<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 8-K

                                 CURRENT REPORT

     Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

        Date of Report (Date of earliest event reported) December 26, 1996

                         Commission File Number: 1-12546

                          PACIFIC GULF PROPERTIES INC.
             (Exact name of Registrant as specified in its Charter)

        MARYLAND                                         33-0577520
(State of Incorporation)                    (I.R.S. Employer Identification No.)

     363 SAN MIGUEL DRIVE, SUITE 100, NEWPORT BEACH, CALIFORNIA 92660-7805
          (Address of principal executive offices, including zip code)

                                  714-721-2700
              (Registrant's telephone number, including area code)


<PAGE>   2
ITEM 2.    ACQUISITION AND DISPOSITION OF ASSETS.

           NEW ACQUISITIONS

           Pacific Gulf Properties Inc. (the "Company") completed the following
           new acquisitions since September 30, 1996:

           Miramar Business Park
           On October 11, 1996, the Company acquired a multitenant
           warehouse/industrial project containing 186,022 leasable square feet
           located in the City of San Diego, California (the "Miramar Business
           Park"). The Company purchased Miramar Business Park, which is subject
           to a ground lease expiring in July 2035, from Burnham Pacific, a
           real estate investment trust, for a total consideration of 
           $7,242,000. The Company funded the acquisition with $7,100,000 of 
           borrowings under its revolving line of credit which bears interest 
           at date of acquisition of 7.125% (LIBOR plus 1.75%).

           Raintree Apartments
           On November 7, 1996, the Company acquired an apartment community
           containing 165 apartment units located in Ontario, California (the
           "Raintree Apartments"). The Company purchased Raintree Apartments
           from Coast Savings, a financial institution, for a total
           consideration of $6,259,000. The Company funded the acquisition with
           $6,200,000 of borrowings from a mortgage note payable bearing a fixed
           rate of interest at date of acquisition of 6.4% and cash.

           PROBABLE ACQUISITIONS 
           On December 5, 1996, the Company entered into an agreement to
           purchase a warehouse/distribution property containing 201,364
           leasable square feet located in the city of Algona, Washington (the
           "Algona Warehouse"). Additionally, on November 19, 1996, the Company
           entered into an agreement to purchase a multitenant industrial park
           containing 323,226 leasable square feet located in the city of Costa
           Mesa, California ("Harbor Business Park"). The acquisitions of Algona
           Warehouse and Harbor Business Park are expected to be funded from
           proceeds raised from the issuance of common stock under the Company's
           shelf registration statement declared effective May 23, 1996. The
           Company has contracted to purchase Algona Warehouse from The
           Principal Financial Group, a life insurance company, for a total
           consideration of $9,550,000, and Harbor Business Park from M.S.
           Vickers Limited Partnership, a division of MetLife, for a total
           consideration of $15,200,000. Both acquisitions remain subject to
           certain conditions to closing, accordingly, there can be no assurance
           that the acquisitions will be consummated.






                                      -1-
<PAGE>   3
ITEM 5.    OTHER EVENTS.

           DEBENTURE-FOR-STOCK EXCHANGE
           On December 26, 1996, the Company completed an exchange of
           $42,069,000 of its 8.375% Convertible Subordinated Debentures (or
           74.45% of the aggregate principal amount at September 30, 1996) for
           shares of the Company's Common Stock. The exchange was consummated
           pursuant to the Company's tender offer to exchange the Debentures as
           filed on December 11, 1996 with the Securities and Exchange
           Commission (the "Debenture-for-Stock Exchange"). In connection with
           the Debenture-for-Stock Exchange, the Company converted 42,069 of its
           $1,000 principal amount Debentures at the rate of 58 shares of Common
           Stock for each $1,000 of Debentures. Included in the 58 shares of
           Common Stock issued for each $1,000 principal amount of Debentures
           were 4.3014 shares of Common Stock (the "excess common shares"),
           representing the excess of 58 shares over the original conversion
           rate of 53.6986 shares of Common Stock for each $1,000 principal
           amount of Debentures. As part of the exchange of the tendered
           Debentures, the Company issued a total of 2,440,002 shares of Common
           Stock, and will recognize a one-time charge to earnings of
           approximately $3,597,000 for the year ending December 31, 1996
           resulting from the issuance of 180,956 excess common shares at a
           price of $19.875 per share, the market price of the Common Stock on
           the date of the exchange. Approximately $14,237,000 in principal
           amount of Debentures remain outstanding after the consummation of the
           Debenture-for-Stock Exchange.

           PREFERRED STOCK
           On December 31, 1996, the Company entered into an agreement to issue
           1,351,351 shares of Class A Senior Cumulative Convertible Preferred
           Stock (the "Class A Preferred Shares") to Five Arrows Realty
           Securities L.L.C. ("Five Arrows") at a price of $18.50 per share. The
           Company is obligated to issue the Class A Preferred Shares over the
           course of 1997 in a maximum of three separate issuances, the timing
           of which may be specified by the Company, provided that the Company
           will be charged with certain availability fees if all of the Class A
           Preferred Shares are not issued before July 1, 1997. Management
           believes the issuance of the Class A Preferred Shares will provide
           the Company with ready access to additional capital in order to
           complete additional acquisitions or to provide additional working
           capital.

           The holders of the Class A Preferred Shares and the holders of the
           Common Stock vote together as a single class. Each Class A Preferred
           Share is convertible into one share of Common Stock, subject to
           adjustment upon certain events. The annual dividend per share on the
           Class A Preferred Shares is (i) $1.70 from the date of issuance until
           December 31, 1997, and (ii) the greater of $1.70 or 104% of the
           then-current dividend on the Common Stock thereafter. At its option,
           the Company may redeem the Class A Preferred Shares beginning on
           December 31, 2001 for cash at a premium of 6% over the initial $18.50
           per share liquidation value. This premium will decrease to zero by
           December 31, 2009.

           The Company has granted to Five Arrows, for as long as Five Arrows
           maintains its ownership of either all of the Class A Preferred Shares
           or an amount of voting securities that, if converted into Common
           Stock, would exceed 10% of the outstanding Common Stock, a seat on
           the Company's Board of Directors. In addition, upon the occurrence
           of certain events, Five Arrows could be granted one additional
           seat.

           Five Arrows is prohibited from transferring any Class A Preferred
           Shares, or any shares of Common Stock into which such Class A
           Preferred Shares have been converted, until December 31, 1997. At
           that time, Five Arrows will have the right, subject to certain
           conditions, to demand the Company effect the registration under the
           Securities Act of the Class A Preferred Shares or the shares of
           Common Stock into which such Class A Preferred Shares have been
           converted. 

ITEM 7.    FINANCIAL STATEMENTS AND EXHIBITS.
           (a)    See Index to Financial Statements attached hereto.

           (b)    Exhibits

                  99.1  Press Release Issued by the Company on December 27,
                        1996 relating to the Debenture-for-Stock Exchange.

                  99.2  Investment Agreement between Pacific Gulf Properties
                        Inc. and Five Arrow Realty Securities L.L.C.

                  99.3  Articles Supplementary Classifying 1,351,351 Shares of
                        Preferred Stock as Class A Senior Cumulative 
                        Convertible Preferred Stock.

                  99.4  Operating Agreement.




                                      -2-
<PAGE>   4
                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

PACIFIC GULF PROPERTIES INC.

