Agreement in a materially adverse manner, which amendment would not also similarly affect the other Limited Partners, such Investor’s Partnership Units shall be voted in accordance with such Investor’s direction.

Section 18.2. Redemption Rights

A. Pursuant to Section 8.6 hereof, each Common Limited Partner has the right, subject to the terms and conditions set forth in Section 8.6 hereof, to require the Partnership to redeem all or a portion of the Partnership Units held by such Common Limited Partner for the Cash Amount or, at the General Partner’s election, the REIT Shares Amount (the “Redemption Right”), provided, however, that such Redemption Right shall not be available to any Investor with respect to any Partnership Unit until a holding period for any such Partnership Unit has occurred ending on the date which is the later of (i) October 31, 2000 (or, in the case of the Investors set forth on Schedule 1, January 31, 1999) and (ii) one year from the date of issuance of such Partnership Unit to such Investor.

B. Provided further, that the fourth and fifth full sentences under Section 8.6.B hereof shall not be applicable to the Redemption Rights of any Investor. Notwithstanding the foregoing subsection 18.2.A, if any Partnership Unit of any Investor has been pledged to a lending institution, which is not an Affiliate of such Investor (a “Lender”), as collateral or security for a bona fide loan or other extension of credit, then, to the extent the Lender has exercised its remedies under such pledge and becomes the owner of such Partnership Unit, such Lender will be entitled to the Redemption Right with respect to such Partnership Unit beginning January 31, 1999, but in no event shall such Partnership Unit of the Lender be subject to the Redemption Right prior to the date which is one year from the date of issuance of such Partnership Unit to such Investor.

C. Notwithstanding the foregoing subsections 18.2.A and 18.2.B, following the occurrence of a Change of Control (as defined below), each Investor may exercise the

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Redemption Right, provided, that such Redemption Right shall not be available to any Investor with respect to any Partnership Unit until a holding period for any such Partnership Unit of no less than one year from the date of issuance of such Partnership Unit to such Investor has occurred. “Change of Control” means the sale, transfer or other conveyance by John B. Kilroy, Jr. (the “Transfer”), in one or more transactions, of a total of at least 70% of the Equity Interests (as defined below) beneficially owned by John B. Kilroy, Jr. on October 31, 1997, other than (i) any involuntary Transfer, (ii) any Transfer in respect of a marital dissolution or similar proceeding, (iii) any Transfer to a trust for the benefit of John B. Kilroy, Jr., his spouse or any member of his immediate family, (iv) any Transfer to a trust for which John B. Kilroy, Jr. serves as trustee, and (v) any Transfer to any entity, all of the interests of which are beneficially owned by John B. Kilroy, Jr. “Equity Interests” means Partnership Units and capital stock of the General Partner.

Section 18.3. Activities of Investors

Section 8.3 hereof relating to the business activities of Limited Partners and certain other persons is modified with respect to each Investor in all respects by the terms of the Contribution Agreement, dated October 31, 1997, by and among the Partnership, the General Partner and the other parties named therein (the “Allen Group Contribution Agreement”) and any other documents entered into in connection with the acquisition of the Allen Properties (as defined in the Allen Group Contribution Agreement) pursuant thereto.

Section 18.4. Sale of Allen Properties

The General Partner shall not sell any of the Allen Properties prior to October 31, 2002 unless (i) the sale will not constitute a taxable event to the Investors, or (ii) the sale is incident to a transaction pursuant to Section 11.2.B or 11.2.C hereof.

Section 18.5. Transfer of Partnership Units

A. Subject to the provisions of this Section 18.5, transfers of Partnership Interests by the Investors shall be governed by the provisions of Article 11 hereof, provided, however, that the restrictions on transfer prescribed in Section 11.3 shall apply with respect to transfer by Investors through October 30, 2000. If any Partnership Units of an Investor shall be pledged in accordance with the terms of Section 11.3.A(iv) hereof and the pledgee exercises its remedies under such pledge by acceleration, notice of intent to foreclose or other exercise, the Partnership may either:

(i) purchase the indebtedness, security interest in the Partnership Units and any other rights with respect to the Partnership Units held by the pledgee for the amounts owed to pledgee or any lesser amount agreed to by such pledgee and the Partnership or

(ii) after a foreclosure of such pledgee’s security interest in the Partnership Units, at any time until the later of (A) October 31, 2000 or (B) the date that

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such Partnership Units become subject to the Redemption Right, acquire the Partnership Units from such pledgee for an amount equal to the Deemed Partnership Interest Value for such Partnership Units.

The pledgee shall give the Partnership any notice of default or delinquency given to such Investor and no less than 30 days written notice of any proposed public or private sale, transfer or exchange of such Partnership Units.

B. Upon the transfer of Partnership Units by an Investor pursuant to the terms of the Article 11 and this Section 18.5 hereof, the transferee shall be subject to and bound by all of the provisions of this Agreement as if such transferee were an Investor.

Section 18.6. Distributions and Allocations

A. For the fiscal quarter in which Partnership Units are issued to an Investor, such Investor shall be entitled to a distribution equal to its pro rata share of the distributions made on all Limited Partnership Interests held by Common Limited Partners multiplied by a fraction, the numerator of which shall be the number of days in such fiscal quarter in which the Investor has held the Partnership Units, and the denominator of which shall be the total number of days in such fiscal quarter.

B. For the fiscal quarter in which the Partnership Units are issued to an Investor, net income and net loss (and items thereof) shall be allocated to such Investor and the other Partners by taking into account their varying interests in the Partnership during the year using a method selected by the General Partner in its sole discretion, which is in accordance with Section 706(d) of the Code.

Section 18.7. Admission of Additional Investors

Any Investor (other than an Investor listed on Schedule 1 hereto) who makes a Capital Contribution after the date hereof will be admitted as a Limited Partner at such time and Exhibit A will be revised to reflect such Capital Contribution. Each Investor will confirm that the representations and warranties set forth in Section 3.4 hereof, and Section 11.1(x) of the Contribution Agreement, as to such Investor will be true and correct on the date of any subsequent Capital Contributions by such Investor. Each Investor agrees to be bound by the terms and conditions of this Agreement.

ARTICLE 19.

SERIES D PREFERRED UNITS

Section 19.1. Definition. The term “Series D Priority Return” mean, an amount equal to 9 1/4% per annum, determined on the basis of a 360 day year of twelve 30 day months (and for any period shorter than a full quarterly period for which distributions are computed, the amount of the distribution payable will be computed based on the ratio of the actual number of days elapsed in such period to ninety (90) days), cumulative to the extent not distributed for any

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given distribution period pursuant to Sections 5.1 and 19.3 of the Partnership Agreement, of the stated value of $50 per Series D Preferred Unit, commencing on the date of issuance of such Series D Preferred Unit. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Partnership Agreement.

Section 19.2. Designation and Number. A series of Partnership Units in the Partnership designated as the “9 1/4% Series D Cumulative Redeemable Preferred Units” (the “Series D Preferred Units”) is hereby established. The number of Series D Preferred Units shall be 900,000.

Section 19.3. Distributions.

A. Payment of Distributions. Subject to the rights of Holders of Parity Preferred Units as to the payment of distributions, pursuant to Section 5.1 hereof, Holders of Series D Preferred Units shall be entitled to receive, when, as and if declared by the Partnership acting through the General Partner, out of Available Cash, cumulative preferential cash distributions at the rate per annum of 9 1/4% of the original Capital Contribution per Series D Preferred Unit. All distributions shall be cumulative, shall accrue from the original date of issuance and will be payable (i) quarterly (such quarterly periods for purposes of payment and accrual will be the quarterly periods ending on the dates specified in this sentence and not calendar year quarters) in arrears, on February 15, May 15, August 15 and November 15, of each year commencing on the first such payment dates to occur following their original date of issuance, and, (ii), in the event of (A) an exchange of Series D Preferred Units into REIT Series D Preferred Shares, or (B) a redemption of Series D Preferred Units, on the exchange date or redemption date, as applicable (each a “Series D Preferred Unit Distribution Payment Date”). The amount of the distribution payable for any period will be computed on the basis of a 360-day year of twelve 30-day months and for any period shorter than a full quarterly period for which distributions are computed, the amount of the distribution payable will be computed based on the ratio of the actual number of days elapsed in such period to ninety (90) days. If any date on which distributions are to be made on the Series D Preferred Units is not a Business Day (as defined herein), then payment of the distribution to be made on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. Distributions on the Series D Preferred Units will be made to the Holders of record of the Series D Preferred Units on the relevant record dates to be fixed by the Partnership acting through the General Partner, which record dates shall in no event exceed fifteen (15) Business Days prior to the relevant Series D Preferred Unit Distribution Payment Date (the “Series D Preferred Unit Partnership Record Date”).

