UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K
   X      ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR 15(d)  OF THE  SECURITIES
          EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December
          31, 1996 OR

         TRANSITION  REPORT  PURSUANT  TO SECTION 13 OR 15(d) OF THE  SECURITIES
         EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
         For the transition period from ____________ to _____________

                          Commission File Number 1-9997
                               KOGER EQUITY, INC.
             (Exact name of Registrant as specified in its Charter)

                FLORIDA                                  59-2898045
      (State or other jurisdiction          (I.R.S. Employer Identification No.)
   of incorporation or organization) 
3986 Boulevard Center Drive, Suite 101
         Jacksonville, Florida                             32207
(Address of principal executive office)                  (Zip code)

       Registrant's telephone number, including area code: (904) 398-3403

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

         Title of Each Class                Name of Exchange on Which Registered
     Common Stock, Par Value $.01                 American Stock Exchange
Warrants to Purchase Shares of Common Stock       American Stock Exchange

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

                                 Title of Class
                                      NONE
================================================================================

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

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

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant on February 28, 1997 was approximately $375,018,000.

The number of shares of  registrant's  Common Stock  outstanding on February 28,
1997 was 20,980,000.

                       Documents Incorporated by Reference
The Company's  Proxy  Statement to be filed pursuant to Regulation 14A under the
Securities  Act  of  1934  for  the  1997  Annual  Meeting  of  Shareholders  is
incorporated by reference in Part III of this report.



<PAGE>




                                TABLE OF CONTENTS

ITEM NO.                          DESCRIPTION                           PAGE NO.


PART I
    1.         BUSINESS................................                   1

    2.         PROPERTIES..............................                   4

    3.         LEGAL PROCEEDINGS.......................                  10

    4.         SUBMISSION OF MATTERS TO A VOTE
                 OF SECURITY HOLDERS...................                  10

PART II
    5.         MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                 STOCKHOLDER MATTERS...................                  10

    6.         SELECTED FINANCIAL DATA.................                  11

    7.         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS...                  12

    8.         FINANCIAL STATEMENTS AND
                 SUPPLEMENTARY DATA....................                  27

    9.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                 ACCOUNTING AND FINANCIAL DISCLOSURE...                  49

PART III
    10.        DIRECTORS AND EXECUTIVE OFFICERS
                 OF THE REGISTRANT......................                 49

    11.        EXECUTIVE COMPENSATION...................                 50

    12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                 OWNERS AND MANAGEMENT..................                 50

    13.        CERTAIN RELATIONSHIPS
                 AND RELATED TRANSACTIONS...............                 50

PART IV
    14.        EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
                 AND REPORTS ON FORM 8-K................                 51

               SIGNATURES...............................                 55



<PAGE>



                                     PART I
Item 1.      BUSINESS

General

      Koger Equity, Inc. ("KE") is a  self-administered  and self-managed equity
real estate  investment  trust (a "REIT")  which  develops,  owns,  operates and
manages  suburban office centers in the  southeastern  and  southwestern  United
States.  As of December  31,  1996,  the KE  portfolio  consisted  of 215 office
buildings  (each an  "Office  Building")  in 17  office  centers  (each a "Koger
Center")  located  in  13  metropolitan   areas  throughout  the  Southeast  and
Southwest.  The Office Buildings contain  approximately 7.7 million net rentable
square  feet and were on average  92 percent  leased as of  December  31,  1996.
During  1996,  KE  began  construction  of  two  buildings  which  will  contain
approximately  106,000 net rentable  square feet and will be ready for occupancy
in late  1997.  While KE has  initiated  and  expects  to  continue a pattern of
vertically  integrated  development  of suburban  office  properties for its own
account,  it may  from  time to time  acquire  developed  properties  which  are
compatible  with its  properties in other markets in the Southeast and Southwest
that the Company considers favorable.

      KE owns  approximately 139 acres of unencumbered land held for development
and approximately 54 acres of unencumbered land held for sale. A majority of the
land held for development  adjoins Office Buildings in seven Koger Centers which
have  infrastructure,  including roads and utilities,  in place. KE intends over
time to develop and construct office buildings using this land and currently has
two buildings  under  construction  on  approximately  11 acres of land held for
development. KE expects to acquire additional land for development. In addition,
KE provides leasing,  management and other customary tenant-related services for
the Koger  Centers  and for 22 office  buildings  containing  approximately  1.3
million net rentable square feet owned by unaffiliated parties.

      As the result of restrictive covenants contained in certain of the KE debt
instruments,   it  was  effectively   prevented  from  engaging  in  significant
development and acquisition  activities as it could not incur additional debt in
excess  of $5  million.  Any  development  or  acquisition  activity  had  to be
internally  financed.  With the refinancing of this debt in December of 1996, KE
is no longer  subject to such  restrictive  covenants and will be able to expand
its development and acquisition activities.

      KE was  incorporated  in Florida in 1988 for the purpose of  investing  in
office buildings located in suburban office centers  throughout the southeastern
and  southwestern  Untied  States.  In selecting its  investments,  KE generally
sought office buildings which had been  substantially  leased. In 1988, 1989 and
1990, KE purchased its initial  Office  Buildings  from Koger  Properties,  Inc.
("KPI"), a real estate  development  company and the sponsor of KE. In September
1991, KPI filed a petition under Chapter 11 of the United States Bankruptcy Code
in the United States  Bankruptcy  Court for the Middle  District of Florida.  In
April 1993, KE and KPI jointly  proposed a plan of  reorganization  of KPI which
provided  for the  merger of KPI with and into KE (the  "Merger").  In  December
1993, the Merger was consummated,  and KE succeeded to substantially  all of the
assets of KPI,  including 93 Office  Buildings  and  approximately  295 acres of
unimproved  land.  All of the  Office  Buildings  acquired  by KE from  KPI were
developed  by  KPI.  In  connection  with  the  Merger,  KE  also  acquired  the
management,   development  and  administrative  organizations  of  KPI  and  its
subsidiaries.  Prior to the Merger, KPI employees  provided property  management
and leasing services for the Office Buildings owned by KE and certain  buildings
owned  by  third  parties.  KE  has  been   self-administered   since  1992  and
self-managed since the Merger.


                                        1

<PAGE>



      As part of the Merger,  KPI  transferred to Southeast  Properties  Holding
Corporation,   a  Florida  corporation  and  a  wholly-owned  subsidiary  of  KE
("Southeast"),  all of KPI's debt and equity interests in The Koger Partnership,
Ltd., a Florida limited partnership ("TKPL"), which had also been the subject of
a Chapter 11 bankruptcy case. At the time of the Merger,  TKPL owned 92 suburban
office buildings located in five metropolitan areas.  Following the Merger, such
buildings were managed by KE, as delegee of Southeast,  pursuant to a management
agreement  between  TKPL and  Southeast.  On July  31,  1995,  TKPL  sold its 92
buildings and parcels of related land to Koala Miami Realty Holding, Inc., Koala
Norfolk Realty Holding, Inc., Koala Raleigh Realty Holding, Inc., Koala Richmond
Realty  Holding,  Inc.,  and Koala Tampa  Realty  Holding,  Inc.  (collectively,
"Koala"), all of which are wholly owned by a co- mingled pension trust for which
Morgan  Guaranty  Trust  Company  of New York is the  trustee  and  J.P.  Morgan
Investment  Management Inc. is the investment  manager.  Simultaneously with the
sale  by TKPL  of its  properties,  KE sold  to  certain  Koala  entities  three
buildings and related parcels of land for an aggregate  purchase price of $25.26
million.  During 1996, Koala continued to hold an option to purchase from KE two
additional parcels of land in Miami, Florida.  During February 1997, this option
was  exercised  and Koala  purchased  these two parcels of land for an aggregate
purchase price of $2.97 million.

      In addition to managing its own  properties,  KE, through  certain related
entities, provides property management services to third parties. In conjunction
with Koger Real Estate Services,  Inc., a Florida corporation and a wholly-owned
subsidiary  of KE  ("KRES"),  KE  manages 21 office  buildings  owned by Centoff
Realty Company, Inc. ("Centoff"),  a subsidiary of Morgan Guaranty Trust Company
of New York (KE, Southeast and KRES are hereafter referred to as the "Company").

      During  1995  (prior to the sale by TKPL of its  properties),  KE acquired
$32.3 million in aggregate  principal  amount (subject to provisions  permitting
prepayment  at a discount) of  promissory  notes issued by TKPL to third parties
(the "TKPL  Notes")  for an  aggregate  purchase  price of  approximately  $18.2
million.  During the quarter  ended  September  30, 1995,  TKPL retired the TKPL
Notes. KE recorded  approximately  $13.1 million of interest revenue on the TKPL
Notes during 1995.

      The Company operates in a manner to qualify as a REIT under the provisions
of the Internal  Revenue Code of 1986, as amended (the "Code" ). As a REIT,  the
Company will not,  with certain  limited  exceptions,  be taxed at the corporate
level on taxable income  distributed to its shareholders on a current basis. The
Company distributes at least 95 percent of its annual REIT taxable income (which
term is used herein as defined and modified in the Code) to its shareholders. To
qualify as a REIT, a corporation  must meet certain  substantive  tests:  (a) at
least 95 percent of its gross income must be derived  from  certain  passive and
real estate sources; (b) at least 75 percent of its gross income must be derived
from certain real estate  sources;  (c) less than 30 percent of its gross income
must be derived from the sale or other  disposition of certain items,  including
certain real  property  held for less than four years;  (d) at the close of each
calendar quarter,  it must meet certain tests designed to ensure that its assets
consist  principally (at least 75 percent by value) of real estate assets,  cash
and  cash  equivalents  and that  its  holdings  of  securities  are  adequately
diversified;  (e) each year, it must  distribute at least 95 percent of its REIT
taxable  income;  and (f) at no time during the second half of any calendar year
may the Company be "closely  held" (i.e.,  have more than 50 percent in value of
its outstanding stock owned, directly, indirectly or constructively, by not more
than five  individuals).  The constructive  ownership rules, among other things,
treat the shareholders of a corporation as owning  proportionately  any stock in
another corporation owned by the first corporation.  Management fee revenue does
not qualify as real estate or passive income for purposes of determining whether


                                        2

<PAGE>



the  Company  has met the REIT  requirements  that at least  95  percent  of the
Company's  gross income be derived from certain real estate and passive  sources
and that at least 75 percent of its gross  income be derived  from  certain real
estate sources.  Accordingly,  in the event the Company derives income in excess
of five percent from  management and other "non-real  estate" and  "non-passive"
activities, the Company would no longer qualify as a REIT for federal income tax
purposes  and  would be  required  to pay  federal  income  taxes as a  business
corporation.

      Two major governmental tenants,  when all of their respective  departments
and agencies  which lease space in the Company's  buildings  are combined,  each
lease more than 10 percent of the net rentable area of the  Company's  buildings
and contribute  more than 10 percent of the Company's  annualized  rentals as of
December 31, 1996. At that date, the State of Florida accounted for an aggregate
of 11.7 percent of the Company's  total net rentable square feet leased and 13.4
percent of the Company's total  annualized  rental  revenues.  In addition,  the
United  States of America  accounted  for an  aggregate  of 10.1  percent of the
Company's  total  net  rentable  square  feet  leased  and 10.5  percent  of the
Company's total annualized  rental revenues as of December 31, 1996. Some of the
Company's  principal  tenants  are the State of  Florida,  the United  States of
America, Blue Cross and Blue Shield of Florida, First Data Resources, Aetna Life
Insurance  Company,  Lumbermens Mutual Casualty Company,  Norwest Bank of Texas,
the State of Texas,  Travelers Insurance Company,  and General Motors Acceptance
Corporation. Governmental tenants (including the State of Florida and the United
States of  America),  which  account for 23.9  percent of the  Company's  leased
space,  may  be  subject  to  budget   reductions  in  times  of  recession  and
governmental   austerity.   There  can  be  no   assurance   that   governmental
appropriations   for   rents   may  not  be   reduced.   Additionally,   certain
private-sector  tenants which have  contributed to the Company's rent stream may
reduce their  current  demands,  or curtail  their future need,  for  additional
office space.

Competition

      The Company  competes in the leasing of office  space with a  considerable
number of other realty concerns, including local, regional and national, some of
which have  greater  resources  than the  Company.  Through  its  ownership  and
management  of suburban  office parks,  the Company seeks to attract  tenants by
offering  office  space  convenient  to  residential  areas  and  away  from the
congestion and attendant traffic problems of the downtown business districts. In
recent years local,  regional and national  concerns have built competing office
parks and single buildings in suburban areas in which the Company's  centers are
located.  In addition,  the Company  competes  for tenants with large  high-rise
office buildings  generally located in the downtown business  districts of these
metropolitan  areas.  Although  competition  from other  lessors of office space
varies from city to city,  the Company has been able to attain and maintain what
it considers satisfactory occupancy levels at satisfactory rental rates.