   /s/      Donald G. Herrman
-------------------------------------
Donald G. Herrman
Executive Vice President,
Chief Financial Officer and Secretary

DATED:      January 13, 1997
      -------------------------------


                                      -3-
<PAGE>   5
                          PACIFIC GULF PROPERTIES INC.

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                        Page
                                                                                        ----
<S>                                                                                     <C>
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)

Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1996 ...............   5
                                                                                      
Pro Forma Condensed Consolidated Statement of Operations for the                      
     Nine Months Ended September 30, 1996 .............................................   6
Pro Forma Condensed Consolidated Statement of Operations for the                      
     Year Ended December 31, 1995 .....................................................   7
                                                                                      
Notes to Pro Forma Condensed Consolidated Financial Statements ........................   8
                                                                                      

MIRAMAR BUSINESS PARK (NEW ACQUISITION)                                               
                                                                                      
Report of Independent Auditors ........................................................  20
                                                                                      
Statement of Revenues and Certain Expenses for the Year Ended                         
     December 31, 1995 and the Nine Months Ended September 30, 1996 (Unaudited) .......  21
                                                                                      
Notes to Statement of Revenues and Certain Expenses ...................................  22

                                                                                      
ALGONA WAREHOUSE (PROBABLE ACQUISITION)                                               
                                                                                      
Report of Independent Auditors ........................................................  25
                                                                                      
Statement of Revenues and Certain Expenses for the Year Ended                         
     December 31, 1995 and the Nine Months Ended September 30, 1996 (Unaudited) .......  26
                                                                                      
Notes to Statement of Revenues and Certain Expenses ...................................  27
                                                                                      
HARBOR BUSINESS PARK (PROBABLE ACQUISITION)                                           
                                                                                      
Report of Independent Auditors ........................................................  29
                                                                                      
Statement of Revenues and Certain Expenses for the Year Ended                         
     December 31, 1995 and the Nine Months Ended September 30, 1996 (Unaudited) .......  30
                                                                                      
Notes to Statement of Revenues and Certain Expenses ...................................  31
</TABLE>


                                      -4-
                                         
<PAGE>   6
                          PACIFIC GULF PROPERTIES INC.
                 PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

                               SEPTEMBER 30, 1996
                                   (UNAUDITED)
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                  PRO FORMA
                                                                    BEFORE                                     
                                                   NEW             PROBABLE        PROBABLE         
                                              ACQUISITIONS        ACQUISITIONS   ACQUISITIONS                 
                                                   AND                AND            AND
                                                DEBENTURE-           COMMON         COMMON                
                                COMPANY         FOR-STOCK            STOCK          STOCK       COMPANY PRO      
                               HISTORICAL       EXCHANGE           OFFERING        OFFERING        FORMA
                               -----------------------------------------------------------------------------
<S>                            <C>             <C>                <C>           <C>             <C>    
ASSETS                                                                          
Real estate, net                $339,457       $ 13,501 (A)       $352,958         24,750 (F)      377,708
Cash and cash equivalents          2,631         (1,190)(B)          1,441                           1,441
Accounts receivable                1,114                             1,114                           1,114
Other assets                       6,489         (1,411)(D)          5,078                           5,078
                                --------------------------------------------------------------------------
                                $349,691       $ 10,900           $360,591       $ 24,750         $385,341
                                ==========================================================================
                                                                              
LIABILITIES AND
  SHAREHOLDERS' EQUITY
Loan payable                    $137,774       $  6,200 (A)       $143,974       $                $143,974
Line of credit                    39,244          7,100 (A)         46,344         (3,858)(G)       42,486
Accounts payable and accrued       
  liabilities                      7,340            201 (A)          7,101            234 (F)        7,335
                                                   (440)(B)

Dividends payable                  2,928                             2,928                           2,928
Convertible subordinated                                   
  debentures                      55,722        (41,485)(C)         14,237                          14,237
                                --------------------------------------------------------------------------
                                 243,008        (28,424)           214,584         (3,624)         210,960

Minority interest in               
  consolidated partnership         3,518                             3,518                           3,518

Shareholders' equity                  
  Common shares                       74             24 (D)             98             15 (G)          113  
  Outstanding restricted stock      (918)                             (918)                           (918)
  Additional paid in capital     114,877         42,897 (B)(D)     157,774         28,359 (G)      186,133  
  Distributions in excess of                                         
    earnings                     (10,868)        (3,597)(E)        (14,465)                        (14,465)
                                --------------------------------------------------------------------------
                                 103,165         39,324            142,489         28,374          170,863
                                --------------------------------------------------------------------------
                                $349,691       $ 10,900           $360,591        $24,750         $385,341
                                ==========================================================================
</TABLE>


     The accompanying notes are an integral part of the pro forma condensed
                       consolidated financial statements.


                                      -5-


<PAGE>   7
                          PACIFIC GULF PROPERTIES INC.
            PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
                                   (UNAUDITED)
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                      PRO FORMA
                                                                        BEFORE                                                   
                                                        NEW            PROBABLE         PROBABLE                    
                                                    ACQUISITIONS     ACQUISITIONS     ACQUISITIONS                      
                                                        AND              AND              AND             
                                                     DEBENTURE-         COMMON           COMMON      COMPANY PRO      
                                      COMPANY         FOR-STOCK         STOCK            STOCK          FORMA
                                     HISTORICAL       EXCHANGE         OFFERING         OFFERING      (T)(V)(W) 
                                  ---------------------------------------------------------------------------
<S>                                <C>               <C>                <C>            <C>         <C>    
REVENUES                                
Rental income                   
  Industrial properties               $14,469        $ 3,787 (H)        $18,256        $ 2,028 (M) $   20,284
  Multifamily properties               21,673            738 (H)         22,411             --         22,411
                                   --------------------------------------------------------------------------
                                       36,142          4,525             40,667          2,028         42,695
                                
EXPENSES                             
Rental property expenses        
  Industrial properties                 3,791          1,243 (H)          5,034            647 (M)      5,681
  Multifamily properties                8,527            436 (H)          8,963             --          8,963
                                   -------------------------------------------------------------------------
                                       12,318          1,679             13,997            647         14,644

Depreciation                            5,921            535 (I)          6,456            371 (J)      6,827

Interest (including amortization    
  of debenture discount and 
  financing costs)                     13,613          1,427 (K)         12,078           (217)(Q)     11,861
                                                      (2,962)(P)
General and administrative              2,056                             2,056                         2,056
                                  ---------------------------------------------------------------------------
INCOME BEFORE GAIN ON             
SALE OF PROPERTIES                 $    2,234        $ 3,846            $ 6,080         $ 1,227    $    7,307
                                  ===========================================================================
WEIGHTED AVERAGE                    
COMMON SHARES (R)(S)                5,955,680                                                      11,242,359
                                  ===========                                                      ===========
INCOME BEFORE GAIN ON               
SALE PER COMMON
SHARE                              $     0.38                                                      $     0.65
                                  ===========                                                      ==========
</TABLE>

The accompanying notes are an integral part of the pro forma financial
statements.