B. Distributions Cumulative. Distributions on the Series D Preferred Units will accrue whether or not the terms and provisions of any agreement of the Partnership, including any agreement relating to its indebtedness at any time prohibit the declaration, setting aside for payment or current payment of distributions, whether or not the Partnership has

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earnings, whether or not there are funds legally available for the payment of such distributions and whether or not such distributions are authorized. Accrued but unpaid distributions on the Series D Preferred Units will accumulate as of the Series D Preferred Unit Distribution Payment Date on which they first become payable. Distributions on account of arrears for any past distribution periods may be declared and paid at any time, without reference to a regular Series D Preferred Unit Distribution Payment Date to Holders of record of the Series D Preferred Units on the record date fixed by the Partnership acting through the General Partner which date shall not exceed fifteen (15) Business Days prior to the payment date. Accumulated and unpaid distributions will not bear interest.

C. Priority as to Distributions.

(i) So long as any Series D Preferred Units are outstanding, no distribution of cash or other property shall be authorized, declared, paid or set apart for payment on or with respect to any Junior Unit, nor shall any cash or other property (other than capital stock of the General Partner which corresponds in ranking to the Partnership Interests being acquired) be set aside for or applied to the purchase, redemption or other acquisition for consideration of any Series D Preferred Units, any Parity Preferred Units (including the Series A Preferred Units or Series E Preferred Units) or any Junior Units, unless, in each case, all distributions accumulated on all Series D Preferred Units and all classes and series of outstanding Parity Preferred Units as to the payment of distributions have been paid in full. The foregoing sentence will not prohibit (a) distributions payable solely in Junior Units, (b) the exchange of Junior Units or Parity Preferred Units (including the Series A Preferred Units or Series E Preferred Units) into Junior Units, or (c) the redemption of Partnership Interests corresponding to any REIT Series D Preferred Shares (as hereinafter defined), Parity Preferred Shares (as defined in the Series D Articles Supplementary to the Charter (as defined below) establishing the REIT Series D Preferred Shares (the “Series D Articles Supplementary”) with respect to distributions or Junior Stock (as defined in the Series D Articles Supplementary) to be purchased by the General Partner pursuant to the Charter to preserve the General Partner’s status as a real estate investment trust, provided that such redemption shall be upon the same terms as the corresponding stock purchase pursuant to the Charter.

(ii) So long as distributions have not been paid in full (or a sum sufficient for such full payment is not irrevocably deposited in trust for immediate payment) upon the Series D Preferred Units, all distributions authorized and declared on the Series D Preferred Units and all classes or series of outstanding Parity Preferred Units (including the Series A Preferred Units or Series E Preferred Units) with respect to payment of distributions shall be authorized and declared so that the amount of distributions authorized and declared per Series D Preferred Unit and such other classes or series of Parity Preferred Units (including the Series A Preferred Units or Series E Preferred Units) shall in all cases bear to each other the same ratio that accrued distributions per Series D Preferred Unit and such other classes or series of Parity Preferred Units (which shall not include any accumulation in respect of unpaid distributions for prior distribution periods if such class or series of Parity Preferred Units do not have cumulative distribution rights) bear to each other.

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(iii) Notwithstanding anything to the contrary set forth herein, distributions on Partnership Interests held by either (a) the General Partner or (b) any other Holder of Partnership Interest in the Partnership, in each case ranking junior to or on parity with the Series D Preferred Units may be made, without preserving the priority of distributions described in Sections 19.3.C(i) and (ii), but only to the extent such distributions are required to preserve the real estate investment trust status of the General Partner and in the case of any Holder other than the General Partner only to the extent required by the Partnership Agreement.

D. No Further Rights. Holders of Series D Preferred Units shall not be entitled to any distributions, whether payable in cash, other property or otherwise, in excess of the full cumulative distributions described herein.

Section 19.4. Intentionally Omitted.

Section 19.5. Liquidation Proceeds.

A. Upon any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of the Partnership, distributions on the Series D Preferred Units shall be made in accordance with Article 13 of the Partnership Agreement.

B. Notice. Written notice of any such voluntary or involuntary liquidation, dissolution or winding-up of the Partnership, stating the payment date or dates when, and the place or places where, the amounts distributable in such circumstances shall be payable, shall be given by (i) fax and (ii) by first class mail, postage pre-paid, not less than thirty (30) and not more than sixty (60) days prior to the payment date stated therein, to each record Holder of the Series D Preferred Units at the respective addresses of such Holders as the same shall appear on the transfer records of the Partnership.

C. No Further Rights. After payment of the full amount of the liquidating distributions to which they are entitled, the Holders of Series D Preferred Units will have no right or claim to any of the remaining assets of the Partnership.

D. Consolidation, Merger or Certain Other Transactions. The consolidation or merger or other business combination of the Partnership with or into, any corporation, trust, or other entity (or of any corporation, trust, or other entity with or into the Partnership) shall not be deemed to constitute a liquidation, dissolution or winding-up of the Partnership.

Section 19.6. Optional Redemption.

A. Right of Optional Redemption. The Series D Preferred Units may not be redeemed prior to the fifth (5th) anniversary of the issuance date. On or after such date, the Partnership shall have the right to redeem the Series D Preferred Units, in whole or in part, at any time or from time to time, upon not less than thirty (30) nor more than sixty (60) days written notice, at a redemption price, payable in cash, equal to the Capital Account balance of the Holders of Series D Preferred Units (the “Series D Redemption Price”); provided, however, that

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no redemption pursuant to this Section 19.6 will be permitted if the Series D Redemption Price does not equal or exceed the original Capital Contribution of such Holder plus the cumulative Series D Priority Return, to the redemption date to the extent not previously distributed. If fewer than all of the outstanding Series D Preferred Units are to be redeemed, the Series D Preferred Units to be redeemed shall be selected pro rata (as nearly as practicable without creating fractional units).

B. Limitation on Redemption.

(i) The Series D Redemption Price of the Series D Preferred Units (other than the portion thereof consisting of accumulated but unpaid distributions) will be payable solely out of the sale proceeds of capital stock of the General Partner, which will be contributed by the General Partner to the Partnership as an additional capital contribution, or out of the sale of limited partner interests in the Partnership and from no other source. For purposes of the preceding sentence, “capital stock” means any equity securities (including Common Stock and Preferred Stock (as such terms are defined in the Charter)), shares, participation or other ownership interests (however designated) and any rights (other than debt securities convertible into or exchangeable for equity securities) or options to purchase any of the foregoing.

(ii) The Partnership may not redeem fewer than all of the outstanding Series D Preferred Units unless all accumulated and unpaid distributions have been paid on all Series D Preferred Units for all quarterly distribution periods terminating on or prior to the date of redemption.

C. Procedures for Redemption.

(i) Notice of redemption will be (A) faxed, and (B) mailed by the Partnership, by certified mail, postage prepaid, not less than thirty (30) nor more than sixty (60) days prior to the redemption date, addressed to the respective Holders of record of the Series D Preferred Units at their respective addresses as they appear on the records of the Partnership. No failure to give or defect in such notice shall affect the validity of the proceedings for the redemption of any Series D Preferred Units except as to the Holder to whom such notice was defective or not given. In addition to any information required by law, each such notice shall state: (1) the redemption date, (2) the Series D Redemption Price, (3) the aggregate number of Series D Preferred Units to be redeemed and if fewer than all of the outstanding Series D Preferred Units are to be redeemed, the number of Series D Preferred Units to be redeemed held by such Holder, which number shall equal such Holder’s pro rata share (based on the percentage of the aggregate number of outstanding Series D Preferred Units the total number of Series D Preferred Units held by such Holder represents) of the aggregate number of Series D Preferred Units to be redeemed, (4) the place or places where the Series D Preferred Units are to be surrendered for payment of the Series D Redemption Price, (5) that distributions on the Series D Preferred Units to be redeemed will cease to accumulate on such redemption date and (6) that payment of the Series D Redemption Price will be made upon presentation and surrender of such Series D Preferred Units.

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(ii) If the Partnership gives a notice of redemption in respect of Series D Preferred Units (which notice will be irrevocable) then, by 12:00 noon, New York City time, on the redemption date, the Partnership will deposit irrevocably in trust for the benefit of the Series D Preferred Units being redeemed funds sufficient to pay the applicable Series D Redemption Price and will give irrevocable instructions and authority to pay such Series D Redemption Price to the Holders of the Series D Preferred Units upon surrender of the Series D Preferred Units by such Holders at the place designated in the notice of redemption. If the Series D Preferred Units are evidenced by a certificate and if fewer than all Series D Preferred Units evidenced by any certificate are being redeemed, a new certificate shall be issued upon surrender of the certificate evidencing all Series D Preferred Units, evidencing the unredeemed Series D Preferred Units without cost to the Holder thereof. On and after the date of redemption, distributions will cease to accumulate on the Series D Preferred Units or portions thereof called for redemption, unless the Partnership defaults in the payment thereof. If any date fixed for redemption of Series D Preferred Units is not a Business Day, then payment of the Series D Redemption Price payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date fixed for redemption. If payment of the Series D Redemption Price is improperly withheld or refused and not paid by the Partnership, distributions on such Series D Preferred Units will continue to accumulate from the original redemption date to the date of payment, in which case the actual payment date will be considered the date fixed for redemption for purposes of calculating the applicable Series D Redemption Price.

Section 19.7. Voting Rights.

A. General. Holders of the Series D Preferred Units will not have any voting rights or right to consent to any matter requiring the consent or approval of the Limited Partners, except as set forth below and in Section 7.3.F.