Investment Policies

      Based on its  improved  financial  structure  and results as of the end of
1996, the Company is in a position to capitalize on some of its strengths,  such
as the  value of its  franchise  in the  suburban  office  park  market  and its
operating systems,  development expertise,  acquisition expertise and unimproved
land available for development.  During 1996, the Company committed to a plan to
enhance shareholder value by refinancing indebtedness and increasing growth. The
Company has completed its plan to refinance its  indebtedness  which  eliminated
certain  restrictive  covenants which had limited the Company's  ability to grow
through  development  and  acquisitions.  In addition,  the Company has signed a
commitment for a $50 million  revolving  credit facility which will be available


                                        3

<PAGE>



to finance growth opportunities, subject to sufficient collateral being provided
to fund this facility which collateral is available.  The plan also contemplates
the possible  use by the Company of its existing  inventory of 139 acres of land
held for development, most of which is partially or wholly improved with streets
and/or utilities and is located in various  metropolitan areas where the Company
currently  operates suburban office parks. The Company may also acquire existing
office  buildings or land for  development in other markets in the Southeast and
Southwest that the Company considers favorable.

      The investment  policies of the Company may be changed by its directors at
any time  without  notice  to, or a vote of,  security  holders.  Although,  the
Company has no current  policy which limits the  percentage  of its assets which
may be invested in any one type of investment or the  geographic  areas in which
the Company may acquire  properties,  the Company intends to continue to operate
so as to qualify for tax  treatment as a REIT.  Although it has no current plans
to do so,  the  Company  may in the  future  invest  in other  types  of  office
buildings,  apartment  buildings,  shopping centers,  and other properties.  The
Company also may invest in the  securities  (including  mortgages)  of companies
primarily  engaged in real  estate  activities;  however,  it does not intend to
become an investment company regulated under the Investment Company Act of 1940.

      For the year ended December 31, 1996, all of the Company's rental revenues
were  derived  from  the  buildings  purchased  from KPI or  buildings  acquired
pursuant to the Merger.  The Company's 1996 interest  revenues were derived from
temporary cash investments.

Employees

      In  connection  with its  current  real  estate  operations  and  property
management  agreements,  the Company has a combined  financial,  administrative,
leasing,  and center  maintenance  staff of 220  employees.  A resident  general
manager is  responsible  for the leasing and  operations  of all  buildings in a
center  or  city.  The  Company  has  approximately  86  employees  who  perform
maintenance activities.

Item 2.      PROPERTIES

General

      As of December 31, 1996, the Company owned 215 office buildings located in
17 Koger Centers in the 13  metropolitan  areas of  Jacksonville,  Orlando,  St.
Petersburg,   and  Tallahassee,   Florida;  Atlanta,   Georgia;   Charlotte  and
Greensboro,  North  Carolina;  Tulsa,  Oklahoma;   Greenville,  South  Carolina;
Memphis,  Tennessee;  and Austin, El Paso, and San Antonio,  Texas. In addition,
the Company had two buildings which were under  construction.  The Koger Centers
have been developed in campus-like settings with extensive landscaping and ample
tenant  parking.  The buildings  are  generally one to five-story  structures of
contemporary design and constructed of masonry, concrete and steel, with facings
of brick,  concrete and glass. The Koger Centers are generally located with easy
access,  via expressways,  to the central business  district and to shopping and
residential  areas  in the  respective  communities.  The  properties  are  well
maintained and adequately covered by insurance.

      Leases on the Office  Buildings  vary between net leases  (under which the
tenant pays some operating expenses,  such as utilities,  insurance and repairs)
and gross leases (under which the Company pays all such items).  Most leases are
on a gross basis and are for terms  generally  ranging from three to five years.
In some instances,  such as when a tenant rents the entire building,  leases are


                                        4

<PAGE>



for terms of up to 20 years. As of December 31, 1996, the Office  Buildings were
on average 92 percent leased and the average annual rent per net rentable square
foot leased was $14.24. The buildings are occupied by numerous tenants,  many of
whom lease  relatively  small  amounts  of space,  conducting  a broad  range of
commercial activities.

      New leases and renewals of existing  leases are  negotiated at the current
market  rate  at the  date  of  execution.  The  Company  endeavors  to  include
escalation  provisions  in all of its gross  leases.  As of December  31,  1996,
approximately 42 percent of the Company's  annualized gross rental revenues were
derived from existing leases containing rental escalation  provisions based upon
changes in the  Consumer  Price Index (some of which  contain  maximum  rates of
increases);  approximately  52 percent of such revenues were derived from leases
containing  escalation  provisions  based  upon real  estate  tax and  operating
expense  increases;  and  approximately  6 percent of such revenues were derived
from leases without escalation provisions.  Some of the Company's leases contain
options  which allow the lessee to renew for varying  periods,  generally at the
same  rental  rate and  subject,  in most  instances,  to  Consumer  Price Index
escalation provisions.

      The Company owns  approximately 200 acres of unimproved land (194 acres of
which  are  suitable  for  development)  located  in the  metropolitan  areas of
Jacksonville,  Miami,  Orlando and St. Petersburg,  Florida;  Atlanta,  Georgia;
Charlotte  and  Greensboro,   North  Carolina;  Tulsa,  Oklahoma;  Columbia  and
Greenville,  South Carolina;  Memphis, Tennessee; Austin and San Antonio, Texas;
and  Richmond,  Virginia.  Each of these  parcels of land has been  partially or
wholly developed with streets and/or  utilities.  The Company  currently has two
buildings under construction on approximately 11 acres of this unimproved land.


                                        5

<PAGE>

<TABLE>
<CAPTION>


Property Location and Other Information

      The  following  table sets forth  information  relating to the  properties
owned by the Company as of December 31, 1996.

                                                               Average                            Land
                                             Number           Age of            Net              Improved           Unimproved
                                            of               Buildings         Rentable        with Bldgs.          Land
Location                                  Buildings       (in Years) (1)      Sq. Ft.          (In Acres)        (In Acres)
--------                                  ---------       --------------   ------------      -------------    -------------
<S>                                         <C>                 <C>            <C>                <C>               <C>  
Atlanta Chamblee                             22                 16              947,920           76.2               2.5
Atlanta Gwinnett                                                                                                    31.0
Austin                                       12                 16              370,860           29.6               1.8
Charlotte Carmel                              1                  5              109,600            7.6              27.0(2)
Charlotte East                               11                 16              468,820           39.9               3.9
Columbia Spring Valley                                                                                               1.0
El Paso                                      14                 24              251,930           19.6
Greensboro South                             13                 14              610,470           46.0
Greensboro Wendover                                                                                                 18.5
Greenville                                    8                 14              290,560           24.7               4.5
Jacksonville Baymeadows                       4                  6              468,000           34.6              13.3
Jacksonville Central                         31                 24              666,500           47.2               1.6
Memphis Germantown                            3                  8              258,400           18.4              16.2(3)
Miami                                                                                                                8.1(4)
Orlando Central                              22                 25              565,220           46.0
Orlando University                            2                  8              159,600           11.6              15.5
Richmond South                                                                                                      23.0
San Antonio                                  26                 19              788,670           63.5               7.2
St. Petersburg                               15                 16              519,320           64.4              11.0
Tallahassee Apalachee Pkwy                   14                 20              408,500           33.7
Tallahassee Capital Circle                    4                  7              300,700           23.3
Tulsa                                        13                 17              476,280           36.0              13.4
                                           ----                              ----------         ------            ------
    Total                                   215                               7,661,350          622.3             199.5
                                            ===                               =========          =====             =====
    Average                                                     16
                                                                ==
</TABLE>

(1)  The age of each  building was weighted by the net rentable  square feet for
     such building to determine the weighted average age of (a) the buildings in
     each Koger Center and (b) all buildings owned by the Company.

(2)  The Company  currently has a building under  construction on  approximately
     7.4 acres of this parcel.

(3)  The Company  currently has a building under  construction on  approximately
     3.9 acres of this parcel.

(4)  This  unimproved land parcel was sold to Koala for an aggregate sales price
     of $2.97 million during February 1997.







                                        6

<PAGE>

<TABLE>
<CAPTION>


Percent Leased and Average Rental Rates

      The following  table sets forth,  with respect to each Koger  Center,  the
number of buildings, number of leases, net rentable square feet, percent leased,
and the average annual rent per net rentable square foot leased, in each case as
of December 31, 1996.

                                                                              Net                                 Average
                                                 Number        Number        Rentable                             Annual
                                               of             of              Square           Percent           Rent Per
Koger Center                                  Buildings      Leases          Feet             Leased (1)        Square Foot(2)
------------                                  ---------    ----------    ------------         ----------        --------------
<S>                                            <C>            <C>           <C>                  <C>               <C>
Atlanta Chamblee                                22              179           947,920             97%              $15.11
Austin                                          12              186           370,860             97%               17.06
Charlotte Carmel                                 1               21           109,600            100%               15.28
Charlotte East                                  11              212           468,820             72%               13.15
El Paso                                         14              192           251,930             96%               14.24
Greensboro South                                13              180           610,470             93%               13.70
Greenville                                       8              145           290,560             87%               14.58
Jacksonville Baymeadows                          4               30           468,000            100%               15.63
Jacksonville Central                            31              242           666,500             89%               11.68
Memphis Germantown                               3               56           258,400             99%               17.38
Orlando Central                                 22              186           565,220             90%               14.49
Orlando University                               2               47           159,600             98%               16.62
San Antonio                                     26              320           788,670             95%               12.40
St. Petersburg                                  15              187           519,320             95%               13.05
Tallahassee Apalachee Pkwy                      14               88           408,500             90%               16.34
Tallahassee Capital Circle                       4               11           300,700             96%               17.12
Tulsa                                           13              176           476,280             77%               10.39
                                              ----          -------        ----------

    Total                                      215            2,458         7,661,350
                                               ===           ======         =========


Weighted Average                                                                                  92%              $14.24
                                                                                                 ====              ======

(1)   The  percent  leased  rates have been  calculated  by  dividing  total net
      rentable  square feet leased in a building by net rentable  square feet in
      such building, which excludes public or common areas.

(2)   Rental  rates are  computed by dividing  (a) total  annualized  base rents
      (which excludes  expense  pass-throughs  and  reimbursements)  for a Koger
      Center  as of  December  31,  1996  by (b) the net  rentable  square  feet
      applicable to such total annualized rents.
</TABLE>

                                        7

<PAGE>



Lease Expirations on the Company's Properties

      The  following  schedule  sets forth with respect to all of the  Company's
office  buildings  (a) the number of leases which will expire in calendar  years
1997 through  2005,  (b) the total net  rentable  area in square feet covered by
such  leases,  (c) the  percentage  of total net  rentable  square  feet  leased
represented by such leases, (d) the average annual rent per square foot for such
leases,  (e) the current annual rental  represented by such leases,  and (f) the
percentage of gross annual rental  contributed by such leases.  This information
is based on the  buildings  owned by the Company on December 31, 1996 and on the
terms of leases in effect as of December 31, 1996, on the basis of then existing
base  rentals,  and  without  regard  to  the  exercise  of  options  to  renew.
Furthermore,  the  information  below does not  reflect  that some  leases  have
provisions for early termination for various reasons,  including, in the case of
government  entities,  lack of budget  appropriations.  Leases  were  renewed on
approximately  63  percent,  67  percent  and 61 percent  of the  Company's  net
rentable  square feet which were scheduled to expire during 1996, 1995 and 1994,
respectively.