                                      -6-
<PAGE>   8
                          PACIFIC GULF PROPERTIES INC.
            PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

                      FOR THE YEAR ENDED DECEMBER 31, 1995
                                   (UNAUDITED)
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                          PRO FORMA
                                                                            BEFORE   
                                                           NEW             PROBABLE        PROBABLE          
                                                       ACQUISITIONS      ACQUISITIONS    ACQUISITIONS        
                                                           AND               AND             AND           
                                                        DEBENTURE-          COMMON          COMMON           COMPANY PRO
                                       COMPANY          FOR-STOCK           STOCK           STOCK               FORMA
                                      HISTORICAL         EXCHANGE          OFFERING        OFFERING           (T)(V)(W) 
                                      ----------------------------------------------------------------------------------   
<S>                                   <C>               <C>                <C>             <C>               <C>        
REVENUES                           
Rental income                                 
  Industrial properties               $   12,193        $ 11,334 (L)        $23,527        $2,233 (M)        $    25,760
  Multifamily properties                  24,898           3,956 (L)         28,854            --                 28,854
                                      ----------------------------------------------------------------------------------   
                                          37,091          15,290             52,381         2,233                 54,614
                                   
EXPENSES                           
Rental property expenses           
  Industrial properties                    2,567           4,246 (L)          6,813           788 (M)              7,601
  Multifamily properties                  10,215           2,062 (L)         12,277            --                 12,277
                                      ----------------------------------------------------------------------------------   
                                          12,782           6,308             19,090           788                 19,878
                                                                                                    
Depreciation and amortization              6,081           1,913 (N)          7,994           495 (J)              8,489
                                                                                                    
Interest (including amortization of   
  debenture discount and financing
  costs)                                  14,066           5,596 (O)         15,718          (289)(Q)             15,429
                                                          (3,944)(P)
General and administrative                 2,423                              2,423                                2,423
                                      ----------------------------------------------------------------------------------

INCOME BEFORE GAIN ON SALE            
  OF PROPERTIES                       $    1,739         $ 5,417            $ 7,156        $1,239            $     8,395
                                      ==================================================================================
WEIGHTED AVERAGE                                                                                              
  COMMON SHARES (R)(S)                 4,830,723                                                              11,206,306
                                      ==========                                                             ===========
INCOME BEFORE GAIN ON                                                                                        
  SALE PER COMMON SHARE               $     0.36                                                             $      0.75   
                                      ==========                                                             ===========
</TABLE>


The accompanying notes are an integral part of the pro forma financial
statements.


                                      -7-
<PAGE>   9
                 (Dollars in thousands, except per share data)
                          PACIFIC GULF PROPERTIES INC.

         NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
                      AND THE YEAR ENDED DECEMBER 31, 1995
                             (UNAUDITED) (continued)

                 (Dollars in thousands, except per share data)


NOTE 1 - BASIS OF PRESENTATION

Pacific Gulf Properties Inc. (the "Company") was formed in 1993 and completed
its initial public offering in February 1994. It is anticipated that the Company
will acquire two additional properties containing approximately 524,000 leasable
square feet located in California (the "Probable Acquisitions") from proceeds
raised from the proposed issuance of 1,500,000 shares of Common Stock, plus up
to 225,000 shares subject to an overallotment option granted to the underwriter 
(the "Common Stock Offering") under the Company's Shelf Registration Statement
declared effective May 23, 1996.

The pro forma condensed consolidated balance sheet as of September 30, 1996 is
based on the unaudited historical financial statements of the Company and has
been prepared as if the following transactions had occurred as of September 30,
1996: (i) the exchange of $42,069 aggregate principal amount of the Company's
8.375% Convertible Subordinated Debentures due 2001 (the "Debentures") for
2,440,002 shares of Common Stock which was completed on December 26, 1996
pursuant to the Company's offer to exchange such Debentures as filed with the
Securities and Exchange Commission in a registration statement on Form S-4 dated
December 11, 1996, as amended (the "Debenture-for-Stock Exchange"); (ii) the
acquisition of Miramar Business Park, a multitenant industrial/warehouse project
containing approximately 186,000 leasable square feet located in the City of
Mira Mesa, California, and the acquisition of Raintree Apartments, a 165-unit
apartment community located in Ontario, California both of which were purchased
by the Company subsequent to September 30, 1996 (the "New Acquisitions"); (iii)
the purchase of the Probable Acquisitions: (a) Algona Warehouse, a
warehouse/distribution facility containing approximately 201,000 leasable square
feet located in Algona, Washington, and (b) Harbor Business Park, a multitenant
industrial park containing approximately 323,000 leasable square feet located in
the city of Costa Mesa, California, both of which are currently subject to
definitive agreements; (iv) and the completion of the proposed Common Stock
Offering and the application of net proceeds thereof to complete the purchase of
the Probable Acquisitions and to repay certain outstanding indebtedness.

The pro forma condensed consolidated statement of operations for the year ended
December 31, 1995 is based on the historical financial statements of the Company
and has been prepared as if the following transactions had occurred as of the
beginning of the period presented: (i) the purchases completed by the Company
during 1995 consisting of 12 multifamily properties containing 1,736 apartment
units and one industrial property containing approximately 475,000 leasable
square feet (the "1995 Acquisitions"); (ii) the sale of the Company's four
multifamily properties located in Texas, which occurred in November 1995 (the
"Texas Dispositions"); (iii) the purchase completed by the Company in March 1996
of an industrial property containing approximately 189,000 leasable square feet
located in Garden Grove, California (the "Pacific Gulf Business Park"); (iv) the
purchase of nine industrial properties containing approximately 1,342,000
leasable square feet located in California completed by the Company during June
and July 1996 (the "Acquisition Properties") using proceeds from a public
offering of 2,435,481 shares of Common Stock consummated in May 1996 (the "May
1996 Offering"); (v) the completion of the May 1996 Offering and the
establishment of an acquisition line of credit for the purchase of the nine
Acquisition Properties; (vi) the sale of a ten-acre parcel and a 56,000 square
foot building in August 1996 to an existing tenant at Baldwin Industrial Park
pursuant to purchase options contained in the existing tenant's lease (the
"Tenant Sale"); (vii) the completion 


                                      -8-

<PAGE>   10
                          PACIFIC GULF PROPERTIES INC.

         NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
                      AND THE YEAR ENDED DECEMBER 31, 1995
                             (UNAUDITED)(continued)

                 (Dollars in thousands, except per share data)


NOTE 1 - BASIS OF PRESENTATION (continued)

of the Debenture-for-Stock Exchange; (viii) the purchase of the New Acquisitions
and Probable Acquisitions; and (ix) the completion of the proposed Common Stock
Offering and the application of the net proceeds thereof to complete the
purchase of the Probable Acquisitions and to repay outstanding indebtedness.

The pro forma condensed consolidated statement of operations for the nine months
ended September 30, 1996 is based on the historical financial statements of the
Company and has been prepared as if the following transactions had occurred as
of the beginning of the period presented: (i) the purchase of Pacific Gulf
Business Park; (ii) the purchase of the nine Acquisition Properties; (iii) the
completion of the May 1996 Offering and the establishment of an acquisition line
of credit for the purchase of the Acquisition Properties; (iv) the completion of
the Tenant Sale; (v) the completion of the Debenture-for-Stock Exchange; (vi)
the purchase of the New Acquisitions and Probable Acquisitions; and (vii) the
completion of the proposed Common Stock Offering and the application of the net
proceeds thereof to complete the purchase of the Probable Acquisitions and to
repay outstanding indebtedness.

The following pro forma information is not necessarily indicative of what the
Company's financial position or results of operations would have been assuming
the completion of the described transactions as of the beginning of the periods
indicated, nor does it purport to project the Company's financial position or
results of operations at any future date or for any future period. In addition,
the historical operating results for the nine months ended September are not
necessarily indicative of the results to be obtained by the Company for the year
ending December 31, 1996. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and all of the financial statements and notes thereto
contained in the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 and in the Company's Annual Report on Form 10-K/A for the
year ended December 31, 1995.