B. Certain Voting Rights. So long as any Series D Preferred Units remain outstanding, the Partnership shall not, without the affirmative vote of the Holders of at least two-thirds of the Series D Preferred Units outstanding at the time (i) (A) authorize or create, or increase the authorized or issued amount of, any class or series of Partnership Interests ranking prior to the Series D Preferred Units with respect to payment of distributions or rights upon liquidation, dissolution or winding-up, or (B) reclassify any Partnership Interests of the Partnership into any such senior Partnership Interest, or (c) create, authorize or issue any obligations or security convertible into or evidencing the right to purchase any such senior Partnership Interests, (ii) (A) authorize or create, or increase the authorized or issued amount of any Parity Preferred Units, or (B) reclassify any Partnership Interest into any such Partnership Interest or (c) create, authorize or issue any obligations or security convertible into or evidencing the right to purchase any such Partnership Interests but only to the extent such Parity Preferred Units are issued to an Affiliate of the Partnership, other than the General Partner to the extent the issuance of such interests was to allow the General Partner to issue corresponding preferred stock to Persons who are not Affiliates of the Partnership, or (iii) either (A) consolidate, merge into or with, or convey, transfer or lease its assets substantially as an entirety to, any corporation or other entity or (B) amend, alter or repeal the provisions of the Partnership Agreement (including, without limitation, this Article 19), whether by merger, consolidation or otherwise, in each case in a manner that would materially and adversely affect the powers, special rights, preferences, privileges or voting power of the Series D Preferred Units or the Holders thereof; provided, however, that with respect to the occurrence of any event set forth in (iii) above, so long as (1) the Partnership is the surviving entity and the Series D Preferred Units remain outstanding with the terms thereof unchanged, or (2) the resulting, surviving or transferee entity is a partnership, limited liability company or other pass-through entity organized under the laws of any state and substitutes the Series D Preferred Units for other interests in such entity having substantially the same terms and rights as the Series D Preferred Units, including with respect to distributions, voting rights and rights upon liquidation, dissolution or winding-up, then the occurrence of any such event shall not be deemed to materially and adversely affect such rights, privileges or voting powers of the Holders of the Series D Preferred Units; and provided further that any increase in the amount of Partnership Interests or the creation or issuance of any other class or series of Partnership Interests, in each case ranking (y) junior to the Series D Preferred Units with respect to payment of distributions and the distribution of assets upon liquidation, dissolution or winding-up, or (z) on a parity to the Series D Preferred Units with respect to payment of distributions and the distribution of assets upon liquidation, dissolution or winding up to the extent such Partnership Interests are not issued to an Affiliate of the Partnership, other than the General Partner to the extent the issuance of such interests was to allow the General Partner to issue corresponding preferred stock to persons who are not Affiliates of the Partnership, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers.

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Section 19.8. Transfer Restrictions. The Series D Preferred Units shall be subject to the provisions of Article 11 hereof; provided, however, that the Series D Preferred Units shall not be subject to the right of first refusal of the General Partner as described in Section 11.3 hereof and any Affiliate of the Series D Contributor to whom the Series D Preferred Units are assigned (in whole or in part) in accordance with this Partnership Agreement (other than the right of first refusal) shall be admitted to the Partnership as a Substitute Limited Partner. No transfer of Series D Preferred Units is permitted, without the consent of the General Partner which consent may be given or withheld in its sole and absolute discretion, if such transfer would result in more than four partners holding all outstanding Series D Preferred Units within the meaning of Treasury Regulation Section 1.7704-1(h)(3)(i); provided, however, that the General Partner’s consent may not be unreasonably withheld if (a) such transfer would not result in more than ten partners holding all outstanding Series D Preferred Units within the meaning of Treasury Regulation Section 1.7704-1(h)(3)(i) and (b) the General Partner is relying on a provision other than Treasury Regulation Section 1.7704- 1(h) to avoid classification of Operating Partnership as a PTP. In addition, no transfer may be made to any person if such transfer would cause the exchange of the Series D Preferred Units for REIT Series D Preferred Shares, as provided herein, to be required to be registered under the Securities Act of 1933, as amended, or any state securities laws.

Section 19.9. Exchange Rights.

A. Right to Exchange.

(i) Series D Preferred Units will be exchangeable in whole but not in part unless expressly otherwise provided herein at anytime on or after the tenth (10th) anniversary of the date of issuance, at the option of 51% of the Holders of all outstanding Series D Preferred Units, for authorized but previously unissued REIT Series D Preferred Shares at an exchange rate of one REIT Series D Preferred Shares from the General Partner for one Series D Preferred Unit, subject to adjustment as described below (the “Series D Exchange Price”), provided that the Series D Preferred Units will become exchangeable at any time, in whole but not in part unless expressly otherwise provided herein, at the option of 51% of the Holders of all outstanding Series D Preferred Units for REIT Series D Preferred Shares if (x) at any time full distributions shall not have been timely made on any Series D Preferred Unit with respect to six (6) prior quarterly distribution periods, whether or not consecutive, provided, however, that a distribution in respect of Series D Preferred Units shall be considered timely made if made within two (2) Business Days after the applicable Series D Preferred Unit Distribution Payment Date if at the time of such late payment there shall not be any prior quarterly distribution periods in respect of which full distributions were not timely made or (y) upon receipt by a Holder or Holders of Series D Preferred Units of (1) notice from the General Partner that the General Partner or a Subsidiary of the General Partner has taken the position that the Partnership is, or upon the occurrence of a defined event in the immediate future will be, a PTP and (2) an opinion rendered by an outside nationally recognized independent counsel familiar with such matters addressed to a Holder or Holders of Series D Preferred Units, that the Partnership is or likely is, or upon the occurrence of a defined event in the immediate future will be or likely will be, a

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PTP. In addition, the Series D Preferred Units may be exchanged for REIT Series D Preferred Shares, in whole but not in part unless expressly otherwise provided herein, at the option of 51% of the Holders of all outstanding Series D Preferred Units prior to the tenth (10th) anniversary of the issuance date and after the third (3rd) anniversary of the issuance date thereof if such Holder of a Series D Preferred Unit shall deliver to the General Partner either (i) a private letter ruling addressed to such Holder of Series D Preferred Units or (ii) an opinion of independent counsel reasonably acceptable to the General Partner based on the enactment of temporary or final Treasury Regulations or the publication of a Revenue Ruling, in either case to the effect that an exchange of the Series D Preferred Units at such earlier time would not cause the Series D Preferred Units to be considered “stock and securities” within the meaning of Section 351(e) of the Code for purposes of determining whether the Holder of such Series D Preferred Units is an “investment company” under section 721(b) of the Code if an exchange is permitted at such earlier date. Furthermore, if the Series D Contributor holding 51% of all outstanding Series D Preferred Units so determines, all outstanding Series D Preferred Units held by all Holders (regardless of whether held by the Series D Contributor) shall be exchanged in whole but not in part for REIT Series D Preferred Shares (but only if the exchange in whole may be accomplished consistently with the ownership limitations set forth under the Series D Articles Supplementary (as defined herein), taking into account exceptions thereto) if either (A) any Holder thereof is a real estate investment trust within the meaning of Sections 856 through 859 of the Code and (i) the Partnership reasonably determines that the assets and income of the Partnership for a taxable year after 1999 would not satisfy the income and assets tests of Section 856 of the Code for such taxable year if the Partnership were a real estate investment trust within the meaning of the Code or (ii) any such Holder of Series D Preferred Units shall deliver to the Partnership and the General Partner an opinion of independent counsel reasonably acceptable to the General Partner to the effect that, based on the assets and income of the Partnership for a taxable year after 1999, the Partnership would not satisfy the income and assets tests of Section 856 of the Code for such taxable year if the Partnership were a real estate investment trust within the meaning of the Code and that such failure would create a meaningful risk that a Holder of the Series D Preferred Units would fail to maintain qualification as a real estate investment trust, or (B) any Holder of the Series D Preferred Units is an entity other than a real estate investment trust within the meaning of Sections 856 through 859 of the Code, and both (I) such Holder concludes based on results or projected results that there exists (in the reasonable judgment of the Holder) an imminent and substantial risk that the Holder’s interest in the Partnership does or will represent more than 19.5% of the total profits or capital interests in the Partnership (determined in accordance with Treasury Regulations Section 1.731-2(e)(4)) for a taxable year, and (II) the Holder delivers to the General Partner an opinion of nationally recognized independent counsel to the effect that there is an imminent and substantial risk that the Holder’s interest in the Partnership does or will represent more than 19.5% of the total profits or capital interests in the Partnership (determined in accordance with Treasury Regulations Section 1.731-2(e)(4)) for a taxable year.

(ii) Notwithstanding anything to the contrary set forth in Section 19.9.A(i) hereof, if a Series D Exchange Notice (as defined herein) has been delivered to the General Partner, then the General Partner may, at its option, within ten (10) Business Days after receipt of the Series D Exchange Notice, elect to cause the Partnership to redeem all or a portion of the

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outstanding Series D Preferred Units for cash in an amount equal to the original Capital Contribution per Series D Preferred Unit plus all accrued and unpaid distributions thereon to the date of redemption. If the General Partner elects to redeem fewer than all of the outstanding Series D Preferred Units, the number of Series D Preferred Units held by each Holder to be redeemed shall equal such Holder’s pro rata share (based on the percentage of the aggregate number of outstanding Series D Preferred Units that the total number of Series D Preferred Units held by such Holder represents) of the number of Series D Preferred Units being redeemed.