<TABLE>
<CAPTION>

                                                      Percentage of         Average                               Percentage
                                                      Total Square         Annual Rent         Total             of Total
                      Number of        Number of      Feet Leased          per Square          Annualized         Annual.  Rents
                     Leases          Square Feet      Represented by       Foot Under          Rents Under        Represented by
Period               Expiring        Expiring        Expiring Leases     Expiring Leases     Expiring Leases     Expiring Leases
------            -------------  ---------------     ---------------     ---------------     ---------------     ---------------
<S>                     <C>            <C>               <C>                 <C>                <C>                   <C>   
1997                    1,156          1,866,554          26.5%              $14.05            $  26,225,375           26.1%
1998                      551          1,534,716          21.8%               13.64               20,930,653           20.8%
1999                      458          1,226,360          17.4%               13.29               16,303,197           16.2%
2000                      139            697,596           9.9%               14.92               10,406,515           10.4%
2001                      104            930,887          13.2%               15.28               14,223,490           14.2%
2002                       14            169,296           2.4%               13.63                2,306,712            2.3%
2003                       13            112,406           1.6%               13.51                1,518,905            1.5%
2004                        4             77,361           1.1%               14.02                1,084,439            1.1%
2005                        4             29,673           0.4%               12.33                  366,001            0.4%
Other                      15            404,142           5.7%               17.36                7,015,240            7.0%
                     --------         ----------       --------                              ---------------        --------
   Total                2,458          7,048,991         100.0%              $14.24             $100,380,527          100.0%
                       ======         ==========         ======              ======             ============          ======
</TABLE>

Building  Improvements,  Tenant  Improvements  and Deferred  Tenant Costs on the
Company's Properties

      The  following  table sets forth certain  information  with respect to the
building  improvements  made, and tenant  improvement  costs and deferred tenant
costs (leasing commissions and tenant relocation costs) incurred, by the Company
during the three years ended December 31, 1996. The  information set forth below
is not necessarily indicative of future expenditures for these items.

<TABLE>
<CAPTION>

                    Number           Building Improvements             Tenant Improvements            Deferred Tenant Costs
                   of Office                    Per Net Sq.                       Per Net Sq.                     Per Net Sq.
 Year              Buildings      Total           Ft. Owned        Total            Ft. Owned      Total            Ft. Owned
------             --------------------------     --------- ------------------      ---------------------------     ---------
<C>                   <C>          <C>              <C>             <C>               <C>            <C>              <C>  
1994                  219          $3,749,000       $0.47           $7,334,000        $0.93          $1,112,000       $0.14
1995(1)               216           2,991,000        0.39            8,592,000         1.12           1,060,000        0.14
1996(2)               215           2,795,000        0.36            7,873,000         1.03           1,862,000        0.24
</TABLE>

(1)   Excludes the three buildings sold on July 31, 1995.

(2)   Increase in deferred  tenant costs due to $799,000  commission paid for 10
      year lease on 142,800 net rentable square feet which takes effect in 1997.

                                        8

<PAGE>



Fixed Rate Indebtedness on the Company's Properties

         The  following  table sets forth with  respect to each Koger Center the
principal  amount (dollars in thousands) of, and the weighted  average  interest
rate on,  the  indebtedness  of the  Company  having a fixed  interest  rate and
encumbering  the  Company's  properties  in such Koger Center as of December 31,
1996.


                                                  Weighted
                              Mortgage            Average
                               Loan               Interest
Koger Center                  Balance               Rate
-------------               -----------          ---------
Atlanta Chamblee              $ 14,809            8.75%
Austin                          17,000            8.33%
Charlotte Carmel                     0             --
Charlotte East                       0             --
El Paso                          9,000            8.33%
Greensboro South                     0             --
Greenville                      11,000            8.33%
Jacksonville Baymeadows         27,500            8.33%
Jacksonville Central               401            9.75%
Memphis Germantown              22,018            8.80%
Orlando Central                 25,000            8.33%
Orlando University                   0             --
San Antonio                     20,203            8.25%
St. Petersburg                  17,194            8.25%
Tallahassee Apalachee Pkwy      17,194            8.25%
Tallahassee Capital Circle      20,582            8.36%
Tulsa                            1,512            9.95%
                                                  ----

     Total                    $203,413            8.41%
                              ========            ====

      For additional information on these loans see Note 4, "Mortgages and Loans
Payable" of the Notes to Consolidated Financial Statements.

Indebtedness with Variable Interest Rates

      As of December 31, 1996, the Company had no  indebtedness  having variable
interest rates and  encumbering  the Company's  properties.  The following table
sets forth historical  information with respect to indebtedness  having variable
interest rates (dollars in thousands):

<TABLE>
<CAPTION>

                                                                                             Approximate           Approximate
                                  Balance           Weighted Avg.         Maximum             Average             Wtg. Avg Int
 Year Ended                      at End           Int Rate at             Amount               Amount              Rate During
December 31                      of Period         End of Period        Outstanding          Outstanding           the Period
-----------                      ---------        ---------------       -----------          -----------        -------------
<S>  <C>                           <C>                 <C>                 <C>                <C>                     <C> 
     1996                          $     0              -                  $22,276            $18,280                 9.3%
     1995                           22,276             9.5%                 58,352             47,945                 8.4%
     1994                           58,352             9.1%                 59,028             58,718                 7.9%
</TABLE>

                                        9

<PAGE>



Item 3.       LEGAL PROCEEDINGS

      None.

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

      None.

                                     PART II

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

      The Company's  common stock is listed on the American Stock Exchange.  The
high and low closing  sales prices for the periods  indicated in the table below
were:

<TABLE>
<CAPTION>

                                                                              Years
                                            1996                               1995                               1994
                                ---------------------------          --------------------------        --------------------------
Quarter Ended                       High            Low                  High           Low                 High           Low
-------------                    ----------       -------             ---------       -------            ---------       -----
<S>                                 <C>           <C>                   <C>            <C>                 <C>            <C> 
March 31                            $12 1/4       $10 3/4               $ 7 7/8        $6 3/4              $ 8 1/2        $6 1/2
June 30                              13 3/8        11                     9             6 3/4                9 5/8         6 3/8
September 30                         16            13                    10 1/8         8 5/8               10 1/2         8 1/4
December 31                          18 3/4        15 1/8                10 5/8         9 1/8                8 7/8         6 7/8

</TABLE>

      The Company  intends that any dividend paid in respect of its common stock
during the last quarter of each year will, if necessary,  be adjusted to satisfy
the REIT  qualification  requirement  that at least 95 percent of the  Company's
REIT taxable  income for such taxable year be  distributed.  The Company did not
pay any  dividends  during the three  years  ended  December  31,  1996.  During
December 1996, the Company's Board of Directors declared a quarterly dividend of
$0.05 per share  payable on February  10,  1997,  to  shareholders  of record on
January 6, 1997.

      On February 28, 1997, there were  approximately 945 shareholders of record
and the  closing  price of the  Company's  common  stock on the  American  Stock
Exchange was $17.875.















                                       10

<PAGE>



Item 6.       SELECTED FINANCIAL DATA

      The following  selected  financial data should be read in conjunction with
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" and the Consolidated Financial Statements (as defined below) and the
notes thereto.

<TABLE>

                                                                (In thousands except per share and property data)
Income Information                                              1996         1995          1994             1993*        1992
                                                            -----------   ----------    -----------      ---------    -------
<S>                                                           <C>          <C>            <C>            <C>           <C>      
Rental revenues and other rental services                     $  98,805    $  95,443      $  94,388      $  46,108     $  45,957
Interest revenues                                                 1,951       14,440          1,062            206           231
Total revenues                                                  104,072      125,750        100,376         46,406        46,188
Property operating expenses                                      41,597       40,830         39,711         21,034        19,579
Depreciation and amortization                                    21,127       19,102         16,728          8,958         8,089
Mortgage and loan interest                                       18,701       23,708         25,872         11,471        11,530
Net income                                                       10,501       28,990          4,215          2,452           933
Earnings per common share - primary                                 .54         1.61            .24            .18           .07

Weighted average shares outstanding - primary                    19,500       18,011         17,719         13,352        13,220

Balance Sheet Information
Operating properties (before depreciation)                    $ 582,972    $ 571,313      $ 578,237      $ 566,770     $ 311,286
Undeveloped land                                                 27,108       30,281         36,012         40,036             0
Total assets                                                    584,666      578,756        613,806        615,089       396,841
Mortgages and loans payable                                     203,044      254,909        323,765        330,625       155,362
Shareholders' equity                                            364,135      310,697        280,601        275,450       235,514

Other Information
Funds from operations (1)                                     $  33,154    $  36,707      $  23,475      $  11,075     $  10,674
Income before interest, income taxes,
    depreciation and amortization                             $  51,144    $  71,866      $  47,042      $  22,881     $  20,552
Number of buildings (at end of  period)                             215          216            219            219           126
Percent leased (at end of period)                                    92%          91%            90%            88%           88%

</TABLE>

* On December 21, 1993, KPI was merged with and into the Company.
(1)  The  Company  believes  that Funds from  Operations  is one  measure of the
     performance  of an  equity  REIT.  Funds  from  Operations  should  not  be
     considered  as an  alternative  to  net  income  as an  indication  of  the
     Company's financial  performance or to cash flow from operating  activities
     (determined  in  accordance  with  GAAP)  as a  measure  of  the  Company's
     liquidity, nor is it necessarily indicative of sufficient cash flow to fund
     all of the Company's needs.  Funds from Operations is calculated as follows
     (in thousands):

<TABLE>
<CAPTION>

                                                                1996         1995            1994           1993          1992
                                                              --------    ---------       ---------      ---------     -------
 <S>                                                          <C>          <C>             <C>            <C>            <C>    
   Net income                                                 $ 10,501      $28,990        $  4,215       $  2,452       $   933
    Depreciation - real estate                                  19,538       17,363          15,202          8,403         7,673
    Amortization - deferred tenant costs                           929          656             452            197            86
    Amortization - goodwill                                        171          504             665             23
    Litigation costs                                               424          176           1,902
    Loss on sale or disposition of assets                          497          255              43
    Provision for loss on land held for sale                                    970             996
    Gain on TKPL note to Southeast                                (292)     (11,288)
    Loss/(gain) on early retirement of debt                      1,386         (919)
    Provision for losses on loans to KPI                                                                                   1,982
                                                         -------------             -------------  ----------------------------------
    Funds from Operations                                     $ 33,154      $36,707        $ 23,475       $ 11,075       $10,674
                                                               =======      =======         =======        =======       =======

    The 1995  calculated  Funds from  Operations  includes  $13,066 of  interest
    revenue  associated  with the TKPL mortgage  notes which KE acquired  during
    1995. These mortgage notes were retired by TKPL during 1995.

</TABLE>

                                       11

<PAGE>



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

      The following  discussion  should be read in conjunction with the selected
financial data and the  consolidated  financial  statements  (the  "Consolidated
Financial  Statements")  appearing elsewhere in this report.  Historical results
and percentage relationships in the Consolidated Financial Statements, including
trends  which  might  appear,  should  not be  taken  as  indicative  of  future
operations or financial position.  The Consolidated Financial Statements include
the accounts of KE, Southeast and KRES (collectively, the "Company").

GENERAL

      The  Company  has  prepared,  and is  responsible  for,  the  accompanying
Consolidated   Financial  Statements  and  the  related  consolidated  financial
information included in this report. Such Consolidated Financial Statements were
prepared in accordance with generally accepted accounting principles and include
amounts  determined  using  management's  best  judgments  and  estimates of the
expected  effects  of  events  and  transactions  that are being  accounted  for
currently.

      The  Company's   independent   auditors  have  audited  the   accompanying
Consolidated  Financial Statements.  The objective of their audit,  conducted in
accordance with generally accepted auditing standards, was to express an opinion
on the fairness of  presentation,  in all material  respects,  of the  Company's
consolidated  financial  position,  results  of  operations,  and cash  flows in
conformity with generally  accepted  accounting  principles.  They evaluated the
Company's internal control structure to the extent considered  necessary by them
to  determine  the audit  procedures  required  to support  their  report on the
Consolidated   Financial  Statements  and  not  to  provide  assurance  on  such
structure.

      The  Company   maintains   accounting  and  other  control  systems  which
management  believes provide reasonable  assurance that the Company's assets are
safeguarded  and that the  Company's  books and records  reflect the  authorized
transactions  of the Company,  although  there are inherent  limitations  in any
internal control structure, as well as cost versus benefit  considerations.  The
Audit  Committee  of  the  Company's  Board  of  Directors,  which  is  composed
exclusively  of directors who are not officers of the Company,  directs  matters
relating  to  audit  functions,   annually  appoints  the  auditors  subject  to
ratification  of  the  Company's  Board  of  Directors,  reviews  the  auditors'
independence,   reviews  the  scope  and  results  of  the  annual  audit,   and
periodically reviews the adequacy of the Company's internal control structure.

RECENT DEVELOPMENTS

      On October 10, 1996,  the Company  completed a private  placement of three
million  shares  of its  common  stock to an  affiliate  of Apollo  Real  Estate
Investment  Fund II, L.P. for an  aggregate  sales price of $43.5  million.  The
Company  applied the proceeds  from this sale to the  repayment of  indebtedness
with an average interest rate of approximately 8 percent.

      On  December  18,  1996,  the Company  closed on $175.9  million of a $190
million  non-recourse  loan with  Northwestern  Mutual  Life  Insurance  Company
("Northwestern")  which is secured by 10 office parks. This loan is divided into
(i) a tranche  in the amount of $100.5  million  ($86.4  million  which has been
drawn) with a 10 year  maturity and an interest  rate of 8.25 percent and (ii) a
tranche  in the  amount  of $89.5  million  with a  maturity  of 12 years and an
interest rate of 8.33 percent.