NOTE 2 - PRO FORMA ADJUSTMENTS

(A)      Purchase of Miramar Business Park for $7,242 and Raintree Apartments
         for $6,259, (the New Acquisitions completed by the Company subsequent
         to September 30, 1996). Funding for the purchases consisted of $7,100
         provided by the Company's revolving line of credit and $6,200 provided
         by borrowings on a mortgage note payable. In connection with the 
         purchases the Company received credits through escrow for the 
         assumption of tenant security deposits related to the properties 
         totaling approximately $201.

(B)      Payment of (i) accrued and unpaid interest of $440 to holders of the
         Debentures pursuant to the Debenture-for-Stock Exchange and (ii)
         transaction costs of $750 including underwriting, proxy solicitation,
         transfer taxes and legal expenses.


                                      -9-
<PAGE>   11
                          PACIFIC GULF PROPERTIES INC.

         NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
                      AND THE YEAR ENDED DECEMBER 31, 1995
                             (UNAUDITED)(continued)

                 (Dollars in thousands, except per share data)

NOTE 2 - PRO FORMA ADJUSTMENTS (continued)

(C)      Exchange of approximately 74.45% of the Company's outstanding
         Debentures ($42,069 aggregate principal amount net of unamortized
         debenture discount of $584) into shares of Common Stock pursuant to the
         Debenture-for-Stock Exchange.

(D)      Issuance of 2,440,002 shares of Common Stock pursuant to the
         Debenture-for-Stock Exchange of $42,069 of Debentures completed on
         December 27, 1996 as follows:

<TABLE>
<CAPTION>
<S>                                                 <C>             <C>       
Common stock, $.01 par value                                        $       24
Additional paid-in capital                                          $   42,897
                                                                    ----------
                                                                    $   42,921
                                                                    ==========

Par Value is calculated as follows:
                                                    Shares per $1        
                                                      Principal 
                                                      Amount of
                                                      Debentures       Total
                                                    --------------------------
Shares issued pursuant to                                
   Original conversion terms                           53.6986       2,259,046 
   Excess common shares                                 4.3014         180,956
                                                    --------------------------
                                                       58.0000       2,440,002

Par value per share                                                 $      .01
                                                                    ----------
Par value of Common Stock                                           $       24
                                                                    ==========

Additional Paid-In Capital is calculated as follows:

Principal amount of debentures tendered                             $   42,069
Issuance of excess common shares (E)                                     3,597
Less unamortized debenture discount                                       (584)
Less unamortized debenture issuance costs                               (1,411)
Less transaction costs                                                    (750)
                                                                    ----------
                                                                    $   42,921
Less par value of Common Stock                                             (24)
                                                                    ----------
Additional Paid-In Capital                                          $   42,897
                                                                    ==========
</TABLE>


                                      -10-
<PAGE>   12

                          PACIFIC GULF PROPERTIES INC.

         NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
                      AND THE YEAR ENDED DECEMBER 31, 1995
                             (UNAUDITED) (continued)

                 (Dollars in thousands, except per share data)


NOTE 2 - PRO FORMA ADJUSTMENTS (continued)

(E)      Loss on the Debenture-for-Stock Exchange resulting from the issuance of
         180,956 excess common shares at $19.875 per share (the closing price
         per share on December 27, 1996, the date of the exchange). These
         shares represent the additional shares issued at the exchange rate of 
         58 shares of Common Stock per each $1,000 principal amount of 
         Debentures, representing 4.3014 additional shares over the original 
         conversion rate of 53.6986 shares.

(F)      Purchase of Algona Warehouse for $9,550 and Harbor Business Park for
         $15,200 (the Probable Acquisitions which the Company expects to
         complete in early 1997). Funding for the purchases will be provided
         from proceeds raised from the proposed issuance of Common Stock under
         the Company's shelf registration statement declared effective May 23,
         1996. In connection with the purchases, the Company received credits
         through escrow for the assumption of tenant security deposits related
         to the properties totaling approximately $234.

(G)      Proposed issuance of 1,500,000 shares of Common Stock at $19.875 per
         share, net of underwriting discounts and commissions and estimated
         expenses of $1,492. Proceeds from the proposed issuance will be used to
         purchase the Probable Acquisitions ($24,750) and to reduce the balance
         of the Company's revolving line of credit ($3,858).

(H)      Revenues and certain expenses of the following industrial and
         multifamily properties for the period prior to their acquisition by the
         Company (adjusted to reflect increased property taxes based on the
         properties' acquisition cost and current property tax rates) and
         revenues and expenses of the property comprising the Tenant Sale for
         the period prior to its disposal by the Company:


<TABLE>
<CAPTION>
                                            For the Nine Months Ended September 30, 1996
                              ------------------------------------------------------------------------
                               Pacific Gulf    Acquisition        New          Tenant
                               Business Park    Properties    Acquisitions      Sale         Total
                              ------------------------------------------------------------------------
<S>                           <C>              <C>           <C>            <C>              <C>  
Rental income
    Industrial properties        $   195       $ 3,217       $ 1,066        $  (691)         3,787
    Multifamily properties           738           738           738                           738
                              ------------------------------------------------------------------------
                                     195         3,217         1,804           (691)         4,525
                              ------------------------------------------------------------------------

Rental property expenses
    Industrial properties             72           809           394            (32)         1,243
    Multifamily properties                                       436                           436
                              ------------------------------------------------------------------------
                                      72           809           830            (32)         1,679
                              ------------------------------------------------------------------------
                                 $   123       $ 2,408       $   974        $   659          2,846
                              ========================================================================
</TABLE>


                                      -11-
<PAGE>   13
                          PACIFIC GULF PROPERTIES INC.

         NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
                      AND THE YEAR ENDED DECEMBER 31, 1995
                             (UNAUDITED) (continued)

                 (Dollars in thousands, except per share data)


NOTE 2 - PRO FORMA ADJUSTMENTS (continued)

(I)      Depreciation expense of $605 relating to the purchase of Pacific Gulf
         Business Park, the Acquisition Properties, and the New Acquisitions,
         net of a reduction in depreciation expense of $70 due to the Tenant
         Sale (the actual depreciation relating to the Tenant Sale during the
         nine months ended September 30, 1996). The depreciation expense
         relative to the purchase of Pacific Gulf Business Park, the Acquisition
         Properties, and the New Acquisitions, for the period prior to their
         acquisition, was computed utilizing estimated remaining useful lives of
         40 years and the depreciable basis of the properties as follows:


<TABLE>
<CAPTION>
                                                       PURCHASE        DEPRECIABLE       DEPRECIATION
                                                         PRICE            BASIS            EXPENSE
                                                   --------------------------------------------------
<S>                                                <C>                 <C>               <C>   
Pacific Gulf Business Park                             $   6,800        $   3,009         $   16
                                                                                              56
Acquisition Properties
                Eden Landing Commerce Park                 7,300            5,460
                Riverview Industrial Park                  6,442            5,281             66
                Bay San Marcos Industrial Center           4,678            2,942             32
                Escondido Business Center                 10,372            6,523             70
                Bell Ranch Industrial Park                 3,750            3,000             35
                North County Business Park                 6,350            3,169             35
                San Marcos Commerce Center                 2,710            1,871             20
                Pacific Park                               6,900            3,001             28
                La Mirada Business Center                  3,600            2,453             26
                                                                                              
New Acquisitions
                Miramar Business Park                      7,242            7,242            136   
                Raintree Apartments                        6,259            4,511             85
                                                                                          ------
                                                                                          $   605
                                                                                          =======
</TABLE>


                                      -12-
<PAGE>   14
                          PACIFIC GULF PROPERTIES INC.

         NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
                      AND THE YEAR ENDED DECEMBER 31, 1995
                             (UNAUDITED) (continued)

                 (Dollars in thousands, except per share data)


NOTE 2 - PRO FORMA ADJUSTMENTS (continued)

(J)      Depreciation expense relating to the purchase of the Probable
         Acquisitions (Algona Warehouse and Harbor Business Park), for the
         period prior to their acquisition, was computed utilizing estimated
         remaining useful lives of 40 years and the depreciable basis of the
         properties as follows:


<TABLE>
<CAPTION>
                                                For the Nine Months Ended
                                                   September 30, 1996
                                  -----------------------------------------------------
                                     Purchase        Depreciable       Depreciation
                                       Price            Basis            Expense
                                  -----------------------------------------------------
<S>                               <C>                 <C>               <C>    
Probable Acquisitions
   Algona Warehouse                  $   9,550        $   7,640         $   143
   Harbor Business Park                 15,200           12,160             228
                                                                        -------
                                                                        $   371
                                                                        =======
</TABLE>


<TABLE>
<CAPTION>
                                                           For the Year Ended December 31, 1995
                                                   -----------------------------------------------------
                                                       Purchase        Depreciable       Depreciation
                                                         Price            Basis            Expense
                                                   -----------------------------------------------------
<S>                                                <C>                <C>               <C>    
Probable Acquisitions
                Algona Warehouse                     $   9,550        $   7,640         $   191
                Harbor Business Park                    15,200           12,160             304
                                                                                        -------
                                                                                        $   495
                                                                                        =======
</TABLE>


                                      -13-
<PAGE>   15
                          PACIFIC GULF PROPERTIES INC.

         NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
                      AND THE YEAR ENDED DECEMBER 31, 1995
                             (UNAUDITED) (continued)

                 (Dollars in thousands, except per share data)


NOTE 2 - PRO FORMA ADJUSTMENTS (continued)

(K)      Interest expense for the nine months ended September 30, 1996 on the
         borrowings utilized to finance the purchase of Pacific Gulf Business
         Park in March 1996, the purchase of the Acquisition Properties in June
         and July 1996 and the purchase of New Acquisitions subsequent to
         September 30, 1996 for the period prior to their purchase, calculated
         based on the actual interest rates of specific new borrowings, less a
         reduction of interest expense resulting from the Tenant Sale of $373
         (the actual interest relating to the Tenant Sale):


<TABLE>
<CAPTION>
                                                                                      Interest
                                                     Debt         Interest Rate        Expense
                                                 ----------------------------------------------------
<S>                                              <C>              <C>               <C>    
Pacific Gulf Business Park                       $   8,000        7.300%            $   124
Acquisition Properties                              19,475        7.500%                997
New Acquisitions
                  Miramar Business Park              7,100        7.125%                379
                  Raintree Apartments                6,200        6.400%                298
Amortization of related loan fees and costs                                               2
                                                                                    -------
                                                                                    $ 1,800
                                                                                    =======
</TABLE>


         The Company borrowed $8,000 to finance the acquisition of Pacific Gulf
         Business Park which was secured by another property. A total of
         $6,800 of the borrowing was used to purchase the property. The
         remaining proceeds were used to rehabilitate the property.

         The Acquisition Properties were financed in June and July 1996
         utilizing borrowings under the Company's acquisition line of credit.
         The interest expense on these borrowings is calculated for the period
         indicated at an interest rate of 7.5% (LIBOR plus 2%), the actual rate
         on the date of the borrowings.

         The New Acquisitions were financed utilizing borrowings under the
         Company's revolving line of credit and a mortgage note payable.
         Interest expense on the line of credit borrowings which totaled $7,100
         and the mortgage note payable which totaled $6,200 is calculated for
         the period indicated at an interest rate of 7.125% (LIBOR plus 1.75%)
         and 6.4%, respectively, the actual rates on the date of the borrowings.

         A .125% change in the interest rate on all of the Company's variable
         rate debt would increase the Company's pro forma interest expense by
         $57 for the nine months ended September 30, 1996.


                                      -14-
<PAGE>   16
                          PACIFIC GULF PROPERTIES INC.

         NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
                      AND THE YEAR ENDED DECEMBER 31, 1995
                             (UNAUDITED) (continued)

                 (Dollars in thousands, except per share data)


NOTE 2 - PRO FORMA ADJUSTMENTS (continued)

(L)      Revenues and certain expenses of the following industrial and
         multifamily properties for the period prior to their acquisition by the
         Company (adjusted to reflect increased property taxes based on the
         properties' acquisition cost and current property tax rates), and
         revenues and certain expenses of the property comprising the Texas
         Dispositions and the Tenant Sale for the period prior to disposal by
         the Company:


<TABLE>
<CAPTION>
                                                          For the Year Ended December 31, 1995
                             ------------------------------------------------------------------------------------------------------
                                   1995        Pacific Gulf    Acquisition        New         Texas
                                Acquisition    Business Park    Properties   Acquisition   Dispositions     Tenant Sale      Total
                             ------------------------------------------------------------------------------------------------------
<S>                          <C>               <C>             <C>           <C>           <C>              <C>           <C>   
Rental income
    Industrial properties        $  3,272       $    724       $  7,109       $  1,294       $    --        $ (1,065)       11,334
    Multifamily properties          8,426             --             --          1,008        (5,478)             --         3,956
                             ------------------------------------------------------------------------------------------------------
                                   11,698            724          7,109          2,302        (5,478)         (1,065)       15,290
                             ------------------------------------------------------------------------------------------------------

Rental property expenses
    Industrial properties           1,317            378          2,106            514            --             (69)        4,246
    Multifamily properties          3,878             --             --            586        (2,402)             --         2,062
                             ------------------------------------------------------------------------------------------------------
                                    5,195            378          2,106          1,100        (2,402)            (69)        6,308
                             ------------------------------------------------------------------------------------------------------
                                 $  6,503       $    346       $  5,003       $  1,202       $(3,076)       $   (996)     $  8,982
                             ======================================================================================================
</TABLE>


                                      -15-
<PAGE>   17
                          PACIFIC GULF PROPERTIES INC.

         NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
                      AND THE YEAR ENDED DECEMBER 31, 1995
                             (UNAUDITED) (continued)

                 (Dollars in thousands, except per share data)


NOTE 2 - PRO FORMA ADJUSTMENTS (continued)

(M)      Revenues and certain expenses of the Probable Acquisitions (Algona
         Warehouse and Harbor Business Park), for the period prior to their
         acquisition by the Company (adjusted to reflect increased property
         taxes based on the properties' acquisition cost and current property
         tax rates):


<TABLE>
<CAPTION>
                                                          For the Nine Months Ended
                                                              September 30, 1996
                                                 --------------------------------------------
                                                     Algona          Harbor
                                                    Warehouse    Business Park      Total
                                                 --------------------------------------------
<S>                                              <C>             <C>                <C>      
Rental income
    Industrial properties                            $   636        $ 1,392         $   2,028
    Multifamily properties                                 -              -                 -
                                                 --------------------------------------------
                                                         636          1,392             2,028
                                                 --------------------------------------------

Rental property expenses
    Industrial properties                                166            481               647
    Multifamily properties                                 -              -                 -
                                                 --------------------------------------------
                                                         166            481               647
                                                 --------------------------------------------
                                                     $   470        $   911         $   1,381
                                                 ============================================
</TABLE>


<TABLE>
<CAPTION>
                                                              For the Year Ended
                                                              December 31, 1995
                                                 --------------------------------------------
                                                     Algona          Harbor
                                                    Warehouse    Business Park      Total
                                                 --------------------------------------------
<S>                                              <C>             <C>                <C>      
Rental income
    Industrial properties                            $   305        $   1,928       $   2,233
    Multifamily properties                                 -                -               -
                                                 --------------------------------------------
                                                         305            1,928           2,233
                                                 --------------------------------------------

Rental property expenses
    Industrial properties                                199              589             788
    Multifamily properties                                 -                -               -
                                                 --------------------------------------------
                                                         199              589             788
                                                 --------------------------------------------
                                                     $   106        $   1,339       $   1,445
                                                 ============================================
</TABLE>


                                      -16-
<PAGE>   18
                          PACIFIC GULF PROPERTIES INC.

         NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
                      AND THE YEAR ENDED DECEMBER 31, 1995
                             (UNAUDITED) (continued)

                 (Dollars in thousands, except per share data)


NOTE 2 - PRO FORMA ADJUSTMENTS (continued)

(N)      Depreciation expense of $2,551 relating to the 1995 Acquisitions,
         Pacific Gulf Business Park, the Acquisition Properties and the New
         Acquisitions, net of the reduction in depreciation of $533 due to the
         Texas Dispositions and $105 due to the Tenant Sale (the actual
         depreciation relating to the Texas Dispositions and the Tenant Sale
         during the year ended December 31, 1995). The depreciation expense
         relating to the 1995 Acquisitions, Pacific Gulf Business Park, the
         Acquisition Properties and the New Acquisitions, for the period prior
         to their purchase, was computed utilizing the estimated remaining
         useful lives and depreciable basis of the properties follows:


<TABLE>
<CAPTION>
                                                       Purchase        Depreciable       Depreciation
                                                         Price            Basis            Expense
                                                   -----------------------------------------------------
<S>                                                <C>                 <C>             <C>      
40-YEAR LIFE PROPERTY
                1995 Acquisitions
                    Konwiser Acquisition Properties       71,469        $  52,281      $     817
                    Heatherwood Apartments                12,500           10,000            222
                    Tukwila Business park                 17,250           11,019            264
                Pacific Gulf Business Park                 6,800            3,009             75
                Acquisition Properties                                                        
                    Eden Landing Commerce Park             7,300            5,460            137
                    Riverview Industrial Park              6,442            5,281            132
                    Bay San Marcos Industrial Center       4,678            2,942             73
                    Escondido Business Center             10,372            6,527            164
                    Bell Ranch Industrial Park             3,750            3,000             75
                    North County Business Park             6,350            3,169             79
                    San Marcos Commerce Center             2,710            1,871             47
                    Pacific Park                           6,900            3,001             75
                    La Mirada Business Center              3,600            2,453             61
                New Acquisitions                                                             
                    Miramar Business Park                  7,242            7,242            181
                    Raintree Apartments                    6,259            4,511            113
5-YEAR LIFE PROPERTY                                                                          
                Personal Property                            289              289             36
                                                                                       ---------
                                                                                       $   2,551
                                                                                       =========
</TABLE>


                                      -17-
<PAGE>   19
                          PACIFIC GULF PROPERTIES INC.

         NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
                      AND THE YEAR ENDED DECEMBER 31, 1995
                             (UNAUDITED) (continued)

                 (Dollars in thousands, except per share data)


NOTE $ - PRO FORMA ADJUSTMENTS (continued)

(O)      Interest expense of $6,909 relating to the 1995 Acquisitions, Pacific
         Gulf Business Park, the Acquisition Properties and the New
         Acquisitions, less reduction of interest expense resulting from the
         Texas Dispositions of $746 and from the Tenant Sale of $567 (the actual
         interest relating to the Texas Dispositions and the Tenant Sale during
         the year ended December 31, 1995). The interest expense associated with
         the borrowings used to finance the purchase of the 1995 Acquisitions,
         Pacific Gulf Business Park and the purchase of the Acquisition
         Properties and the New Acquisitions, was calculated for the period
         prior to acquisition, based on the actual interest rates on the debt
         which was assumed and the specific interest rates on new borrowings, as
         follows:


<TABLE>
<CAPTION>
                                                                            Pro Forma
                                                               Interest     Interest
                                                    Debt         Rate        Expense
                                               ---------------------------------------
<S>                                            <C>             <C>          <C>    
1995 Acquisitions                                 $   30,263     8.000%     $ 1,513
                                                      13,000     8.000%         650
                                                      24,850     5.700%         885
                                                      11,765     7.400%         838
Pacific Gulf Business Park                             8,000     7.300%         584
Acquisition Properties                                19,475     7.500%       1,360
New Acquisitions
                Miramar Business Park                  7,100     7.125%         506
                Raintree Apartments                    6,200     6.400%         397
Amortization of related loan fees and costs                                     176
                                                                            -------
                                                                            $ 6,909
                                                                            =======
</TABLE>


(P)      Reduction in interest expense, resulting from the exchange of the
         Debentures as of the beginning of each period presented (including the
         related amortization of debenture discount and costs of $319 for the
         nine months ended September 30, 1996 and $418 for the year ended
         December 31, 1995).

(Q)      Reduction in interest expense associated with the repayment of $3,858
         of indebtedness with proceeds from the proposed Common Stock Offering.

(R)      Represents the weighted average of common shares and common stock
         equivalents outstanding during the period indicated. Common stock
         equivalents include stock options which are considered dilutive for
         purposes of computing primary earnings per common share.

(S)      Pro forma weighted average common shares include 2,435,581 shares of
         Common Stock issued by the Company in conjunction with its May 1996
         Offering, 2,440,002 shares of Common Stock to be issued as part of the
         Debenture-for-Stock Exchange and 1,500,000 shares to be issued as part
         of the proposed Common Stock Offering.



                                      -18-
<PAGE>   20
                          PACIFIC GULF PROPERTIES INC.

         NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
                      AND THE YEAR ENDED DECEMBER 31, 1995
                             (UNAUDITED) (continued)

                 (Dollars in thousands, except per share data)


NOTE 2 - PRO FORMA ADJUSTMENTS (continued)

(T)      Excludes the effect of a $3,597 nonrecurring loss which will be
         recognized by the Company in the fourth quarter of 1996 relating to the
         Debenture-for-Stock Exchange and the issuance of 180,956 excess common
         shares.

(U)      Excludes the effect of a $6,664 nonrecurring gain from the sale of the
         four multifamily properties comprising the Texas Dispositions in
         November 1995.

(V)      Excludes the effect of a $74 nonrecurring gain from the sale of land
         and buildings comprising the Tenant Sale in August 1996.