(iii) In the event an exchange of all or a portion of Series D Preferred Units pursuant to Section 19.9.A(i) hereof would violate the provisions on ownership limitation of the General Partner set forth in Section 7 of Article Third of the Series D Articles Supplementary to the Charter with respect to the REIT Series D Preferred Shares, each Holder of the Series D Preferred Units shall be entitled to exchange, pursuant to the provisions of Section 19.9.B a number of Series D Preferred Units which would comply with the provisions on the ownership limitation of the General Partner set forth in such Section 7 of Article Third of the Series D Articles Supplementary, with respect to such Holder, and any Series D Preferred Units not so exchanged (the “Series D Excess Units”) shall be redeemed by the Partnership for cash in an amount equal to the original Capital Contribution per Excess Unit, plus any accrued and unpaid distributions thereon, whether or not declared, to the date of redemption subject to any restriction therein contained in any debt instrument or agreement of the Partnership. In the event an exchange would result in Series D Excess Units, as a condition to such exchange, each Holder of such units agrees to provide representations and covenants reasonably requested by the General Partner relating to (1) the widely held nature of the interests in such Holder, sufficient to assure the General Partner that the Holder’s ownership of stock of the General Partner (without regard to the limits described above) will not cause any individual to own in excess of 6.2% of the stock of the General Partner, and (2) to the extent such Holder can so represent and covenant without obtaining information from its owners (other than one or more direct or indirect parent corporations, limited liability companies or partnerships and not the holders of any interests in any such parent), the Holder’s ownership of tenants of the Partnership and its Affiliates. For purposes of determining the number of Series D Excess Units under this Section 19.9(A)(iii), the “Beneficial Ownership Limit” and “Constructive Ownership Limit” set forth in the Series D Articles Supplementary shall be deemed to be 0.8 percentage points less than the limits set forth in the Series D Articles Supplementary. To the extent the General Partner would not be able to pay the cash set forth above in exchange for the Series D Excess Units, and to the extent consistent with the Charter, the General Partner agrees that it will grant to the Holders of the Series D Preferred Units exceptions to the Beneficial Ownership Limit and Constructive Ownership Limit set forth in the Series D Articles Supplementary sufficient to allow such Holders to exchange all of their Series D Preferred Units for REIT Series D Preferred Shares, provided such Holders furnish to the General Partner representations acceptable to the General Partner in its sole and absolute discretion which assure the General Partner that such exceptions will not jeopardize the General Partner’s tax status as a REIT for purposes of federal and applicable state law. Notwithstanding any provision of this Partnership Agreement to the contrary, no Series D Limited Partner shall be entitled to effect an exchange of Series D Preferred Units for REIT Series D Preferred Shares to the extent that ownership or right to

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acquire such shares would cause the Partner or any other Person or, in the opinion of counsel selected by the General Partner, may cause the Partner or any other Person, to violate the restrictions on ownership and transfer of REIT Series D Preferred Shares set forth in the Charter. To the extent any such attempted exchange for REIT Series D Preferred Shares would be in violation of the previous sentence, it shall be void ab initio and such Series D Limited Partner shall not acquire any rights or economic interest in the REIT Series D Preferred Shares otherwise issuable upon such exchange.

(iv) The redemption of Series D Preferred Units described in Section 19.9.A(ii) and (iii) shall be subject to the provisions of Section 19.6.B(i) and Section 19.6.C(ii); provided, however, that the term “Series D Redemption Price” in such Section shall be read to mean the original Capital Contribution per Series D Preferred Unit being redeemed plus all accrued and unpaid distributions to the redemption date.

B. Procedure for Exchange.

(i) Any exchange shall be exercised pursuant to a notice of exchange (the “Series D Exchange Notice”) delivered to the General Partner by the Partners representing at least 51% of the outstanding Series D Preferred Units (or by the Series D Contributor in the case of an exchange pursuant to the last sentence of Section 19.9.A(i) hereof), by (A) fax and (B) by certified mail postage prepaid. The General Partner may effect any exchange of Series D Preferred Units, or exercise its option to cause the Partnership to redeem any portion of the Series D Preferred Units for cash pursuant to Section 19.9.A(ii) or redeem Series D Excess Units pursuant to Section 19.9.A(iii), by delivering to each Holder of record of Series D Preferred Units, within ten (10) Business Days following receipt of the Series D Exchange Notice, (a) if the General Partner elects to cause the Partnership to acquire any of the Series D Preferred Units then outstanding, (1) certificates representing the REIT Series D Preferred Shares being issued in exchange for the Series D Preferred Units of such Holder being exchanged and (2) a written notice (a “Series D Redemption Notice”) stating (A) the redemption date, which may be the date of such Series D Redemption Notice or any other date which is not later than sixty (60) days following the receipt of the Series D Exchange Notice, (B) the redemption price, (C) the place or places where the Series D Preferred Units are to be surrendered and (D) that distributions on the Series D Preferred Units will cease to accrue on such redemption date, or (b) if the General Partner elects to cause the Partnership to redeem all of the Series D Preferred Units then outstanding in exchange for cash, a Series D Redemption Notice. Series D Preferred Units shall be deemed canceled (and any corresponding Partnership Interest represented thereby deemed terminated) on the redemption date. Holders of Series D Preferred Units shall deliver any canceled certificates representing Series D Preferred Units which have been exchanged or redeemed to the office of General Partner (which currently is located at 12200 West Olympic Boulevard, Los Angeles, California 90064) within ten (10) Business Days of the exchange or redemption with respect thereto. Notwithstanding anything to the contrary contained herein, any and all Series D Preferred Units to be exchanged for REIT Series D Preferred Shares pursuant to this Section 19.9 shall be so exchanged in a single transaction at one time. As a condition to exchange, the General Partner may require the Holders of Series D Preferred Units to make such

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representations as may be reasonably necessary for the General Partner to establish that the issuance of REIT Series D Preferred Shares pursuant to the exchange shall not be required to be registered under the Securities Act or any state securities laws. Any REIT Series D Preferred Shares issued pursuant to this Section 19.9 shall be delivered as shares which are duly authorized, validly issued, fully paid and nonassessable, free of any pledge, lien, encumbrance or restriction other than those provided in the Charter, the Bylaws of the General Partner, the Securities Act and relevant state securities or blue sky laws.

The certificates representing the REIT Series D Preferred Shares issued upon exchange of the Series D Preferred Units shall contain the following legend:

THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”) AND STATE SECURITIES LAWS OR (B) IF THE CORPORATION HAS BEEN FURNISHED WITH A SATISFACTORY OPINION OF COUNSEL FOR THE HOLDER OF THE SHARES REPRESENTED HEREBY, OR OTHER EVIDENCE SATISFACTORY TO THE CORPORATION, THAT SUCH TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF THE ACT AND STATE SECURITIES LAWS AND THE RULES AND REGULATIONS THEREUNDER.

(ii) In the event of an exchange of Series D Preferred Units for REIT Series D Preferred Shares, an amount equal to the accrued and unpaid distributions, whether or not declared, to the date of exchange on any Series D Preferred Units tendered for exchange shall (A) accrue on the REIT Series D Preferred Shares into which such Series D Preferred Units are exchanged, and (B) continue to accrue on such Series D Preferred Units, which shall remain outstanding following such exchange, with the General Partner as the Holder of such Series D Preferred Units. Notwithstanding anything to the contrary set forth herein, in no event shall a Holder of a Series D Preferred Unit that was validly exchanged into REIT Series D Preferred Shares pursuant to this section (other than the General Partner now holding such Series D Preferred Unit), receive a cash distribution out of Available Cash of the Partnership, if such Holder, after exchange, is entitled to receive a distribution out of Available Cash with respect to the share of REIT Series D Preferred Shares for which such Series D Preferred Unit was exchanged or redeemed. Further for purposes of the foregoing, in the event of an exchange of Series D Preferred Units for REIT Series D Preferred Shares, if the accrued and unpaid distributions per Series D Preferred Unit is not the same for each Series D Preferred Unit, the accrued and unpaid distributions per Series D Preferred Unit for each such Series D Preferred

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Unit shall be equal to the greatest amount of such accrued and unpaid distributions per Series D Preferred Unit on any such unit.

(iii) Fractional shares of REIT Series D Preferred Shares are not to be issued upon exchange but, in lieu thereof, the General Partner will pay a cash adjustment based upon the fair market value of the Series D Preferred Stock on the day prior to the exchange date as determined in good faith by the Board of Directors of the General Partner.