                                       12

<PAGE>



RESULTS OF OPERATIONS

      Rental Revenues.  Rental revenues increased $3,477,000 from the year ended
December 31, 1995 to the year ended  December 31, 1996.  This increase  resulted
primarily  from (i)  increases  in the  percent  leased  rate and the  Company's
average  rental  rate  and  (ii)  increases  in  revenues  from  operating  cost
escalations  and other  items  passed  through to  tenants.  The effect of these
increases was partially offset by the sale of three buildings during 1995, which
is described below. For 1995, rental revenues increased $1,733,000 from the year
ended December 31, 1994. This increase resulted  primarily from increases in the
percent  leased rate and the average  rental  rate in the  Company's  buildings,
which increases were partially offset by the sale of three buildings (containing
233,980 net rentable  square feet) on July 31,  1995.  During 1995,  the Company
earned $2,228,000 in rental revenues from these three buildings through the date
of sale.  As of December 31, 1996,  the Company's  buildings  were on average 92
percent  leased.  As of December 31, 1995 and 1994,  the buildings  owned by the
Company were on average 91 and 90 percent leased, respectively.

      Management Fee Revenues.  Management fee revenues  decreased  $942,000 for
1996 as compared to 1995.  This decrease was due primarily to the termination of
the management agreement with TKPL which resulted from the sale of all of TKPL's
operating  properties  during 1995. The Company earned  $1,685,000 in management
fee revenue from this contract during 1995.  This decrease was partially  offset
by (i) an increase in fees earned for construction  management services and (ii)
an  increase  in  fees  earned  under  the  management  contract  with  Centoff.
Management  fee revenues  decreased by $1,302,000  for 1995 as compared to 1994.
This decrease was primarily due to the  termination of the management  agreement
with TKPL,  as previously  described.  The effect of this decrease was partially
offset by an increase  in the fees earned  under the  management  contract  with
Centoff.  On May 5, 1994,  third party  management  contracts  on two  buildings
terminated  due to a change  of  ownership  of such  buildings.  Management  fee
revenue  related to the  management  of such  buildings  totalled  approximately
$106,000 during 1994.

      Interest  Revenues.  Interest revenues  decreased  $12,489,000 for 1996 as
compared to 1995.  This decrease was due to the interest  revenue  earned during
1995 from the TKPL Notes  ($13,066,000).  For 1995,  interest revenues increased
$13,378,000  from the year ended December 31, 1994. This increase was due to (i)
the interest  revenue  associated  with the TKPL Notes  ($13,066,000),  (ii) the
higher  interest rates earned on the Company's  temporary cash  investments  and
(iii) the higher average balance of temporary cash investments.

      Gain  on  TKPL  Note  to  Southeast.   During  1995,   Southeast  received
approximately  $17.7 million as a partial repayment of an unsecured note, issued
by TKPL to KPI (and  subsequently  transferred by KPI to Southeast in connection
with the Merger) in an original  principal amount of approximately  $31 million.
This TKPL unsecured note had been valued and carried on the books of the Company
at $0. A gain of $11,288,000 was recorded on this repayment,  which was net of a
write-off  of  unamortized  cost in excess of fair value of net assets  acquired
from KPI of $6,412,000.

      Expenses.  Property  operating expenses include such charges as utilities,
real estate taxes, janitorial,  maintenance,  property insurance,  provision for
uncollectible  rents,  and management  costs.  During 1996,  property  operating
expenses increased by $767,000 or 1.9 percent,  compared to 1995,  primarily due
to increases in maintenance  costs.  During 1995,  property  operating  expenses
increased by $1,119,000 or 2.8 percent,  compared to 1994,  primarily due to the


                                       13

<PAGE>



increase  in  management  cost for the  Company's  buildings.  This  increase in
management cost was primarily due to the accrued compensation expense ($876,000)
related to stock appreciation  rights granted in conjunction with stock options.
For 1996,  property  operating expenses as a percentage of total rental revenues
were  42.1  percent.  For  1995  and  1994,  property  operating  expenses  as a
percentage  of total  rental  revenues  were  42.8  percent  and  42.1  percent,
respectively.

      Depreciation expense has been calculated on the straight-line method based
upon the useful lives of the  Company's  depreciable  assets,  generally 3 to 40
years.  For 1996,  depreciation  expense  increased  $2,208,000  or 12.5 percent
compared to the prior year, due to improvements  made to the properties owned by
the  Company  during 1996 and 1995.  For 1995,  depreciation  expense  increased
$2,222,000 or 14.4 percent compared to the prior year, due to improvements  made
to the properties owned by the Company during 1995 and 1994.

      Amortization  expense  decreased by $183,000 during 1996 compared to 1995,
due primarily to the $6,412,000 of  unamortized  cost in excess of fair value of
net assets acquired which was written off and offset against  proceeds  received
by Southeast from the TKPL  unsecured  note during 1995. For 1995,  amortization
expense  increased  $152,000 compared to the prior year, due to amounts incurred
for deferred tenant costs.

      Interest  expense  decreased by  $5,007,000  during 1996 compared to 1995,
primarily  due to the  reduction in the average  balance of mortgages  and loans
payable.  Interest expense decreased by $2,164,000 during 1995 compared to 1994,
primarily due to (i) the reduction in the average balance of mortgages and loans
payable and (ii) the  forgiveness  of accrued  interest  on certain  debt due to
early repayment  ($1,362,000),  which  forgiveness was partially offset by yield
maintenance  payments  required  due to early  repayment  of  certain  mortgages
($882,000).  During 1996,  1995, and 1994, the weighted average interest rate on
the Company's variable rate loans was 9.3 percent, 8.4 percent, and 7.9 percent,
respectively.  The Company's average  outstanding amount under such loans during
1996, 1995, and 1994 was $18,280,000, $47,945,000 and $58,718,000, respectively.

      General and administrative expenses were 1.1 percent, 1.2 percent, and 1.0
percent of average  invested assets for 1996, 1995 and 1994,  respectively.  For
1996, general and  administrative  expenses decreased $936,000 compared to 1995,
primarily due to (i) decreases in the accrual for  compensation  expense related
to stock  appreciation  rights granted in conjunction  with stock options,  (ii)
decreases in  professional  and legal fees incurred,  (iii) decreases in certain
insurance   costs,   and  (iv)  decreases  in  the  accrual  for  the  Company's
contribution to the 401(k) Plan. For 1995, general and  administrative  expenses
increased  $1,193,000 compared to the prior year, primarily due to (i) increases
in the accrual for  compensation  expense related to stock  appreciation  rights
granted in  conjunction  with stock  options  ($423,000),  (ii) the  accrual for
expense  related to the  Supplemental  Executive  Retirement Plan adopted during
1995 ($184,000), and (iii) increases in compensation costs.

      For  1996,  direct  costs  of  management  contracts  decreased  $953,000,
compared to 1995, due to the  termination of the management  agreement with TKPL
which resulted from the sale of all of TKPL's operating  properties during 1995.
The Company incurred  $1,601,000 in costs pursuant to this contract during 1995.
This decrease was partially  offset by (i) an increase in costs  associated with
providing  construction  management  services  and (ii) an increase in costs for
providing services under the management agreement with Centoff.  Direct costs of
management  contracts  decreased by $812,000 for 1995,  compared to 1994, due to
the termination of the management agreement with TKPL, as previously  described.
The effect of this  decrease was  partially  offset by the increase in costs for
providing services under the management agreement with Centoff.

                                       14

<PAGE>



      For 1996,  undeveloped land costs remained basically  unchanged from those
incurred during 1995. Real estate taxes and other costs related to the Company's
unimproved land decreased $155,000 during 1995, compared to 1994, due to (i) the
sale of a parcel of unimproved land (approximately 23 acres) during October 1994
($77,000) and (ii) the sale of two parcels of unimproved land  (approximately 44
acres) on July 31, 1995 ($22,000).

      During 1994, the Company  settled a pending class action  proceeding  (the
"Securities Action"). The Company recorded a provision of $1,685,000 relating to
the settlement of the Securities Action and incurred additional costs related to
such settlement which totalled $217,000.

      During 1995,  the Company  recorded a provision  for loss on land held for
sale which totalled $970,000.  This provision for loss was based upon a contract
for the sale of a land  parcel  (approximately  8.1  acres)  which is located in
Miami,  Florida adjacent to an office center sold to Koala.  Contingent upon the
assurances which can be received from the local government concerning the square
footage of office  buildings  which can be constructed on this land parcel,  the
contract price ranges between  $2,000,000 and  $2,970,000.  In 1994, the Company
recorded a  provision  for loss on land held for sale which  totalled  $996,000.
This  provision  for  loss was  based  upon  contracts  for the sale of two land
parcels  (approximately  53  acres).  The  sale  of one of  these  land  parcels
(approximately 23 acres) was consummated during 1994, while the contract for the
sale of the other land parcel expired.

      Management  periodically reviews its investment in properties for evidence
of other than temporary impairments in value. Factors considered consist of, but
are not limited to, the following: current and projected occupancy rates, market
conditions in different  geographic regions, and management's plans with respect
to its properties.  Where management concludes that expected cash flows will not
enable the Company to recover the carrying amount of its investments, losses are
recorded and asset  values are reduced.  No such  impairments  in value  existed
during 1996, 1995 or 1994.

      Operating  Results.  Net  income  totalled  $10,501,000,  $28,990,000  and
$4,215,000 for 1996, 1995 and 1994, respectively. For 1996, net income decreased
$18,489,000 over the prior year due primarily to (i) the interest revenue earned
during 1995 on the TKPL  mortgage  notes which were  retired by TKPL during 1995
and (ii) the  gain  associated  with the  partial  repayment  of a TKPL  note to
Southeast during 1995. For 1995, net income increased $24,775,000 over the prior
year due to (i) the interest revenue associated with KE's investment in the TKPL
Notes,  (ii) the gain associated with the partial repayment of a note owing from
TKPL to Southeast,  (iii) the reduction in mortgage and loan interest,  (iv) the
increase in rental revenues, and (v) the gain on early retirement of debt.

LIQUIDITY AND CAPITAL RESOURCES

      Operating Activities. During the year ended December 31, 1996, the Company
generated approximately $35.9 million in net cash from operating activities. The
Company's  primary internal sources of cash are (i) the collection of rents from
buildings  owned by the Company and (ii) the receipt of management  fees paid to
the Company in respect of properties managed on behalf of others. As a REIT, the
Company is required to pay out annually,  as  dividends,  95 percent of its REIT
taxable income (which, due to non-cash charges,  including  provision for losses
and  depreciation,  may be substantially  less than cash flow). In the past, the
Company has paid out  dividends  in amounts at least  equal to its REIT  taxable
income. The Company believes that its cash provided by operating activities will
be sufficient to cover debt service  payments and to pay the dividends  required
to maintain REIT status through 1997.

                                       15

<PAGE>



      The  level of cash  flow  generated  by  rents  depends  primarily  on the
occupancy  rates of the  Company's  buildings and changes in rental rates on new
and renewed  leases and under  escalation  provisions.  As of December 31, 1996,
approximately 94 percent of the Company's  annualized gross rental revenues were
derived  from  existing  leases  containing  provisions  for  rent  escalations.
However,  market  conditions may prevent the Company from escalating rents under
such provisions.

      As of December 31, 1996, leases representing approximately 26.1 percent of
the gross annualized rent from the Company's  properties,  without regard to the
exercise of options to renew,  were due to expire during 1997.  This  represents
1,156  leases for space in buildings  located in all of the 17 Koger  Centers in
which the Company owns  buildings.  Certain of these tenants may not renew their
leases  or  may  reduce  their   demand  for  space.   Leases  were  renewed  on
approximately  63  percent,  67  percent  and 61 percent  of the  Company's  net
rentable  square feet which were scheduled to expire during 1996, 1995 and 1994,
respectively.  For those leases which renewed  during 1996,  the average  rental
rate increased  from $14.13 to $15.00.  However,  current  market  conditions in
certain  markets may require that rental rates at which leases are renewed or at
which vacated space is leased be lower than rental rates under existing  leases.
Based upon the  significant  amount of leases which will expire  during 1996 and
the  competition for tenants in the markets in which the Company  operates,  the
Company has offered, and expects to continue to offer, incentives to certain new
and  renewal  tenants.  These  incentives  may  include  the  payment  of tenant
improvement  costs and, in certain  markets,  reduced rents during initial lease
periods.