(W)      Excludes 1,351,351 shares of Class A Senior Cumulative Convertible
         Preferred Stock to be issued pursuant to an agreement executed by the 
         Company on December 31, 1996. The preferred stock shares, which
         will be issued in up to three installments at a price of $18.50 per
         share, bear an initial quarterly dividend yield of $0.425 per share
         (increasing thereafter as specified in the related Prospectus
         Supplement), are redeemable by the Company in whole or part, five years
         from the date of issuance and are convertible into shares of Common
         Stock, at any time, at the option of the holders based on an initial
         conversion ratio of one, subject to adjustment under certain
         circumstances.


                                      -19-
<PAGE>   21
                         Report of Independent Auditors


To the Shareholders and Board of Directors
Pacific Gulf Properties, Inc.

We have audited the accompanying statement of revenues and certain expenses of
Miramar Business Park for the year ended December 31, 1995. The statement is the
responsibility of management. Our responsibility is to express an opinion on the
statement based on our audit.

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

The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a Form 8-K filing) as described in Note 2 to the statement and is not
intended to be a complete presentation of the revenues and expenses of Miramar
Business Park.

In our opinion, the statement referred to above presents fairly, in all material
respects, the revenues and certain expenses, as defined above, of Miramar
Business Park for the year ended December 31, 1995, in conformity with generally
accepted accounting principles.





Newport Beach, California
December 9, 1996


                                      -20-
<PAGE>   22

                              MIRAMAR BUSINESS PARK

                   Statement of Revenues and Certain Expenses

                      For the Year Ended December 31, 1995
            and the Nine Months Ended September 30, 1996 (Unaudited)



<TABLE>
<CAPTION>
                                                                          Nine Months
                                                                             Ended
                                                         Year Ended      September 30,
                                                        December 31,         1996
                                                            1995          (Unaudited)
                                                         ----------       ----------
<S>                                                     <C>              <C>       
REVENUES
Rental and other income (Notes 2, 3 and 5)               $1,299,000       $1,066,000

CERTAIN EXPENSES
Property operating and maintenance (Notes 2 and 6)          383,000          294,000
Real estate taxes                                           148,000           97,000
Management fees (Note 4)                                     52,000           42,000
                                                         ----------       ----------
                                                            583,000          433,000
                                                         ----------       ----------
REVENUES IN EXCESS OF CERTAIN EXPENSES                   $  716,000       $  633,000
                                                         ==========       ==========
</TABLE>

See accompanying notes.


                                      -21-
<PAGE>   23

                              MIRAMAR BUSINESS PARK

               Notes to Statement of Revenues and Certain Expenses

                  For the Year Ended December 31, 1995 and the
                Nine Months Ended September 30, 1996 (Unaudited)


1. ORGANIZATION

Miramar Business Park (the "Property") contains 186,022 leasable square feet of
industrial space located in San Diego, California. Pacific Gulf Properties 
Inc. (the "Company") acquired the Property from Burnham Pacific Properties 
Inc. ("Burnham"), a real estate investment trust, in October 1996.

2. BASIS OF PRESENTATION

The statement of revenues and certain expenses presents the operations of the
Property for the year ended December 31, 1995 and for the nine months ended
September 30, 1996 (unaudited) and has been prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission (for inclusion in a Form 8-K filing).

Certain expenses that are dependent on the particular owner and the carrying
value of the Property have been excluded from the statement. The excluded
expenses consist primarily of depreciation, interest, and amortization of loan
fees. Consequently, the revenues in excess of certain expenses as presented is
not intended to be a complete presentation of the Property's revenues and
expenses nor is it intended to be comparable to the proposed future operations
of the Property.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

The Property is generally leased to tenants with lease terms which exceed one
year and are accounted for as operating leases. Revenues from leases are
recognized on a straight-line basis over the term of the related leases. Cost
recoveries from tenants are recognized as income in the period the related costs
are accrued.


                                      -22-
<PAGE>   24

                              MIRAMAR BUSINESS PARK

         Notes to Statement of Revenues and Certain Expenses (continued)


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Capitalization Policy

Recurring repair and maintenance costs are expensed as incurred. Major
replacements and betterments are capitalized.

Use of Estimates

The preparation of the statement in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the statement. Actual results could differ from
these estimates in the near term.

4. MANAGEMENT FEES

The Property is subject to an agreement with John Burnham & Co., a property
management company affiliated with Burnham, to maintain and manage the
operations of the Property. Management fees are based on 3.5% of total collected
income, as defined, from the Property. The agreements with John Burnham & Co.
terminated upon the Company's acquisition of the Property.

5. FUTURE MINIMUM LEASE PAYMENTS

The Property is leased to tenants under leases which expire at various dates and
contain provisions for rent increases based on cost of living indices. Certain
leases also contain renewal options. The minimum future lease payments to be
received under the terms of these operating leases for each of the next five
years ending December 31, are as follows:

<TABLE>
<S>                                                                  <C>       
1996                                                                 $1,223,000
1997                                                                  1,093,000
1998                                                                    891,000
1999                                                                    702,000
2000                                                                    568,000
</TABLE>


                                      -23-
<PAGE>   25

                              MIRAMAR BUSINESS PARK

         Notes to Statement of Revenues and Certain Expenses (continued)

6. GROUND LEASE COMMITMENT

The Property is subject to a 57-year ground lease which expires in July 2035 and
is accounted for as an operating lease. Monthly ground lease payments total
$19,800 and are subject to increases based on the Consumer Price Index each
September, with the next adjustment in September 1997. Ground lease payments
totaled $237,000 and $178,000, respectively, for the year ended December 31,
1995 and the period ended September 30, 1996.


                                      -24-
<PAGE>   26
                         Report of Independent Auditors



To the Shareholders and Board of Directors
Pacific Gulf Properties, Inc.

We have audited the accompanying statement of revenues and certain expenses of
Algona Warehouse for the year ended December 31, 1995. The statement is the
responsibility of management. Our responsibility is to express an opinion on the
statement based on our audit.

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

The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a Form 8-K filing) as described in Note 2 to the statement and is not
intended to be a complete presentation of the revenues and expenses of Algona
Warehouse.

In our opinion, the statement referred to above presents fairly, in all material
respects, the revenues and certain expenses, as defined above, of Algona
Warehouse for the year ended December 31, 1995, in conformity with generally
accepted accounting principles.




Newport Beach, California
December 6, 1996


                                      -25-
<PAGE>   27

                                ALGONA WAREHOUSE

                   Statement of Revenues and Certain Expenses

                      For the Year Ended December 31, 1995
            and the Nine Months Ended September 30, 1996 (Unaudited)


<TABLE>
<CAPTION>
                                                                       Nine Months
                                                                         Ended
                                                        Year Ended    September 30,
                                                       December 31,       1996
                                                           1995        (Unaudited)
                                                         --------       --------
<S>                                                    <C>            <C>     
REVENUES
Rental and other income (Notes 2, 3 and 5)               $305,000       $636,000

CERTAIN EXPENSES
Property operating and maintenance (Notes 2 and 3)         61,000         63,000
Real estate taxes                                          89,000         67,000
Management fees (Note 4)                                   10,000         11,000
                                                         --------       --------
                                                          160,000        141,000
                                                         --------       --------
REVENUES IN EXCESS OF CERTAIN ASSETS                     $145,000       $495,000
                                                         ========       ========
</TABLE>

See accompanying notes.