C. Adjustment of Series D Exchange Price.

In case the General Partner shall be a party to any transaction (including, without limitation, a merger, consolidation, statutory share exchange, tender offer for all or substantially all of the General Partner’s capital stock or sale of all or substantially all of the General Partner’s assets), in each case as a result of which the REIT Series D Preferred Shares will be converted into the right to receive shares of capital stock, other securities or other property (including cash or any combination thereof), each Series D Preferred Unit will thereafter be exchangeable into the kind and amount of shares of capital stock and other securities and property receivable (including cash or any combination thereof) upon the consummation of such transaction by a Holder of that number of REIT Series D Preferred Shares or fraction thereof into which one Series D Preferred Unit was exchangeable immediately prior to such transaction. The General Partner may not become a party to any such transaction unless the terms thereof are consistent with the foregoing.

Section 19.10. No Exchange Rights. The Holders of the Series D Preferred Units shall not have any rights to exchange such units into shares of any other class or series of stock or into any other securities of, or interest in, the Partnership.

Section 19.11. No Sinking Fund. No sinking fund shall be established for the retirement or redemption of Series D Preferred Units.

ARTICLE 20.

SERIES E PREFERRED UNITS

Section 20.1. Designation and Number. A series of Partnership Units in the Partnership designated as the “7.80% Series E Cumulative Redeemable Preferred Units” (the “Series E Preferred Units”) is hereby established. The number of Series E Preferred Units shall be 1,610,000.

Section 20.2. Distributions.

A. Payment of Distributions. Subject to the rights of Holders of Parity Preferred Units as to the payment of distributions, pursuant to Section 5.1, the General Partner, as holder of the Series E Preferred Units, will be entitled to receive, when, as and if declared by the Partnership acting through the General Partner, out of Available Cash, cumulative preferential cash distributions in an amount equal to the Series E Priority Return. Such

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distributions shall be cumulative, shall accrue from the original date of issuance and will be payable (i) quarterly (such quarterly periods for purposes of payment and accrual will be the quarterly periods ending on the dates specified in this sentence and not calendar quarters) in arrears, on February 15, May 15, August 15 and November 15, of each year commencing on the first of such dates to occur after the original date of issuance, and, (ii), in the event of a redemption of Series E Preferred Units, on the redemption date (each a “Series E Preferred Unit Distribution Payment Date”). If any date on which distributions are to be made on the Series E Preferred Units is not a Business Day, then payment of the distribution to be made on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date.

B. Distributions Cumulative. Notwithstanding the foregoing, distributions on the Series E Preferred Units will accrue whether or not the terms and provisions set forth in Section 20.2.B. hereof at any time prohibit the current payment of distributions whether or not the Partnership has earnings, whether or not there are funds legally available for the payment of such distributions and whether or not such distributions are authorized. Accrued but unpaid distributions on the Series E Preferred Units will accumulate as of the Series E Preferred Unit Distribution Payment Date on which they first become payable. No interest, or sum of money in lieu of interest, shall be payable in respect of any distributions on the Series E Preferred stock which may be in arrears. Any distribution made on the Series E Preferred Unit shall first be credited against the earliest accrued but unpaid distribution due with respect to such shares that remains payable.

C. Priority as to Distributions.

(i) Unless all distributions accumulated on all Series E Preferred Units and all classes and series of outstanding Parity Preferred Units as to payment of distributions have been paid in full, (i) no distribution of cash or other property shall be authorized, declared, paid or set apart for payment on or with respect to any Junior Unit, and (ii) no cash or other property (other than capital stock of the General Partner which corresponds in ranking to the Partnership Interests being acquired) shall be set aside for or applied to the purchase, redemption or other acquisition for consideration of any Series E Preferred Units, any Parity Preferred Units (including the Series A Preferred Units or Series D Preferred Units) or any Junior Units. Without limiting Section 20.2.C hereof, the foregoing sentence will not prohibit (a) distributions payable solely in Junior Units, (b) the exchange of Junior Units or Parity Preferred Units (including the Series A Preferred Units or Series D Preferred Units) into Junior Units, or (c) the redemption of Partnership Interests corresponding to any REIT Series E Preferred Shares, Parity Preferred Shares (as defined in the Series E Articles Supplementary) with respect to distributions or Junior Stock (as defined in the Series E Articles Supplementary) to be purchased by the General Partner pursuant to the Charter to the extent necessary to preserve the General Partner’s status as a real estate investment trust, provided that such redemption shall be upon the same terms as the corresponding stock purchase pursuant to the Charter.

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(ii) So long as distributions have not been paid in full (and a sum sufficient for such full payment is not set apart for payment) upon the Series E Preferred Units and any other Parity Preferred Units (including the Series A Preferred Units or Series D Preferred Units), all distributions authorized or declared upon the Series E Preferred Units and all classes or series of outstanding Parity Preferred Units (including the Series A Preferred Units or Series D Preferred Units) as to the payment of distributions with the Series E Preferred Units shall be authorized and declared pro rata so that the amount of distributions authorized and declared per Series E Preferred Unit and such other classes or series of Parity Preferred Units (including the Series A Preferred Units or Series D Preferred Units) shall in all cases bear to each other the same ratio that the sum of the liquidation preference plus accrued distributions per Series E Preferred Unit bears to the sum of the liquidation preference plus accrued distributions per Unit on such other classes or series of outstanding Parity Preferred Units (which, in any event, shall not include any accumulation in respect of unpaid distributions for prior distribution periods if such class or series of Parity Preferred Units do not have cumulative distribution rights). No interest, or sum of money in lieu of interest, shall be payable in respect of any distributions or payments on Series E Preferred Units which may be in arrears.

D. No Further Rights. The General Partner, as holder of the Series E Preferred Units, shall not be entitled to any distributions, whether payable in cash, other property or otherwise, in excess of the full cumulative distributions described herein. Any distribution payment made on the Series E Preferred Units shall first be credited against the earliest accrued but unpaid distribution due with respect to such Series E Preferred Units which remain payable.

Section 20.3. Liquidation Proceeds.

A. Upon any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of the Partnership, distributions on the Series E Preferred Units shall be made in accordance with Article 13 hereof.

B. Notice. Written notice of any such voluntary or involuntary liquidation, dissolution or winding-up of the Partnership, stating the payment date or dates when, and the place or places where, the amounts distributable in such circumstances shall be payable, shall be given by the General Partner pursuant to Section 13.6 hereof.

C. No Further Rights. After payment of the full amount of the liquidating distributions to which they are entitled, the General Partner, as holder of the Series E Preferred Units will have no right or claim to any of the remaining assets of the Partnership.

D. Consolidation, Merger or Certain Other Transactions. The voluntary sale, conveyance, lease, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Partnership to, or the consolidation or merger or other business combination of the Partnership with or into, any corporation, trust or other entity (or of any corporation, trust or other entity with or into the

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Partnership) shall not be deemed to constitute a liquidation, dissolution or winding-up of the Partnership.

Section 20.4. Redemption.

A. Redemption. The Series E Preferred Units may not be redeemed prior to November 21, 2008. If, on or after such date, the General Partner elects to redeem any of the Series E Preferred Shares, the Partnership shall, on the date set for redemption of such Series E Preferred Shares, redeem the number of Series E Preferred Units equal to the number of Series E Preferred Shares for which the General Partner has given notice of redemption pursuant to Section 5 of Article Third of the Series E Articles Supplementary, at a redemption price, payable in cash, equal to the product of (i) the number of Series E Preferred Units being redeemed, and (ii) the sum of $25 and the Preferred Distribution Shortfall per Series E Preferred Unit, if any.

B. Payment of Accumulated Distributions. Immediately prior to any redemption of Series E Preferred Units, the Partnership shall pay, in cash, any accumulated and unpaid distributions on the Series E Preferred Units to be redeemed through the redemption date. Except as provided above, the Partnership will make no payment or allowance for unpaid distributions, whether or not in arrears, on Series E Preferred Units for which a notice of redemption has been given.

C. Procedures for Redemption. The following provisions set forth the procedures for redemption:

(i) Notice of redemption will be given by the General Partner to the Partnership concurrently with the notice of the General Partner sent to the holders of its Series E Preferred Shares in connection with such redemption. Such notice shall state: (A) the redemption date; (B) the redemption price; (C) the number of Series E Preferred Units to be redeemed; (D) the place or places where the Series E Preferred Units are to be surrendered for payment of the redemption price; and (E) that distributions on the Series E Preferred Units to be redeemed will cease to accumulate on such redemption date. If less than all of the Series E Preferred Units are to be redeemed, the notice shall also specify the number of Series E Preferred Units to be redeemed.

(ii) On or after the redemption date, the General Partner shall present and surrender the certificates, if any, representing the Series E Preferred Units to the Partnership at the place designated in the notice of redemption and thereupon the redemption price of such Units (including all accumulated and unpaid distributions up to the redemption date) shall be paid to the General Partner and each surrendered Unit certificate, if any, shall be canceled. If fewer than all the Units represented by any such certificate representing Series E Preferred Units are to be redeemed, a new certificate shall be issued representing the unredeemed shares.