      During 1994,  1995,  and 1996,  the Company has benefited  from  improving
economic  conditions and reduced vacancy levels for office  buildings in many of
the metropolitan areas in which the Company owns buildings. The Company believes
that the  southeastern  and  southwestern  regions of the United States  provide
significant  economic growth potential due to their diverse regional  economies,
expanding  metropolitan  areas,  skilled  work force and  moderate  labor costs.
However,  the Company cannot predict whether such economic growth will continue.
Cash flow from  operations  could be  reduced  if  economic  growth  were not to
continue in the Company's  markets and if this resulted in lower occupancy rates
for the Company's buildings.

      Governmental tenants (including the State of Florida and the United States
of America) which accounted for 23.9 percent of the Company's leased space as of
December 31, 1996, may be subject to budget reductions in times of recession and
governmental  austerity measures.  Consequently,  there can be no assurance that
governmental appropriations for rents may not be reduced. Additionally,  certain
of the  private-sector  tenants which have  contributed  to the  Company's  rent
stream may reduce their  current  demands,  or curtail  their  future need,  for
additional office space.

      At  the  end of  1996,  the  Company  had  management  contracts  for  the
management of 22 commercial office  properties.  On March 31, 1996, a management
agreement  to  manage  21  commercial  office  buildings  owned by  Centoff  was
automatically  extended to March 31, 1997.  This management  agreement  provides
that,  so long as no default has  occurred,  the  management  agreement  will be
automatically  extended  from year to year  until  such  time as the  management
agreement  is  terminated.  The  Company  earned  fees of  $2,259,000  from this
management  agreement  during 1996.  Another  agreement to manage one commercial
office  building has been extended on a month to month basis.  During 1996,  the
Company earned  management  fees of $92,000 for the management of this building.
With  the  sale of  TKPL's  92  buildings  to  Koala  during  1995,  Southeast's
management agreement with TKPL ended.


                                       16

<PAGE>



      Investing  Activities.  At December  31,  1996,  substantially  all of the
Company's invested assets were in real properties. Improvements to the Company's
existing properties have been financed through internal operations. During 1996,
the Company's  expenditures for improvements to existing properties decreased by
$1.8 million over the prior year,  primarily due to  reductions in  expenditures
for tenant  improvements and energy  management  improvements.  During 1996, the
Company did not purchase any buildings.

      The  Company  has  started  the   construction   of  two   buildings,   on
approximately  11.3 acres of undeveloped land, which will contain  approximately
106,000 net rentable  square feet.  Expenditures  for  construction of these two
buildings are expected to total  approximately $7.6 million,  excluding land and
tenant improvement costs.

      During 1995, KE acquired  $32.3 million in aggregate  principal  amount of
TKPL Notes for an  aggregate  purchase  price of  approximately  $18.2  million.
During the quarter  ended  September 30, 1995,  TKPL retired the TKPL Notes.  KE
recorded  approximately  $13.1  million  of  interest  revenue on the TKPL Notes
during 1995.

      During  1996 and 1995,  Southeast  received  $292,000  and $17.7  million,
respectively,  as partial  repayment of an unsecured  note issued by TKPL to KPI
(and subsequently transferred by KPI to Southeast in connection with the Merger)
in an original principal amount of approximately $31 million.

      During 1996, the Company sold a 30 acre land parcel located in Birmingham,
Alabama for $1,263,000,  net of selling costs.  During 1995, the Company sold to
Koala three office buildings  (containing 233,980 net rentable square feet), two
undeveloped land parcels  (totalling  approximately 44 acres), and certain other
assets for approximately $25,267,000, net of selling costs.

      Based on its improved financial structure and results, the Company is in a
position  to  capitalize  on some of its  strengths,  such as the  value  of its
franchise  in the  suburban  office  park  market  and  its  operating  systems,
development  expertise,  acquisition expertise and unimproved land available for
development. The Company has committed to a plan to enhance shareholder value by
refinancing  indebtedness and increasing  growth.  The Company has completed the
refinancing of its indebtedness to eliminate certain restrictive covenants which
had limited the Company's ability to grow through  development and acquisitions.
In addition, the Company has signed a commitment for a new bank revolving credit
facility which will be available to finance growth opportunities.  The plan also
contemplates  the possible  use by the Company of its existing  inventory of 139
acres  of land  held for  development,  most of which  is  partially  or  wholly
improved with streets  and/or  utilities and is located in various  metropolitan
areas where the Company  currently  operates  suburban office parks. The Company
may also acquire  existing  office  buildings or land for  development  in other
markets in the Southeast and Southwest that the Company considers favorable.

      Financing Activities. Historically, the Company's primary external sources
of cash  have  been in the form of bank  borrowings,  mortgage  financings,  and
public  and  private  offerings  of equity  securities.  The  proceeds  of these
financings  were used by the Company to acquire  buildings or to refinance debt.
The  Company  has no open  lines of  credit,  but had cash  and  temporary  cash
investments which totalled $35,715,000 at December 31, 1996.



                                       17

<PAGE>



      On October 10, 1996,  the Company  completed a private  placement of three
million  shares  of its  common  stock to an  affiliate  of Apollo  Real  Estate
Investment  Fund II, L.P. for an  aggregate  sales price of $43.5  million.  The
Company  applied the proceeds  from this sale to the  repayment of  indebtedness
with an average interest rate of approximately 8 percent.

      On  December  18,  1996,  the Company  closed on $175.9  million of a $190
million non-recourse loan with Northwestern which is secured by 10 office parks.
This loan is divided into (i) a tranche in the amount of $100.5  million  ($86.4
million  which has been drawn) with a 10 year  maturity and an interest  rate of
8.25  percent and (ii) a tranche in the amount of $89.5  million with a maturity
of 12 years and an interest rate of 8.33 percent.  The Company plans to draw the
remaining loan proceeds when the existing indebtedness on two buildings matures.
Amortization  with  respect  to this  indebtedness  is based  on  equal  monthly
installments over a 25 year amortization period. This indebtedness  requires the
Company to maintain certain financial ratios.

      With the  proceeds  of the  private  placement  of  common  stock  and the
Northwestern  loan,  the Company  repaid all of the  restructured  debt acquired
pursuant to the Merger and repaid all of its bank debt.  The  repayment  of this
indebtedness  eliminated  the  restrictive  covenants  which  have  limited  the
Company's  ability to grow.  At December 31, 1996,  the Company had 82 buildings
(containing  approximately  three  million net rentable  square feet) which were
unencumbered.

      Based upon interest rates in effect on December 31, 1996 and assuming only
scheduled principal payments for 1997, management expects total interest expense
for 1997 to decrease to approximately $16.3 million. The high degree of leverage
of the Company,  when compared to other REITs,  may result in the  impairment of
its ability to obtain additional  financing,  to make acquisitions,  and to take
advantage  of  significant  business  opportunities  that may  arise,  including
activities which require significant  funding.  This high degree of leverage may
also increase the  vulnerability  of the Company to adverse general economic and
industry conditions and to increased  competitive  pressures,  especially rental
pressures from less highly leveraged competitors.

      Loan maturities and normal amortization of mortgages and loans payable are
expected to total  approximately  $11.3 million over the next twelve months. The
Company plans to draw $8.3 million of the remaining  Northwestern  loan proceeds
when existing  indebtedness on a building  matures in 1997 and believes that the
remainder of these  obligations will be paid from cash provided by operations or
from current cash balances.  Significant  maturities of the Company's  mortgages
and loans payable do not begin to occur until 2006.

      In order to  generate  funds  sufficient  to make  principal  payments  in
respect of  indebtedness of the Company over the long term, as well as necessary
capital and tenant  acquisition  expenditures,  the Company  will be required to
successfully  refinance its indebtedness or procure  additional  equity capital.
However, there can be no assurance that any such refinancing or equity financing
will be achieved or will  generate  adequate  funds on a timely  basis for these
purposes.  If additional funds are raised by issuing equity securities,  further
dilution to existing  shareholders  may result.  Unfavorable  conditions  in the
financial  markets,  the degree of leverage  of the  Company  and various  other
factors may limit the ability of the Company to successfully  undertake any such
financings,  and no assurance can be given as to the availability of alternative
sources of funds.  On August 22, 1994,  the Company  filed a shelf  registration
statement  with respect to the possible  issuance of up to  $100,000,000  of its
common stock and/or  preferred  stock. The Company has not yet issued any equity


                                       18

<PAGE>



under such registration  statement.  During 1995, the Company wrote off $745,000
of certain costs incurred for potential  public and private  offerings of equity
securities which management determined had no future value.

      In  addition,  in the event the Company is unable to  generate  sufficient
funds both to meet  principal  payments  in respect of its  indebtedness  and to
satisfy distribution requirements of 95 percent of annual REIT taxable income to
its  shareholders,  the Company  may be unable to qualify as a REIT.  In such an
event,  the Company (i) will incur federal  income taxes and perhaps  penalties,
(ii) if the Company is then paying  dividends,  may be required to decrease  any
dividend  payments  to its  shareholders,  and  (iii)  the  market  price of the
Company's  common stock may decrease.  The Company would also be prohibited from
requalifying as a REIT for five years.

IMPACT OF INFLATION

      The  Company  may  experience  increases  in its  expenses  as a result of
inflation;   however,   the  amount  of  such  increases  cannot  be  accurately
determined.  The Company's  exposure to inflationary  cost increases in property
level  expenses  is reduced by  escalation  clauses  which are  included in most
leases.  However,  market  conditions  may prevent the Company  from  escalating
rents.  Inflationary  pressure may increase operating expenses,  including labor
and energy costs (and,  indirectly,  property taxes) above expected levels, at a
time when it may not be possible  to increase  lease rates to offset such higher
operating  expenses.  In addition,  inflation  can have  secondary  effects upon
occupancy rates by decreasing the demand for office space in many of the markets
in which the  Company  operates.  As of  December  31,  1996,  94 percent of the
Company's  annualized  rentals were subject to leases having  annual  escalation
clauses as described under "Properties" above. As of December 31, 1995 and 1994,
93 percent and 94 percent,  respectively,  of the Company's  annualized  rentals
were subject to leases having annual escalation clauses.

      Historically,  inflation  has  often  caused  increases  in the  value  of
income-producing  real estate through higher rentals. The Company,  however, can
provide no assurance that inflation will increase the value of its properties in
the  future,  and, in fact,  the rate of  inflation  over recent  years has been
considerably below that which has been experienced previously.

CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION FOR PURPOSE OF
"SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

      The Private Securities  Litigation Reform Act of 1995 (the "Act") provides
a "safe  harbor" for  forward-  looking  statements  to  encourage  companies to
provide   prospective   information  about  their  businesses  without  fear  of
litigation so long as those statements are identified as forward-looking and are
accompanied by meaningful  cautionary  statements  identifying important factors
that could cause actual  results to differ  materially  from those  projected in
such  statements.  The Company  desires to take  advantage of the "safe  harbor"
provisions of the Act.

      This  Annual  Report on Form  10-K  contains  forward-looking  statements,
together  with  related  data and  projections,  about the  Company's  projected
financial results and its future plans and strategies.  However,  actual results
and needs of the Company may vary materially from forward-looking statements and
projections  made from time to time by the Company on the basis of  management's
then-current expectations. The business in which the Company is engaged involves
changing and competitive  markets and a high degree of risk, and there can be no


                                       19

<PAGE>



assurance that  forward-looking  statements and projections will prove accurate.
Accordingly, the Company hereby identifies the following important factors which
could cause the Company's  actual  performance  and financial  results to differ
materially  from any results  which might be projected,  forecast,  estimated or
budgeted by the Company.

Real Estate Financing Risks

      Existing Debt. The Company is subject to risks  normally  associated  with
debt  financing,  including  (a) the risk that the  Company's  cash flow will be
insufficient to meet required  payments of principal and interest,  (b) the risk
that  the  existing  debt in  respect  of the  Company's  properties  (which  in
substantially all cases will not have been fully amortized at maturity) will not
be able to be refinanced  and (c) the risk that the terms of any  refinancing of
any existing debt will not be as favorable as the terms of such  existing  debt.
The Company currently has outstanding debt of approximately $203 million, all of
which is  secured by certain of the  Company's  properties.  Approximately  $131
million  of such  debt will  mature  before  2007,  with the  remaining  balance
maturing in 2008. If principal  payments due at maturity  cannot be  refinanced,
extended or paid with proceeds of other capital transactions, such as new equity
capital,  the Company expects that its cash flow will not be sufficient to repay
all such  maturing  debt.  Furthermore,  if prevailing  interest  rates or other
factors at the time of  refinancing  (such as the  reluctance of lenders to make
commercial real estate loans) result in higher  interest rates upon  refinancing
than the interest rates on the existing debt, the interest  expense  relating to
such refinanced debt would increase,  which would adversely affect the Company's
cash flow and the amount of  distributions  the Company would be able to make to
its  shareholders.  If the Company has mortgaged a property to secure payment of
debt and the Company is unable to meet the mortgage payments, then the mortgagee
may  foreclose  upon,  or  otherwise  take  control  of, such  property,  with a
consequent loss of income and asset value to the Company.