                                      -26-
<PAGE>   28

                                ALGONA WAREHOUSE

               Notes to Statement of Revenues and Certain Expenses

                  For the Year Ended December 31, 1995 and the
                Nine Months Ended September 30, 1996 (Unaudited)


1. ORGANIZATION

Algona Warehouse (the "Property") contains 201,364 leasable square feet of
industrial space located in Seattle, Washington. In December 1996, Pacific Gulf
Properties Inc. (the "Company") entered into an agreement to purchase the
Property from The Principal Financial Group for a total consideration of $9.55
million.

2. BASIS OF PRESENTATION

The statement of revenues and certain expenses presents the operations of the
Property for the year ended December 31, 1995 and for the nine months ended
September 30, 1996 (unaudited) and has been prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission (for inclusion in a Form 8-K filing).

Certain expenses that are dependent on the particular owner and the carrying
value of the Property have been excluded from the statement. The excluded
expenses consist primarily of depreciation, interest, and amortization of loan
fees. Consequently, the revenues in excess of certain expenses as presented is
not intended to be a complete presentation of the Property's revenues and
expenses nor is it intended to be comparable to the proposed future operations
of the Property.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

The Property is generally leased to tenants with lease terms which exceed one
year and are accounted for as operating leases. Revenue from leases is
recognized on a straight-line basis over the term of the related leases. Cost
recoveries from tenants are recognized as income in the period the related cost
is accrued.

For the year ended December 31, 1995, the Property was leased to two tenants in
July and December 1995 which occupy 76% of the total leasable square feet in the
Property. At September 30, 1996, the Property was 100% leased and occupied.


                                      -27-
<PAGE>   29

                                ALGONA WAREHOUSE

         Notes to Statement of Revenues and Certain Expenses (continued)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Capitalization Policy

Recurring repair and maintenance costs are expensed as incurred. Major
replacements and betterments are capitalized.

Use of Estimates

The preparation of the statement in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the statement. Actual results could differ from
these estimates in the near term.

4. MANAGEMENT FEES

The Property is subject to an agreement with Martin Smith Real Estate Services
("Martin"), a property management company, to maintain and manage the operations
of the Property. Management fees are based on 1.75% of total collected income or
$850 monthly, whichever is greater. The agreement with Marin will terminate upon
the Company's acquisition of the Property.

5. FUTURE MINIMUM LEASE PAYMENTS

The Property is leased to tenants under leases which expire at various dates and
contain provisions for rent increases based on cost of living indices. Certain
leases also contain renewal options. The minimum future lease payments to be
received under the terms of these operating leases for each of the next five
years ending December 31, are as follows:

<TABLE>
<S>                                                                    <C>     
1996                                                                   $675,000
1997                                                                    713,000
1998                                                                    713,000
1999                                                                    731,000
2000                                                                    734,000
</TABLE>


                                      -28-
<PAGE>   30
                         Report of Independent Auditors



To the Shareholders and Board of Directors
Pacific Gulf Properties, Inc.

We have audited the accompanying statement of revenues and certain expenses of
Harbor Business Park for the year ended December 31, 1995. The statement is the
responsibility of management. Our responsibility is to express an opinion on the
statement based on our audit.

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

The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a Form 8-K filing) as described in Note 2 to the statement and is not
intended to be a complete presentation of the revenues and expenses of Harbor
Business Park.

In our opinion, the statement referred to above presents fairly, in all material
respects, the revenues and certain expenses, as defined above, of Harbor
Business Park for the year ended December 31, 1995, in conformity with generally
accepted accounting principles.




Newport Beach, California
January 3, 1997



                                      -29-
<PAGE>   31

                              HARBOR BUSINESS PARK

                   Statement of Revenues and Certain Expenses

                      For the Year Ended December 31, 1995
            and the Nine Months Ended September 30, 1996 (Unaudited)


<TABLE>
<CAPTION>
                                                                         Nine Months
                                                                            Ended
                                                         Year Ended      September 30,
                                                        December 31,        1996
                                                            1995         (Unaudited)
                                                         ----------       ----------
<S>                                                     <C>              <C>       
REVENUES
Rental and other income (Notes 2, 3 and 5)               $1,927,000       $1,391,000

CERTAIN EXPENSES
Property operating and maintenance (Notes 2 and 3)          434,000          458,000
Real estate taxes                                           191,000          144,000
Management fees (Note 4)                                     76,000           46,000
                                                         ----------       ----------
                                                            701,000          648,000
                                                         ----------       ----------
REVENUES IN EXCESS OF CERTAIN ASSETS                     $1,226,000       $  743,000
                                                         ==========       ==========
</TABLE>

See accompanying notes.


                                      -30-
<PAGE>   32

                              HARBOR BUSINESS PARK

               Notes to Statement of Revenues and Certain Expenses

                  For the Year Ended December 31, 1995 and the
                Nine Months Ended September 30, 1996 (Unaudited)


1. ORGANIZATION

Harbor Business Park (the "Property") contains 323,226 leasable square feet of
industrial space located in Santa Ana, California. In November 1996, Pacific
Gulf Properties Inc. (the "Company") entered into an agreement to purchase
the Property from M.S. Vickers Limited Partnership, a division of MetLife, a
life insurance company, for a total consideration of $15.2 million.

2. BASIS OF PRESENTATION

The statement of revenues and certain expenses presents the operations of the
Property for the year ended December 31, 1995 and for the nine months ended
September 30, 1996 (unaudited) and has been prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission (for inclusion in a Form 8-K filing).

Certain expenses that are dependent on the particular owner and the carrying
value of the Property have been excluded from the statement. The excluded
expenses consist primarily of depreciation, interest, and amortization of loan
fees. Consequently, the revenues in excess of certain expenses as presented are
not intended to be a complete presentation of the Property's revenues and
expenses nor are they intended to be comparable to the proposed future
operations of the Property.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

The Property is generally leased to tenants with lease terms which exceed one
year and are accounted for as operating leases. Revenue from leases is
recognized on a straight-line basis over the term of the related leases. Cost
recoveries from tenants are recognized as income in the period the related cost
is accrued.


                                      -31-
<PAGE>   33

                              HARBOR BUSINESS PARK

         Notes to Statement of Revenues and Certain Expenses (continued)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Capitalization Policy

Recurring repair and maintenance costs are expensed as incurred. Major
replacements and betterments are capitalized.

Use of Estimates

The preparation of the statement in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the statement. Actual results could differ from
these estimates in the near term.

4. MANAGEMENT FEES

The Property is subject to an agreement with Koll Management Services ("Koll"),
a property management company, to maintain and manage the operations of the
Property. Management fees under the agreement which commenced in May 1996 are
based on 3% of total collected income. The agreement with Koll will terminate
upon the Company's acquisition of the Property.

For the period January 1, 1996 to May 1996, prior to Koll's involvement, the
Property was managed by Huntington Sea Cliff Corp., a property management firm.
Fees under the Huntington Sea Cliff Corp. management agreement were based on 4%
of total collected income.

5. FUTURE MINIMUM LEASE PAYMENTS

The Property is leased to tenants under leases which expire at various dates and
contain provisions for rent increases based on cost of living indices. Certain
leases also contain renewal options. The minimum future lease payments to be
received under the terms of these operating leases for each of the next five
years ending December 31, are as follows:


<TABLE>
<S>                                                                  <C>       
1996                                                                 $2,164,000
1997                                                                  2,192,000
1998                                                                  2,234,000
1999                                                                  2,293,000
2000                                                                  2,420,000
</TABLE>


                                      -32-