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(iii) From and after the redemption date (unless the Partnership defaults in payment of the redemption price), all distributions on the Series E Preferred Units designated for redemption in such notice shall cease to accumulate and all rights of the General Partner, except the right to receive the redemption price thereof (including all accumulated and unpaid distributions up to the redemption date), shall cease and terminate, and such Units shall not be deemed to be outstanding for any purpose whatsoever. At its election, the Partnership, prior to a redemption date, may irrevocably deposit the redemption price (including accumulated and unpaid distributions to the redemption date) of the Series E Preferred Units so called for redemption in trust for the General Partner with a bank or trust company, in which case the redemption notice to General Partner shall (A) state the date of such deposit, (B) specify the office of such bank or trust company as the place of payment of the redemption price and (C) require the General Partner to surrender the certificates, if any, representing such Series E Preferred Units at such place on or about the date fixed in such redemption notice (which may not be later than the redemption date) against payment of the redemption price (including all accumulated and unpaid distributions to the redemption date). Any monies so deposited which remain unclaimed by the General Partner at the end of two years after the redemption date shall be returned by such bank or trust company to the Partnership.

Section 20.5. Ranking. The Series E Preferred Units shall, with respect to distribution rights and rights upon voluntary or involuntary liquidation, winding up or dissolution of the Partnership, rank (i) senior to the Common Units, the Series B Preferred Units and to all Partnership Units the terms of which provide that such Partnership Units shall rank junior to the Series E Preferred Units; (ii) on a parity with the Series A Preferred Units, the Series D Preferred Units and all other Parity Preferred Units; and (iii) junior to all Partnership Units which rank senior to the Series E Preferred Units.

Section 20.6. Voting Rights. The General Partner shall not have any voting or consent rights in respect of its partnership interest represented by the Series E Preferred Units.

Section 20.7. Transfer Restrictions. The Series E Preferred Units shall not be transferable.

Section 20.8. No Conversion Rights. The Series E Preferred Units shall not be convertible into any other class or series of interest in the Partnership.

Section 20.9. No Sinking Fund. No sinking fund shall be established for the retirement or redemption of Series E Preferred Units.

(Signature Page Follows)

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

GENERAL PARTNER:
KILROY REALTY CORPORATION
By:	/s/    TYLER ROSE
	Name: Tyler Rose Title: Senior Vice President and Treasurer

By:	/s/    RICHARD E. MORAN JR.
	Name: Richard E. Moran Jr. Title: Executive Vice President and Chief           Financial Officer

S-1

SERIES A LIMITED PARTNER:
BELAIR REAL ESTATE CORPORATION
By:	/s/    WILLIAM R. CROSS
	Name: William R. Cross Title: Vice President

BELROSE REALTY CORPORATION
By:	/s/    WILLIAM R. CROSS
	Name: William R. Cross Title: Vice President

BELSHIRE REALTY CORPORATION
By:	/s/    WILLIAM R. CROSS
	Name: William R. Cross Title: Vice President

MONTEBELLO REALTY CORP. 2002
By:	/s/     J. TIMOTHY FORD
	Name: J. Timothy Ford Title: Authorized Signer President

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SCHEDULE 1

INVESTORS

INVESTORS WHO RECEIVED UNITS ON OCTOBER 31, 1997:

Richard S. Allen, Inc.

Commercial Management Corporation

Allen Investments, Inc.

Steven L. Black

Martin V. Clevenger

Self Directed Individual Retirement Account(s) Of Martin V. Clevenger

Allen Development, Inc.

THE FOLLOWING INVESTORS MAY RECEIVE UNITS AFTER OCTOBER 31, 1997 AND MAY EXECUTE THE AGREEMENT AT A LATER DATE:

T. Patrick Smith

Doyle & Associates, Inc.

LPL Holdings, Inc.

SHEDULE 1-1

SCHEDULE 2

Doyle & Associates, Inc., a California corporation

Martin V. Clevenger, an individual

Self Directed Individual Retirement Account(s) of Martin V. Clevenger

LPL Holdings, Inc., a Delaware corporation

SHEDULE 2-1

EXHIBIT A

PARTNERS, CONTRIBUTIONS AND PARTNERSHIP INTERESTS

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EXHIBIT B

NOTICE OF REDEMPTION

The undersigned hereby [irrevocably] (i) exchanges                      Limited Partnership Units in Kilroy Realty, L.P. in accordance with the terms of the Limited Partnership Agreement of Kilroy Realty, L.P. dated as of                     , as amended, and the rights of Redemption referred to therein, (ii) surrenders such Limited Partnership Units and all right, title and interest therein, and (iii) directs that the cash (or, if applicable, REIT Shares) deliverable upon Redemption or exchange be delivered to the address specified below, and if applicable, that such REIT Shares be registered or placed in the name(s) and at the address(es) specified below.

Dated:                    

Name of Limited Partner:

(Signature of Limited Partner)

(Street Address)

(City) (State) (Zip Code)

Signature Guaranteed by:

Issue REIT Shares in the name of:

Please insert social security or identifying number:

Address (if different than above):

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EXHIBIT C

SCHEDULE OF CERTAIN PROPERTY OF THE PARTNERSHIP

2260 E. Imperial Highway, El Segundo, California

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EXHIBIT D

FORM OF PARTNERSHIP UNIT CERTIFICATE

CERTIFICATE FOR PARTNERSHIP UNITS OF

KILROY REALTY, L.P.

No.                                          UNITS

Kilroy Realty Corporation as the General Partner of Kilroy Realty, L.P., a Delaware limited partnership (the “Operating Partnership”), hereby certifies that                                  is a Limited Partner of the Operating Partnership whose Partnership Interests therein, as set forth in the Agreement of Limited Partnership of Kilroy Realty, L.P., dated as of                     , 1997 (as it may be amended, modified or supplemented from time to time in accordance with its terms, (the “Partnership Agreement”), under which the Operating Partnership is existing and as filed in the office of the Delaware [State Department of Assessments and Taxation] (copies of which are on file at the Operating Partnership’s principal office at                     , represent                      units of limited partnership interest in the Operating Partnership (the “Partnership Units”).

THE PARTNERSHIP UNITS REPRESENTED BY THIS CERTIFICATE OR INSTRUMENT MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS SUCH TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION COMPLIES WITH THE PROVISIONS OF THE PARTNERSHIP AGREEMENT (A COPY OF WHICH IS ON FILE WITH THE OPERATING PARTNERSHIP). EXCEPT AS OTHERWISE PROVIDED IN THE PARTNERSHIP AGREEMENT, NO TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION OF THE PARTNERSHIP UNITS REPRESENTED BY THIS CERTIFICATE MAY BE MADE EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR (B) IF THE OPERATING PARTNERSHIP HAS BEEN FURNISHED WITH A SATISFACTORY OPINION OF COUNSEL FOR THE HOLDER OF THE PARTNERSHIP UNITS REPRESENTED BY THIS CERTIFICATE THAT SUCH TRANSFER, SALE ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF THE ACT AND THE RULES AND REGULATIONS IN EFFECT THEREUNDER.

DATED:                      , 1997.

ATTEST:	KILROY REALTY CORPORATION General Partner of Kilroy Realty, L.P.
By:	By:

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EXHIBIT E

RESTRICTIONS ON OWNERSHIP AND TRANSFER TO PRESERVE TAX BENEFIT

(a) Definitions. for the purposes of this Exhibit E, the following terms shall have the following meanings:

“Charitable Beneficiary” shall mean one or more beneficiaries of a Trust, as determined pursuant to subsection (c)(vi), each of which shall be an organization described in Sections 170(b)(1)(A), 170(c)(2) and 501(c)(3) of the Code.

“Code” shall mean the Internal Revenue Code of 1986, as amended.

“Constructive Ownership” shall mean ownership of Partnership Units by a Person who is or would be treated as an owner of such Partnership Units either actually or constructively through the application of Section 318 of the Code, as modified by Section 856(d)(5) of the Code. The terms “Constructive Owner,” “Constructively Owns” and “Constructively Owned” shall have the correlative meanings.

“Exempted Person” shall mean any Person exempted from time to time by the General Partner in its sole and absolute discretion.

“Market Price” shall mean the market price of the Partnership Units on the relevant date as determined in good faith by the General Partner; provided, however, if the General Partner has outstanding shares of capital stock which correspond to such Partnership Units, the Market Price of each such Partnership Unit shall be equal to the Value of a share of such capital stock, subject to adjustment if the right to exchange such Partnership Units for such stock is other than one-to-one.

“Ownership Limit” shall mean 24.5% of the capital or profits interests of the Partnership.

“Person” shall mean an individual, corporation, partnership, limited liability company, estate, trust (including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity.

“Purported Beneficial Transferee” shall mean, with respect to any purported Transfer (or other event) which results in a transfer to a Trust, as provided in subsection (b)(ii), the Purported Record Transferee, unless the Purported Record Transferee would have acquired or owned Partnership Units for another Person who

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is the beneficial transferee or owner of such Partnership Units, in which case the Purported Beneficial Transferee shall be such Person.

“Purported Record Transferee” shall mean, with respect to any purported Transfer (or other event) which results in a transfer to a Trust, as provided in subsection (b)(ii), the Holder of the Partnership Units as set forth or to be set forth in Exhibit A to the Partnership Agreement, and any Assignee of such Partnership Units, if such Transfer or ownership had been valid under subsection (b)(i).

“Restriction Termination Date” shall mean the first day after the date hereof on which the General Partner determines, in its sole and absolute discretion, that compliance with subsection (b)(i) is no longer necessary or advisable.