      Risk of  Rising  Interest  Rates  and  Variable  Rate  Debt.  The  Company
currently has no variable rate debt. The Company may incur variable rate debt in
the  future.  Increases  in  interest  rates on such  debt  could  increase  the
Company's interest expense, which would adversely affect the Company's cash flow
and its ability to pay distributions to its shareholders.

Existing Leverage; No Limitation on Debt

      As of December 31, 1996, the debt to total market  capitalization ratio of
the Company was approximately 33.5 percent.  The Company's policy regarding this
ratio (i.e.,  total  consolidated  debt as a percentage of the sum of the market
value of issued and outstanding  capital stock plus total  consolidated debt) is
not subject to any  limitation in the  organizational  documents of the Company.
Accordingly,  the Board of  Directors  could  establish  a policy  and decide to
borrow on a case-by-case or other basis, which would increase the Company's debt
to total market  capitalization  ratio.  If this action were taken,  the Company
could  become more highly  leveraged,  resulting  in an increase in debt service
that (a) could adversely affect the Company's cash flow and,  consequently,  the
amount of cash available for distribution to shareholders and (b) could increase
the risk of default on the Company's debt.

      For purposes of establishing  and evaluating its debt policy,  the Company
measures its leverage by  reference  to the total market  capitalization  of the
Company  rather than by reference  to the book value of its assets.  The Company
has used total market capitalization  because it believes that the book value of
its assets  (which to a large extent is comprised  of the  depreciated  value of
real property, the Company's primary tangible asset) does not accurately reflect


                                       20

<PAGE>



its  ability  to  borrow  and to meet  debt  service  requirements.  The  market
capitalization  of the Company,  however,  is more variable than book value, and
does not necessarily  reflect the fair market value of the underlying  assets of
the Company at all times.  The Company  also  considers  factors  other than its
market   capitalization   in  making  decisions   regarding  the  incurrence  of
indebtedness,  such as the purchase price of properties to be acquired with debt
financing, the estimated market value of its properties upon refinancing and the
ability of particular  properties,  and the Company as a whole, to generate cash
flow to cover expected debt service.

Geographic Concentration

      The Company's  revenues and the value of its properties may be affected by
a number of factors,  including the regional and local economic  climates of the
metropolitan  areas in which the Company's  buildings are located  (which may be
adversely  impacted  by  business  layoffs or  downsizing,  industry  slowdowns,
changing  demographics  and other  factors)  and  regional and local real estate
conditions in such areas (such as oversupply of, or reduced  demand for,  office
and other competing commercial properties).  All of the Company's properties are
located in the  southeastern  and  southwestern  United  States.  The  Company's
performance  and its  ability to make  distributions  to its  shareholders  are,
therefore, dependent on economic conditions in these market areas. The Company's
historical   growth  has  occurred  during  periods  when  the  economy  in  the
southeastern United States has out-performed the national economy.  There can be
no  assurance  as to the  continued  growth of the  economy in the  southeastern
United States or the future growth rate of the Company.

Renewal of Leases and Reletting of Space

      The  Company is subject  to the risks that upon  expiration  of leases for
space  located in its  buildings  (a) such leases may not be  renewed,  (b) such
space may not be relet or (c) the terms of renewal  or  reletting  (taking  into
account the cost of required  renovations)  may be less  favorable  than current
lease terms. Leases on a total of 26.5 percent and 21.8 percent of the total net
rentable  square feet leased in the Company's  buildings will expire in 1997 and
1998,  respectively.  The Company has established annual reserves for renovation
and  reletting  expenses,  which  take into  consideration  its view of both the
current and expected  business  conditions in the  southeastern and southwestern
United  States,  but no  assurance  can be given  that  these  reserves  will be
sufficient to cover such expenses.  If the Company is unable to promptly  relet,
or renew the leases for, all or a  substantial  portion of the space  located in
its  buildings,  or if the rental  rates  upon such  renewal  or  reletting  are
significantly lower than expected rental rates, or if the Company's reserves for
these purposes prove inadequate, then the Company's cash flow and its ability to
make expected distributions to its shareholders may be adversely affected.

Real Estate Investment Risks

      General Risks. Real property investments are subject to varying degrees of
risk.  The yields  available  from equity  investments  in real estate depend in
large part on the  amount of income  generated  and  expenses  incurred.  If the
Company's  properties  do not generate  revenues  sufficient  to meet  operating
expenses, including current levels of debt service, tenant improvements, leasing
commissions  and other  capital  expenditures,  the  Company  may have to borrow
additional  amounts to cover  fixed  costs and the  Company's  cash flow and its
ability to make  distributions to its shareholders  will be adversely  affected.
The Company must obtain external financing to meet future debt maturities.



                                       21

<PAGE>



      The  Company's  net  revenues  and  the  value  of its  properties  may be
adversely affected by a number of factors, including the national,  regional and
local  economic  climates;  regional  and  local  real  estate  conditions;  the
perceptions of prospective tenants as to the attractiveness of the property; the
ability  of  the  Company  to  provide  adequate  management,   maintenance  and
insurance;  and  increased  operating  costs  (including  real estate  taxes and
utilities).  In addition, real estate values and income from properties are also
affected by such factors as applicable laws,  including tax laws,  interest rate
levels and the availability of financing.

      Illiquidity of Real Estate.  Equity real estate investments are relatively
illiquid. Such illiquidity will tend to limit the ability of the Company to vary
its portfolio  promptly in response to changes in economic or other  conditions.
In addition,  the Internal  Revenue  Code limits the  Company's  ability to sell
certain  properties  held for  fewer  than four  years,  which  may  affect  the
Company's ability to sell its properties.

      Competition.   Numerous  office  buildings   compete  with  the  Company's
buildings  in  attracting  tenants  to  lease  space.  Some of  these  competing
buildings  are  newer,  better  located or better  capitalized  than some of the
Company's  buildings.  Moreover,  the Company  believes  that major  national or
regional  commercial  property  developers  will  continue  to seek  development
opportunities  in  the  southeastern  and  southwestern  United  States.   These
developers may have greater financial resources than the Company.  The number of
competitive  commercial  properties  in a particular  area could have a material
adverse  effect on the  Company's  ability to lease space in its buildings or at
newly developed or acquired properties and the rents charged.

      Changes in Laws.  Because  increases in income,  service or transfer taxes
are generally not passed  through to tenants  under leases,  such  increases may
adversely  affect the Company's cash flow and its ability to make  distributions
to its  shareholders.  The  Company's  properties  are also  subject  to various
federal,  state and local regulatory  requirements,  such as requirements of the
Americans  with  Disabilities  Act (the "ADA") and state and local fire and life
safety  requirements.  Failure to comply with these requirements could result in
the  imposition  of fines by  governmental  authorities  or awards of damages to
private  litigants.  The Company  believes that its  properties are currently in
compliance  with all such  regulatory  requirements.  However,  there  can be no
assurance that these  requirements  will not be changed or that new requirements
will not be imposed which would require significant  unanticipated  expenditures
by the Company and could have an adverse  effect on the Company's  cash flow and
expected distributions.

      Uninsured Loss. The Company  presently  carries  comprehensive  liability,
fire,  flood (where  appropriate),  extended  coverage and rental loss insurance
with respect to its properties,  with policy  specifications  and insured limits
customary for similar  properties.  There are, however,  certain types of losses
(such  as  from  wars)  that  may be  either  uninsurable  or  not  economically
insurable. Should an uninsured loss or a loss exceeding policy limits occur, the
Company could lose both its capital  invested in, and anticipated  profits from,
one or more of its properties.

      Bankruptcy  and Financial  Condition of Tenants.  At any time, a tenant of
the Company's  buildings may seek the protection of the bankruptcy  laws,  which
could result in the rejection and termination of such tenant's lease and thereby
cause a reduction in the cash flow available for distribution by the Company. No
assurance can be given that tenants will not file for  bankruptcy  protection in
the future or, if any  tenants  file,  that they will  affirm  their  leases and
continue to make rental payments in a timely manner. In addition,  a tenant from


                                       22

<PAGE>



time to time may  experience  a downturn  in its  business  which may weaken its
financial  condition and result in its failure to make rental payments when due.
If a  tenant's  lease is not  affirmed  following  bankruptcy  or if a  tenant's
financial condition weakens, the Company's income may be adversely affected.

      Americans  with  Disabilities  Act  Compliance.  Under the ADA, all public
accommodations  and commercial  facilities are required to meet certain  federal
requirements relating to access and use by disabled persons.  These requirements
became  effective in 1992.  Compliance  with the  requirements  of the ADA could
require removal of access barriers and non-compliance could result in imposition
of fines by the U.S.  Government  or an award of damages  to private  litigants.
Although  the  Company  believes  that  its  properties  are   substantially  in
compliance with these  requirements,  the Company may incur  additional costs to
comply with the ADA. Although the Company believes that such costs will not have
a material adverse effect on the Company,  if required changes involve a greater
expenditure than the Company  currently  anticipates,  the Company's  ability to
make distributions to its shareholders could be adversely affected.

      Risks  Involved  in  Property  Ownership  Through  Partnership  and  Joint
Ventures.  Although the Company owns fee simple interests in its properties,  in
the future the Company  could,  if then  permitted by the  covenants in its loan
agreements  and its  financial  position,  participate  with other  entities  in
property ownership through partnerships or joint ventures.  Partnership or joint
venture  investments  may,  under  certain  circumstances,   involve  risks  not
otherwise present in property ownership,  including the possibility that (a) the
Company's partners or co-venturers  might become bankrupt,  (b) such partners or
co-venturers  might at any time have  economic or other  business  interests  or
goals  which  are  inconsistent  with  the  business  interests  or goals of the
Company,  and (c) such  partners  or  co-venturers  may be in a position to take
action  contrary to the  instructions or the requests of the Company or contrary
to the Company's  policies or  objectives,  including  the  Company's  policy to
maintain  its  qualification  as a REIT.  The  Company  will,  however,  seek to
maintain sufficient control of such participants or joint ventures to permit the
Company's business  objectives to be achieved.  There is no limitation under the
Company's  organizational documents as to the amount of available funds that may
be invested in partnerships or joint ventures.

      Impact of Inflation. The Company may experience increases in its expenses,
including  debt  service,  as a result of inflation.  The Company's  exposure to
inflationary  cost increases in property level expenses is reduced by escalation
clauses which are included in most of its leases. However, market conditions may
prevent the Company from escalating  rents.  Inflationary  pressure may increase
operating expenses, including labor and energy costs (and, indirectly,  property
taxes)  above  expected  levels  at a time when it may not be  possible  for the
Company to increase  lease rates to offset such higher  operating  expenses.  In
addition,   inflation  can  have  secondary  effects  upon  occupancy  rates  by
decreasing  the  demand  for  office  space in many of the  markets in which the
Company operates.

      Although,  inflation has historically  often caused increases in the value
of income-producing  real estate through higher rentals, the Company can provide
no assurance  that  inflation  will increase the value of its  properties in the
future  and,  in  fact,  the  rate of  inflation  over  recent  years  has  been
considerably below that which has been experienced previously.





                                       23

<PAGE>



Risk of Development, Construction and Acquisition Activities

      Within the constraints of its policy concerning leverage,  the Company has
and will continue to develop and construct office buildings, particularly on its
undeveloped   land.  Risks   associated  with  the  Company's   development  and
construction activities,  including activities relating to its undeveloped land,
may include:  abandonment of development opportunities;  construction costs of a
property   exceeding   original  estimates  and  possibly  making  the  property
uneconomical;  insufficient  occupancy  rates  and  rents  at a newly  completed
property  to make  the  property  profitable;  unavailability  of  financing  on
favorable  terms for  development  of a  property;  and the  failure to complete
construction  and  lease-up on schedule,  resulting  in  increased  debt service
expense  and  construction  costs.  In  addition,  new  development  activities,
regardless of whether or not they are ultimately successful, typically require a
substantial portion of management's time and attention.  Development  activities
are  subject  to risks  relating  to the  inability  to  obtain,  or  delays  in
obtaining,  all  necessary  zoning,  land-use,  building,  occupancy  and  other
required governmental permits and authorizations.