“Transfer” shall mean any sale, transfer, gift, assignment, devise or other disposition of Partnership Units, (including (i) the granting of any option or entering into any agreement for the sale, transfer or other disposition of Partnership Units or (ii) the sale, transfer, assignment or other disposition of any securities (or rights convertible into or exchangeable for Partnership Units), whether voluntary or involuntary, whether such transfer has occurred of record or beneficially or Constructively (including but not limited to transfers of interests in other entities which results in changes in Constructive Ownership of Partnership Units), and whether such transfer has occurred by operation of law or otherwise.

“Trust” shall mean each of the trusts provided for in subsection (c).

“Trustee” shall mean any Person unaffiliated with the Partnership, or a Purported Beneficial Transferee, or a Purported Record Transferee, that is appointed by the Partnership to serve as trustee of a Trust.

Capitalized terms used and not defined herein shall have the meanings ascribed to them in the Third Amended and Restated Agreement of Limited Partnership of Kilroy Realty, L.P. (the “Partnership Agreement), as such agreement may be amended from time to time. All references to “Section” refer to the Partnership Agreement.

(b) Restriction on Ownership and Transfers.

(i) Prior to the Restriction Termination Date, no Person, other than an Exempted Person, shall at any time Constructively Own Partnership Units in excess of the Ownership Limit if the representations contained in Section 3.4.D(i) are not at such time true and correct.

(ii) If, prior to the Restriction Termination Date, any Transfer or other event occurs that, if effective, would result in any Person Constructively Owning Partnership Units in violation of subsection (b)(i), (1) then that number of Partnership Units that otherwise would cause such Person to violate subsection (b)(i) (rounded up to the nearest whole Partnership Unit) shall be

E-2

automatically transferred (provided such Transfer is not in violation of the restrictions on transfer set forth in the Partnership Agreement, except to the extent the General Partner waives such restrictions) to a Trust for the benefit of a Charitable Beneficiary, as described in subsection (c), effective as of the close of business on the business day prior to the date of such Transfer or other event, and such Purported Beneficial Transferee shall thereafter have no rights in such Partnership Units or (2) if, for any reason, the transfer to the Trust described in clause (1) of this sentence is not automatically effective as provided therein to prevent any Person from Constructively Owning Partnership Units in violation of subsection (b)(i), then the Transfer of that number of Partnership Units that otherwise would cause any Person to violate subsection (b)(i) shall be void ab initio, and the Purported Beneficial Transferee shall have no rights in such Partnership Units.

(c) Transfers of Partnership Units in Trust.

(i) Upon any purported Transfer or other event described in subsection (b)(ii), such Partnership Units shall be deemed to have been transferred to the Trustee in his capacity as trustee of a Trust for the exclusive benefit of one or more Charitable Beneficiaries. Such transfer to the Trustee shall be deemed to be effective as of the close of business on the business day prior to the purported Transfer or other event that results in a transfer to the Trust pursuant to subsection (b)(ii). The Trustee shall be appointed by the Partnership and shall be a Person unaffiliated with the Partnership, any Purported Beneficial Transferee, or any Purported Record Transferee. Each Charitable Beneficiary shall be designated by the Partnership as provided in subsection (c)(vi).

(ii) Partnership Units held by the Trustee shall be issued and outstanding Partnership Units of the Partnership. The Purported Beneficial Transferee or Purported Record Transferee shall have no rights in the Partnership Units held by the Trustee. The Purported Beneficial Transferee or Purported Record Transferee shall not benefit economically from ownership of any Partnership Units held in trust by the Trustee, shall have no rights to distributions or allocations with respect to Partnership Units held in the Trust and shall not possess any rights to vote or other rights attributable to the Partnership Units held in the Trust.

(iii) The Trustee shall have all voting rights and rights to distributions and allocations with respect to Partnership Units held in the Trust, which rights shall be exercised for the exclusive benefit of the Charitable Beneficiary. Any distribution paid prior to the discovery by the Partnership that Partnership Units have been transferred to the Trustee shall be paid to the Trustee upon demand, and any distribution with respect to such Partnership Units shall be paid when due to the Trustee. Any distributions so paid over to the Trustee shall be held in trust for the Charitable Beneficiary.

The Purported Record Transferee and Purported Beneficial Transferee shall have no voting rights with respect to the Partnership Units held in the Trust and, subject to Delaware law, effective as of the date the Partnership Units has been transferred to the Trustee, the Trustee shall have the authority (at the Trustee’s sole discretion) (i) to rescind as void any vote cast by a Purported Record Transferee with respect to such Partnership Units prior to the discovery by the Partnership that the Partnership Units has been transferred to the Trustee and (ii) to recast such vote in accordance with the desires of the Trustee acting for the benefit of the Charitable Beneficiary;

E-3

provided, however, that if the Partnership has already taken irreversible action, then the Trustee shall not have the authority to rescind and recast such vote. Notwithstanding any other provision of this Exhibit E to the contrary, until the Partnership has received notification that the Partnership Units have been transferred into a Trust, the Partnership shall be entitled to rely on its Partnership Unit transfer and other unitholder records for purposes of preparing Exhibit A to the Partnership Agreement, lists of unitholders entitled to vote at meetings, and otherwise conducting votes of Partners.

(iv) Within 20 days of receiving notice from the Partnership that Partnership Units have been transferred to the Trust, the Trustee of the Trust shall, in accordance with the terms of (and subject to the limitations contained in) the Partnership Agreement, sell the Partnership Units held in the Trust to a Person, designated by the Trustee, whose ownership of the Partnership Units will not violate the ownership limitations set forth in subsection (b)(i). Upon such sale, the interest of the Charitable Beneficiary in the Partnership Units sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Purported Record Transferee and to the Charitable Beneficiary as provided in this subsection (c)(iv). The Purported Record Transferee shall receive the lesser of (1) the price paid by the Purported Record Transferee for the Partnership Units in the transaction that resulted in such transfer to the Trust (or, if the event which resulted in the transfer to the Trust did not involve a purchase of such Partnership Units at Market Price, the Market Price of such Partnership Units on the day of the event which resulted in the transfer of such Partnership Units to the Trust) and (2) the price per Partnership Unit received by the Trustee (net of any commissions and other expenses of sale) from the sale or other disposition of the Partnership Units held in the Trust. Any net sales proceeds in excess of the amount payable to the Purported Record Transferee shall be immediately paid to the Charitable Beneficiary together with any distributions thereon. If, prior to the discovery by the Partnership that Partnership Units have been transferred to the Trustee, such Partnership Units are sold by a Purported Record Transferee then (i) such Partnership Units shall be deemed to have been sold on behalf of the Trust and (ii) to the extent that the Purported Record Transferee received an amount for such Partnership Units that exceeds the amount that such Purported Record Transferee was entitled to receive pursuant to this subsection (c)(iv), such excess shall be paid to the Trustee upon demand. The expenses described in item (2) above shall include any expenses of administering the Trust, any transfer of Partnership Units thereto or disposition of Partnership Units thereby, which shall be allocated equitably among the Partnership Units which are transferred to the Trust.

(v) Partnership Units transferred to the Trustee shall be deemed to have been offered for sale to the Partnership, or its designee, at a price per Partnership Unit equal to the lesser of (i) the price paid by the Purported Record Transferee for the Partnership Units in the transaction that resulted in such transfer to the Trust (or, if the event which resulted in the transfer to the Trust did not involve a purchase of such Partnership Units at Market Price, the Market Price of such Partnership Units on the day of the event which resulted in the transfer of such Partnership Units to the Trust) and (ii) the Market Price on the date the Partnership, or its designee, accepts such offer. The Partnership shall have the right to accept such offer until the Trustee has sold the Partnership Units held in the Trust pursuant to subsection (c)(iv). Upon such a sale to the Partnership, the interest of the Charitable Beneficiary in the Partnership Units sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Purported Record Transferee and any distributions

E-4

held by the Trustee with respect to such Partnership Units shall thereupon be paid to the Charitable Beneficiary.

(vi) By written notice to the Trustee, the Partnership shall designate one or more nonprofit organizations to be the Charitable Beneficiary of the interest in the Trust such that (i) the Partnership Units held in the Trust would not violate the restrictions set forth in subsection (b)(i) in the hands of such Charitable Beneficiary.

(d) Remedies For Breach. If the General Partner shall at any time determine in good faith that a Transfer or other event has taken place in violation of subsection (b) or that a Person intends to acquire, has attempted to acquire or may acquire beneficial ownership (determined without reference to any rules of attribution) or Constructive Ownership of any Partnership Units of the Partnership in violation of subsection (b), the General Partner shall take such action as it deems advisable to refuse to give effect or to prevent such Transfer, including, but not limited to, causing the Partnership to redeem Partnership Units, refusing to give effect to such Transfer on the books of the Partnership or instituting proceedings to enjoin such Transfer; provided, however, that any Transfers (or, in the case of events other than a Transfer, ownership or Constructive Ownership) in violation of subsection (b)(i), shall automatically result in the transfer to a Trust as described in subsection (b)(ii).

(e) Notice of Restricted Transfer. Any Person who acquires or attempts to acquire or own Partnership Units in violation of subsection (b), or any Person who is a Purported Beneficial Transferee such that an automatic transfer to a Trust results under subsection (b)(ii), shall immediately give written notice to the Partnership of such event and shall provide to the Partnership such other information as the Partnership may request in order to determine the effect, if any, of such Transfer or attempted Transfer on such Person’s compliance with subsection (b)(i).

(f) Owners Required To Provide Information. Prior to the Restriction Termination Date each Person who is a beneficial owner or Constructive Owner of Partnership Units and each Person who is holding Partnership Units for a beneficial owner or Constructive Owner shall provide to the Partnership such information that the Partnership may request, in good faith, in order to determine the Partnership’s status as a partnership (as opposed to a corporation) or the General Partner’s status as a REIT for federal income tax purposes.

(g) Remedies Not Limited. Nothing contained in this Exhibit E shall limit the authority of the General Partner to take such other action as it deems necessary or advisable to protect the Partnership and the interests of its Partners by preservation of the Partnership’s status as a partnership (as opposed to a corporation) or the General Partner’s status as a REIT for federal income tax purposes.

(h) Ambiguity. In the case of an ambiguity in the application of any of the provisions of this Exhibit E, including any definition contained in subsection (a), the General Partner shall have the power to determine the application of the provisions of this Exhibit E with respect to any situation based on the facts known to it. In the event that a provision of this Exhibit E requires an action by the General Partner and Exhibit E fails to provide specific guidance with respect to such action, the General Partner shall have the power to determine the action to be taken so long as such action is not contrary to the provisions of Exhibit E. Absent a decision to the contrary by the General Partner (which the General Partner may make in its sole and absolute discretion), if a Person would have (but for the remedies set forth in subsection (b)) acquired Constructive Ownership of Partnership Units in violation of subsection (b)(i), such remedies (as applicable) shall apply first to the Partnership Units which, but for such remedies, would have been actually owned by such Person, and second to Partnership Units which, but for such remedies, would have been Constructively Owned (but not actually owned) by such Person, pro rata among the Persons who actually own such Partnership Units based upon the relative number of the Partnership Units held by each such Person.

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EXHIBIT F

SCHEDULE OF CERTAIN AGREEMENTS CONTAINING

LIMITATIONS ON GENERAL PARTNERS GENERAL AUTHORITY

1. Purchase and Sale Agreement, Contribution Agreement and Joint Escrow Instructions by and between Shidler West Acquisition Company, LLC, and Kilroy Realty, L.P. dated May 12, 1997.

2. Contribution Agreement, dated as of October 21, 1997, by and among Kilroy Realty, L.P., Kilroy Realty Corporation and the other parties named therein.

3. Contribution Agreement, dated as of February 6, 1998, by and among Belair Capital Fund LLC, Kilroy Realty, L.P. and Kilroy Realty Corporation.

4. First Supplement to Second Amended and Restated Agreement of Limited Partnership of Kilroy Realty, L.P., dated as of March 27, 1998, by and among Kilroy Realty, L.P. and the other parties named therein.

5. Contribution Agreement and Joint Escrow Instructions, dated as of April 15, 1998, by and between Kilroy Realty, L.P. and Kilroy Calabasas Associates

6. Contribution Agreement, dated as of April 20, 1998, by and among Belair Capital Fund LLC, Kilroy Realty, L.P. and Kilroy Realty Corporation.

F-1

EXHIBIT G

CONSTRUCTIVE OWNERSHIP DEFINITION

The term “Constructively Owns” means ownership determined through the application of the constructive ownership rules of Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code. Generally, these rules provide the following:

a. an individual is considered as owning the Ownership Interest that is owned, actually or constructively, by or for his spouse, his children, his grandchildren, and his parents;

b. an Ownership Interest that is owned, actually or constructively, by or for a partnership, limited liability company or estate is considered as owned proportionately by its partners, members or beneficiaries;

c. an Ownership Interest that is owned, actually or constructively, by or for a trust is considered as owned by its beneficiaries in proportion to the actuarial interest of such beneficiaries (provided, however, that in the case of a “grantor trust” the Ownership Interest will be considered as owned by the grantors);

d. if ten percent (10%) or more in value of the stock in a corporation is owned, actually or constructively, by or for any person, such person shall be considered as owning the Ownership Interest that is owned, actually or constructively, by or for such corporation in that proportion which the value of the stock which such person so owns bears to the value of all the stock in such corporation;

e. an Ownership Interest that is owned, actually or constructively, by or for a partner or member which actually or constructively owns a 25% or greater capital interest or profits interest in a partnership or limited liability company, or by or for a beneficiary of an estate or trust, shall be considered as owned by the partnership, limited liability company, estate, or trust (or, in the case of a grantor trust, the grantors);

f. if ten percent (10%) or more in value of the stock in a corporation is owned, actually or constructively, by or for any person, such corporation shall be considered as owning the Ownership Interest that is owned, actually or constructively, by or for such person;

g. if any person has an option to acquire an Ownership Interest (including an option to acquire an option or any one of a series of such options), such Ownership Interest shall be considered as owned by such person;

h. an Ownership Interest that is constructively owned by a person by reason of the application of the rules described in paragraphs (a) through (g) above shall, for purposes of applying paragraphs (a) through (g), be considered as actually owned by such person provided, however, that (i) an Ownership Interest constructively owned by an individual by reason of paragraph (a) shall not be considered as owned by him for purposes of again applying paragraph (a) in order to make another the constructive owner of such Ownership Interest, (ii) an Ownership Interest constructively owned by a partnership, estate, trust, or corporation by reason of the application of paragraphs (e) or (f) shall not be considered as owned by it for purposes of applying paragraphs (b), (c), or (d) in order to make another the constructive owner of such Ownership Interest, (iii) if an Ownership Interest may be considered as owned by an individual under paragraphs (a) or (g), it shall be considered as owned by him under paragraph (g) and (iv) for purposes of the above described rules, an S corporation shall be treated as a partnership and any stockholder of the S corporation shall be treated as a partner of such partnership except that this rule shall not apply for purposes of determining whether stock in the S corporation is constructively owned by any person.

i. For purposes of the above summary of the constructive ownership rules, the term “Ownership Interest” means the ownership of stock with respect to a corporation and, with respect to any other type of entity, the ownership of an interest in either its assets or net profits.

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EX-21.1

EXHIBIT 21.1

SUBSIDIARIES OF THE REGISTRANT

NAME OF SUBSIDIARY OR ORGANIZATION	STATE OF INCORPORATION OR FORMATION
Kilroy Realty, L.P	Delaware
Kilroy Realty Finance, Inc.	Delaware
Kilroy Realty Finance Partnership, L.P.	Delaware
Kilroy Services, LLC	Delaware
Kilroy Realty Partners, L.P.	Delaware
Kilroy Realty TRS, Inc.	Delaware

EX-23.1

EXHIBIT 23.1

INDEPENDENT AUDITORS’ CONSENT

We consent to the incorporation by reference in Registration Statement No. 333-72229, Registration Statement No. 333-104320, Registration Statement No. 333-34638, Registration Statement No. 333-49948, and Registration No. 333-83112 of Kilroy Realty Corporation on Forms S-3, and Registration Statement No. 333-43227 of Kilroy Realty Corporation on Form S-8 of our report dated February 25, 2004 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to Kilroy Realty Corporation’s change in accounting for the impairment or disposal of long-lived assets to conform to the Statement of Financial Standards 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”) appearing in this Annual Report on Form 10-K of Kilroy Realty Corporation for the year ended December 31, 2003.

/s/    DELOITTE & TOUCHE LLP

Los Angeles, California

March 9, 2004

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, John B. Kilroy, Jr., certify that:

1. I have reviewed this annual report on Form 10-K of Kilroy Realty Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/    JOHN B. KILROY, JR.

John B. Kilroy, Jr.

President and Chief Executive Officer

Date: March 10, 2004

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Richard E. Moran Jr., certify that:

1. I have reviewed this annual report on Form 10-K of Kilroy Realty Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/    RICHARD E. MORAN JR.

Richard E. Moran Jr.

Executive Vice President and Chief Financial Officer

Date: March 10, 2004

EX-32.1

Exhibit 32.1

Certification of Chief Executive Officer

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Kilroy Realty Corporation (the “Company”) hereby certifies, to his knowledge, that:

(i) the accompanying Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2003 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/    JOHN B. KILROY, JR.

John B. Kilroy, Jr.

President and Chief Executive Officer

Date: March 10, 2004

The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350, and is not being filed as part of the Report or as a separate disclosure document. The signed original of this written statement required by Section 906 has been provided to Kilroy Realty Corporation and will be retained by Kilroy Realty Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

Certification of Chief Financial Officer

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Kilroy Realty Corporation (the “Company”) hereby certifies, to his knowledge, that:

(i) the accompanying Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2003 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/    RICHARD E. MORAN JR.

Richard E. Moran Jr.

Chief Financial Officer

Date: March 10, 2004

The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350, and is not being filed as part of the Report or as a separate disclosure document. The signed original of this written statement required by Section 906 has been provided to Kilroy Realty Corporation and will be retained by Kilroy Realty Corporation and furnished to the Securities and Exchange Commission or its staff upon request.