      The Company will in the future also acquire office buildings. Acquisitions
of office  buildings  entail  risks  that  investments  will fail to  perform in
accordance with expectations.  Estimates of the cost of improvements to bring an
acquired  building up to standards  established for the market position intended
for  such  building  may  prove  inaccurate.  In  addition,  there  are  general
investment risks associated with any new real estate investment.

      The Company  anticipates  that any future  developments  and  acquisitions
would be financed  through a combination of internally  generated  cash,  equity
investments and secured or unsecured financing. If new developments are financed
through   construction   loans,  there  is  a  risk  that,  upon  completion  of
construction,  permanent  financing for newly  developed  properties  may not be
available or may be available only on disadvantageous terms.

Changes in Policies Without Stockholder Approval

      The  investment,  financing,  borrowing and  distribution  policies of the
Company, as well as its policies with respect to all other activities, including
growth,  debt,  capitalization  and  operations,  are determined by the Board of
Directors.  Although the Board of Directors  has no present  intention to do so,
these  policies  may be  amended or revised at any time and from time to time at
the discretion of the Board of Directors  without a vote of the  shareholders of
the Company.  A change in these  policies could  adversely  affect the financial
condition  or results of  operations  of the Company or the market  price of the
Common Stock.

Limitations of REIT Status on Business of Subsidiaries

      Certain  requirements for REIT  qualification  may in the future limit the
Company's ability to increase fee development, management and leasing operations
conducted,  and related services offered, by the Company's  subsidiaries without
jeopardizing the Company's qualification as a REIT.






                                       24

<PAGE>



Adverse Consequences of Failure to Qualify as a REIT

      The Company  believes it has operated so as to qualify as a REIT under the
Internal  Revenue Code since its inception in 1988.  Although  management of the
Company intends that the Company continue to operate so as to qualify as a REIT,
no  assurance  can be given that the Company  will remain  qualified  as a REIT.
Qualification  as a REIT involves the  application  and  satisfaction  of highly
technical  and  complex  Code  requirements  for which  there  are only  limited
judicial and administrative  interpretations.  Uncertainty in the application of
such  requirements,  as well as circumstances  not entirely within the Company's
control, may affect the Company's ability to qualify as a REIT. In addition,  no
assurance  can  be  given  that  legislation,  new  regulations,  administrative
interpretations  or court decisions will not  significantly  change the tax laws
with respect to  qualification  as a REIT or the federal income tax consequences
of such  qualification.  The Company,  however,  is not aware of any pending tax
legislation  that would adversely  affect the Company's  ability to operate as a
REIT.

Possible Environmental Liabilities

      Under various federal,  state and local environmental laws, ordinances and
regulations,  a current or  previous  owner or  operator  of real  estate may be
required to investigate and clean up hazardous or toxic  substances or petroleum
product  releases  at such  property  and may be held  liable to a  governmental
entity  or to third  parties  for  property  damage  and for  investigation  and
clean-up  costs incurred by such parties in connection  with the  contamination.
Such laws typically impose clean-up  responsibility and liability without regard
to whether the owner knew, or caused the presence, of the contaminants,  and the
liability  under such laws has been  interpreted  to be joint and several unless
the harm is  divisible  and  there  is a  reasonable  basis  for  allocation  of
responsibility.  The costs of  investigation,  remediation  or  removal  of such
substances  may be  substantial,  and the  presence of such  substances,  or the
failure to properly remediate the contamination on such property,  may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral. Any person who arranges for the disposal or treatment of
hazardous or toxic  substances  at a disposal or treatment  facility also may be
liable for the costs of  removal or  remediation  of a release of  hazardous  or
toxic  substances  at such disposal or treatment  facility,  whether or not such
facility is owned or operated by such person.  In addition,  some  environmental
laws  create a lien on the  contaminated  site in favor  of the  government  for
damages and costs that it incurs in connection with the contamination.  Finally,
the owner of a site may be subject to common law claims by third  parties  based
on damages and costs resulting from environmental contamination emanating from a
site.

      Certain federal,  state and local laws,  regulations and ordinances govern
the removal,  encapsulation  or  disturbance  of  asbestos-containing  materials
("ACM")  when  such  materials  are  in  poor  condition  or  in  the  event  of
construction,  remodeling, renovation or demolition of a building. Such laws may
impose  liability  for release of ACM and may provide for third  parties to seek
recovery  from  owners or  operators  of real  properties  for  personal  injury
associated  with ACM. In  connection  with its  ownership  and  operation of its
properties, the Company may be potentially liable for such costs. All ACM in the
Company's buildings has been found to be in good condition and non-friable,  and
should not present a risk as long as it continues to be properly managed.

      The  Company's  environmental  assessments  of  its  properties  have  not
revealed any  environmental  liability  that the Company  believes  would have a
material  adverse effect on its business,  assets or results of operations taken
as a  whole,  nor is  the  Company  aware  of any  such  material  environmental


                                       25

<PAGE>



liability.  Nevertheless,  it is possible that the Company's  assessments do not
reveal all  environmental  liabilities or that there are material  environmental
liabilities of which the Company is unaware. Moreover, there can be no assurance
that  future  laws,  ordinances  or  regulations  will not impose  any  material
environmental  liability or the current environmental condition of the Company's
properties  will  not be  affected  by  tenants,  by the  condition  of  land or
operations  in  the  vicinity  of  such  properties  (such  as the  presence  of
underground storage tanks), or by third parties unrelated to the Company.

Effect of Market Interest Rates on Price of Common Stock

      One of the  factors  that will  influence  the market  price of the Common
Stock in public  markets  will be the annual  dividend  yield on the share price
reflected  by  dividend  distributions  by the  Company.  An  increase in market
interest  rates could reduce cash available for  distribution  by the Company to
its  shareholders  and,  accordingly,  adversely  affect the market price of the
Common Stock.

Additional Information

      For additional disclosure of risk factors to which the Company is subject,
see the other  sections of  "Management's  Discussion  and Analysis of Financial
Condition and Results of Operations."

                                       26

<PAGE>



Item 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULES

                                                                        PAGE NO.

Independent Auditors' Report................................              28

Consolidated Financial Statements:
     Consolidated Balance Sheets as of December 31, 1996
        and 1995............................................              29

     Consolidated Statements of Operations for Each
        of the Three Years in the Period Ended
        December 31, 1996...................................              30

     Consolidated Statements of Changes in
        Shareholders' Equity for Each of the Three
        Years in the Period Ended December 31, 1996.........              31

     Consolidated Statements of Cash Flows for Each
        of the Three Years in the Period Ended
        December 31, 1996...................................              32

     Notes to Consolidated Financial Statements for
        Each of the Three Years in the Period Ended
        December 31, 1996...................................              33

Financial Statement Schedules:
     Schedule II - Valuation and Qualifying Accounts
        for the Three Years Ended December 31, 1996.........              45

     Schedule III - Real Estate and Accumulated
        Depreciation as of December 31, 1996................              46


                                       27

<PAGE>



INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
Koger Equity, Inc.
Jacksonville, Florida

We have audited the  accompanying  consolidated  balance sheets of Koger Equity,
Inc. and subsidiaries  (the "Company") as of December 31, 1996 and 1995, and the
related consolidated statements of operations,  changes in shareholders' equity,
and cash flows for each of the three  years in the  period  ended  December  31,
1996. Our audits also included the financial  statement  schedules listed in the
Index at Item 8. These financial  statements and financial  statement  schedules
are the  responsibility of the Company's  management.  Our  responsibility is to
express  an  opinion  on these  financial  statements  and  financial  statement
schedules based on our audits.

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

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



DELOITTE & TOUCHE LLP


Jacksonville, Florida
February 28, 1997

                                       28

<PAGE>
<TABLE>
<CAPTION>



                       KOGER EQUITY, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 1996 AND 1995
                        (In Thousands Except Share Data)

                                                                                   1996                1995
                                                                                  ------              -----
<S>                                                                                  <C>                 <C>     
ASSETS
Real Estate Investments:
   Operating properties:
     Land                                                                           $  98,567           $  98,727
     Buildings                                                                        482,836             471,145
     Furniture and equipment                                                            1,569               1,441
     Accumulated depreciation                                                         (82,478)            (62,845)
                                                                                   ----------           ---------
         Operating properties - net                                                   500,494             508,468
   Properties under construction:
     Land                                                                               2,083
     Buildings                                                                            930
   Undeveloped land held for investment                                                20,558              21,150
   Undeveloped land held for sale                                                       6,550               9,131
Cash and temporary investments                                                         35,715              25,415
Accounts receivable, net of allowance for uncollectible
     accounts of $231 and $391                                                          5,600               4,724
Investment in Koger Realty Services, Inc.                                                 259                 407
Cost in excess of fair value of net assets acquired
   net of accumulated amortization of $515 and $345                                     2,040               2,211
Other assets                                                                           10,437               7,250
                                                                                   ----------         -----------
      TOTAL ASSETS                                                                   $584,666            $578,756
                                                                                     ========            ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
   Mortgages and loans payable                                                       $203,044            $254,909
   Accounts payable                                                                     4,662               2,631
   Accrued real estate taxes payable                                                    2,144               2,222
   Accrued liabilities - other                                                          5,467               4,723
   Dividends payable                                                                    1,045
   Advance rents and security deposits                                                  4,169               3,574
                                                                                 ------------         -----------
      Total Liabilities                                                               220,531             268,059
                                                                                 ------------         -----------

Commitments and Contingencies (Notes 2, 11  and 12)                                      -                   -

Shareholders' Equity:
   Preferred stock, $.01 par value; 50,000,000  shares
      authorized; issued: none
   Common stock, $.01 par value; 100,000,000 shares
      authorized; issued: 23,560,427 and 20,476,705 shares;
      outstanding: 20,892,574 and 17,753,677 shares                                       236                 205
   Capital in excess of par value                                                     362,127             318,609
   Warrants; outstanding 1,110,887 and 1,114,217                                        2,243               2,250
   Retained earnings                                                                   22,666              13,210
   Treasury stock, at cost; 2,667,853 and 2,723,028 shares                            (23,137)            (23,577)
                                                                                   ----------          ----------
     Total Shareholders' Equity                                                       364,135             310,697
                                                                                    ---------           ---------
     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                      $584,666            $578,756
                                                                                     ========            ========

See Notes to Consolidated Financial Statements.

</TABLE>

                                       29

<PAGE>

<TABLE>
<CAPTION>



                       KOGER EQUITY, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    FOR EACH OF THE THREE YEARS IN THE PERIOD
                             ENDED DECEMBER 31, 1996
                      (In Thousands Except Per Share Data)


                                                                            1996              1995             1994
                                                                            ----              ----             ----
<S>                                                                    <C>                <C>              <C>        
Revenues
  Rental                                                                   $ 98,342          $ 94,865         $ 93,132
  Other rental services                                                         463               578            1,256
  Management fees ($0, $1,685 and  $3,288 from TKPL)                          2,682             3,624            4,926
  Interest ($13,066 from TKPL in 1995)                                        1,951            14,440            1,062
  Income from Koger Realty Services, Inc.                                       342                36
  Gain on TKPL note to Southeast                                                292            11,288
  Gain on early retirement of debt                                                                919
                                                                           --------          --------         --------
     Total revenues                                                         104,072           125,750          100,376
                                                                           --------          --------         --------

Expenses
  Property operations                                                        41,597            40,830           39,711
  Depreciation and amortization                                              21,127            19,102           16,728
  Mortgage and loan interest                                                 18,701            23,708           25,872
  General and administrative                                                  6,623             7,559            6,366
  Direct cost of management fees                                              1,884             2,837            3,649
  Undeveloped land costs                                                        517               512              667
  Litigation costs                                                              424               176            1,902
  Loss on sale or disposition  of assets                                        497               255               43
  Provision for loss on land held for sale                                                        970              996
  Other                                                                                           745
                                                                           --------          --------         --------
      Total expenses                                                         91,370            96,694           95,934
                                                                           --------          --------         --------

Income Before Income Taxes                                                   12,702            29,056            4,442
Income taxes                                                                    815                66              227
                                                                           --------          --------         --------
Income Before Extraordinary Item                                             11,887            28,990            4,215
Extraordinary loss on early retirement of debt                                1,386
                                                                           --------          --------         --------
Net Income                                                                 $ 10,501         $  28,990       $    4,215
                                                                           ========         =========       ==========

Earnings Per Common Share and Common
  Equivalent Share:
   Primary      -
      Income before extraordinary item                                 $      0.61        $      1.61      $      0.24
      Extraordinary loss                                                     (0.07)
                                                                           --------          --------         --------
      Net Income                                                       $      0.54        $      1.61      $      0.24
                                                                       ===========        ===========      ===========
   Fully Diluted -
      Income before extraordinary item                                 $      0.61         $     1.60      $      0.24
      Extraordinary loss                                                      (0.07)
                                                                       ------------
      Net Income                                                       $      0.54         $     1.60      $      0.24
                                                                       ===========         ==========      ===========

See Notes to Consolidated Financial Statements.
</TABLE>






                                       30

<PAGE>

<TABLE>
<CAPTION>


                                                KOGER EQUITY, INC. AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                             FOR EACH OF THE THREE YEARS IN THE PERIOD
                                                      ENDED DECEMBER 31, 1996
                                                           (In Thousands)


                                                                                 Retained Earnings
                                                      Capital                      (Accumulated                        Total
                                         Common Stock   in Excess                   Dividends                           Share-
                               Shares       Par       of Par                      in Excess of        Treasury          holders'
                              Issued        Value      Value          Warrants      Net  Income)       Stock            Equity
                            ----------      -----   ------------      -------- --------------------------------    -----------
<S>                             <C>          <C>        <C>            <C>                <C>         <C>               <C>     
BALANCE
  DECEMBER 31, 1993             20,472       $205       $318,574       $1,368            $(19,872)    $(24,825)         $275,450

Treasury stock reissued                                       (3)                                           38               35
Warrants issued                                                           885                                                885
Warrants exercised                   1                        12           (2)                                                10
Options exercised                    1                         6                                                               6
Net income                                                                                  4,215                          4,215
                                ------       ----       --------       ------            --------     --------          --------
BALANCE,
  DECEMBER 31, 1994             20,474        205        318,589        2,251             (15,657)     (24,787)          280,601

Treasury stock reissued                                                                      (123)       1,217             1,094
Warrants exercised                   1                         7           (1)                                                 6
Options exercised                    1                         7                                            (7)
Stock appreciation
  rights exercised                   1                         6                                                               6
Net income                                                                                 28,990                         28,990
                                ------       ----       --------       ------            --------     --------          --------
BALANCE,
  DECEMBER 31, 1995             20,477        205        318,609        2,250              13,210      (23,577)          310,697

Treasury stock reissued                                      182                                           487               669
Warrants exercised                   3                        33           (7)                                                26
Options exercised                   57          1            519                                           (47)              473
Stock appreciation
  rights exercised                  23                       270                                                             270
Common stock issued              3,000         30         42,514                                                          42,544
Dividends declared                                                                         (1,045)                        (1,045)
Net income                                                                                 10,501                         10,501
                                ------       ----       --------       ------            --------     --------          --------
BALANCE,
  DECEMBER 31, 1996             23,560       $236       $362,127       $2,243             $22,666     $(23,137)         $364,135
                               =======       ====       ========       ======            ========     ========         =========


See Notes to Consolidated Financial Statements.








</TABLE>


                                       31

<PAGE>

<TABLE>
<CAPTION>


                                            KOGER EQUITY, INC. AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                         FOR EACH OF THE THREE YEARS IN THE PERIOD
                                                  ENDED DECEMBER 31, 1996
                                                      (In Thousands)

                                                                          1996           1995             1994
                                                                          ----           ----             ----
<S>                                                                  <C>               <C>               <C>     
Operating Activities
    Net income                                                        $ 10,501         $ 28,990         $   4,215
    Adjustments to reconcile net income to net cash
      provided by operating activities:
      Depreciation and amortization                                     21,127           19,102            16,728
      Gain on TKPL note to Southeast                                      (292)         (11,288)
      Warrants issued - litigation settlement                                                                 885
      Provision for loss on land held for sale                                              970               996
      Loss on sale or disposition of assets                                497              255                43
      Loss/(gain) on early debt repayment                                1,386             (919)
      Income from Koger Realty Services, Inc.                             (342)             (36)
      Provision for uncollectible rents                                     50              172               212
      Accrued interest added to principal                                  112              496             1,336
      Amortization of mortgage discounts                                   196              175               219
      Changes in assets and liabilities:
         Increase in accounts payable, accrued
           liabilities and other liabilities                             3,542            4,500                35
         Increase in receivables and other assets                         (829)            (349)           (3,176)
         Decrease (increase) in receivable from TKPL                                      1,851            (1,217)
                                                                 -------------        ---------          ----------
      Net cash provided by operating activities                         35,948           43,919            20,276
                                                                      --------         --------         ---------
Investing Activities
   Proceeds from sale of assets                                          1,241           25,267             3,499
   Proceeds from TKPL note to Southeast                                    887           17,105
   Proceeds from TKPL mortgage notes                                                     18,195
   Purchase of TKPL mortgage notes                                                      (18,195)
   Tenant improvements to existing properties                           (7,873)          (8,644)           (7,334)
   Building improvements to existing properties                         (2,795)          (3,064)           (3,749)
   Energy management improvements                                       (1,900)          (2,663)
   Building construction expenditures                                     (930)
   Deferred tenant costs                                                (1,862)          (1,085)           (1,112)
   Additions to furniture and equipment                                   (128)            (330)             (383)
   Purchase of Koger Realty Services, Inc. preferred stock                                 (300)
   Dividends received from Koger Realty Services, Inc.                     490
   Merger costs                                                                                              (344)
   Cash acquired in purchase of assets                                                      307             2,316
                                                                --------------     ------------       -----------
      Net cash provided by (used in) investing activities              (12,870)          26,593            (7,107)
                                                                     ---------       ----------       -----------
Financing Activities
   Principal payments on mortgages and loans                          (228,090)         (68,608)           (8,267)
   Proceeds from mortgages                                             175,900
   Proceeds from sale of common stock                                   42,748              206                35
   Proceeds from exercise of warrants and stock options                    376                6                16
   Financing costs                                                      (3,712)             (16)             (204)
                                                                   -----------    -------------       -----------
      Net cash used in financing activities                            (12,778)         (68,412)           (8,420)
                                                                    ----------       ----------        ----------
Net increase in cash and cash equivalents                               10,300            2,100             4,749
Cash and cash equivalents - beginning of year                           25,415           23,315            18,566
                                                                    ----------        ---------         ---------
Cash and cash equivalents - end of year                              $  35,715         $ 25,415          $ 23,315
                                                                     =========         ========          ========

See Notes to Consolidated Financial Statements.

</TABLE>

                                       32

<PAGE>



                       KOGER EQUITY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR EACH OF THE THREE YEARS IN THE PERIOD
                             ENDED DECEMBER 31, 1996

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

      Organization.  Koger Equity,  Inc.  ("KE") was  incorporated in Florida on
June  21,  1988.  KE has  two  wholly-owned  subsidiaries  which  are  Southeast
Properties Holding Corporation ("Southeast"),  a Florida corporation,  and Koger
Real Estate Services, Inc. ("KRES"), a Florida corporation.

      Principles of Consolidation. The consolidated financial statements include
the  accounts  of KE and its  wholly-owned  subsidiaries  (the  "Company").  All
material intercompany accounts have been eliminated in consolidation.

      Investment in Koger Realty Services,  Inc. Koger Realty Services,  Inc., a
Delaware corporation ("KRSI"), provides leasing and property management services
to owners of commercial office buildings. During 1995, the Company purchased all
of the preferred stock of KRSI,  which  preferred  stock  represents at least 95
percent of the  economic  value of KRSI.  Initially,  such  preferred  stock was
non-voting  but was  convertible  into  voting  common  stock.  Accordingly,  KE
consolidated  KRSI in the 1995  financial  statements.  During 1996, the Company
requested KRSI to change the convertibility feature of the preferred stock owned
by the Company.  Effective in 1996, the preferred stock is non-voting and is not
convertible into the common stock of KRSI while held by the Company. The Company
has accounted for its investment in the preferred stock of KRSI using the equity
method.

      Real Estate Investments.  Operating  properties,  furniture and equipment,
and  undeveloped  land held for investment  are stated at cost less  accumulated
depreciation.  Undeveloped land held for sale is carried at the lower of cost or
fair value less selling costs.

      Periodically,  management  reviews its portfolio of operating  properties,
undeveloped land held for investment and related goodwill and in those instances
where properties have suffered an impairment in value that is deemed to be other
than  temporary,  the properties  and related  goodwill will be reduced to their
fair value.  This review includes a quarterly  analysis of occupancy  levels and
rental rates for the Company's  properties in order to identify properties which
may have  suffered an  impairment  in value.  Management  prepares  estimates of
future cash flows for these properties to determine  whether the Company will be
able to recover its investment.  In making such estimates,  management considers
the conditions in the commercial real estate markets in which the properties are
located,  current and expected  occupancy  rates,  current and  expected  rental
rates,  and expected  changes in operating costs. As of December 31, 1996, there
were no such  impairments  in value.  Maintenance  and  repairs  are  charged to
operations. Acquisitions, additions, and improvements are capitalized.

      Depreciation and Amortization.  The Company uses the straight-line  method
for depreciation and amortization.  Acquisition costs, building improvements and
tenant   improvements  are  depreciated  over  the  periods   benefited  by  the
expenditures  which range from 3 to 40 years.  Deferred  tenant  costs  (leasing
commissions  and tenant  relocation  costs) are  amortized  over the term of the
related  leases.  Deferred  financing  costs are amortized over the terms of the
related agreements. Cost in excess of fair value of net assets acquired is being
amortized over 15 years.

                                       33

<PAGE>



      Revenue Recognition.  Rentals are generally recognized as revenue over the
lives of leases according to provisions of the lease  agreements.  However,  the
straight-line  basis,  which  averages  annual  minimum  rents over the terms of
leases,  is used to recognize  minimum rent revenues  under leases which provide
for  material  varying  rents over their  terms.  For 1996,  1995 and 1994,  the
recognition  of rental  revenues on this basis for applicable  leases  increased
rental revenues by $114,000, $80,000 and $512,000, respectively, over the amount
which would have been recognized based upon the contractual  provisions of these
leases. Interest revenue is recognized on the accrual basis for interest-earning
investments.

      Federal  Income  Taxes.  The  Company is  qualified  and has  elected  tax
treatment as a real estate  investment  trust under the Internal Revenue Code (a
"REIT").  Accordingly,  the Company  distributes at least 95 percent of its REIT
taxable income to its shareholders. Since the Company had no REIT taxable income
in 1996, 1995 or 1994, no distributions to shareholders were made. To the extent
that the Company pays dividends equal to 100 percent of REIT taxable income, the
earnings of the Company are taxed at the shareholder level.  However, the use of
net operating loss carryforwards,  which may reduce REIT taxable income to zero,
are limited for alternative minimum tax purposes.

      Earnings Per Common  Share.  Earnings per common share have been  computed
based on the weighted  average number of shares of common stock and common stock
equivalents outstanding as follows:

          Year                 Primary                 Fully Diluted
          ----                 -------                 -------------
          1996               19,500,171                 19,575,513
          1995               18,011,076                 18,091,029
          1994               17,718,757                 17,718,757

      Fair  Value  of  Financial  Instruments.  The  Company  believes  that the
carrying amount of its financial instruments  (temporary  investments,  accounts
receivable,  accounts payable,  and mortgages and loans payable) is a reasonable
estimate of fair value of these instruments.

      Statements of Cash Flows. Cash in excess of daily requirements is invested
in short-term  monetary  securities.  Such  temporary cash  investments  have an
original  maturity  of  less  than  three  months  and  are  deemed  to be  cash
equivalents for purposes of the statements of cash flows.

      During  1994,  cost in excess of fair  value of net  assets  acquired  was
adjusted as follows: (1) assets acquired increased  $2,250,000;  (2) liabilities
assumed increased $243,000; and (3) additional direct merger costs were incurred
which totalled $344,000. During 1995, cost in excess of fair value of net assets
acquired was adjusted as follows:  (1) assets acquired increased  $169,000;  and
(2)  liabilities  assumed  increased  $1,000.  In  addition,  $6,412,000  of the
unamortized  cost in excess of fair value of net assets acquired was written off
and offset against proceeds  received by Southeast from the TKPL unsecured note.
This write-off was based on management's  analysis of the remaining value of the
intangible  assets based on the liquidation of TKPL and the partial repayment of
the TKPL unsecured note.

      During 1995, the Company contributed 122,441 shares of common stock to the
Company's 401(k) Plan. These shares had a value of approximately  $888,000 based
on the  closing  price  of the  Company's  common  stock on the  American  Stock
Exchange on December 30, 1994. In addition,  TKPL  assigned  $595,000 of its net
assets to Southeast as payment on the unsecured  note to Southeast  during 1995.
During  1996,  the  Company  contributed  43,804  shares of common  stock to the


                                       34

<PAGE>



Company's 401(k) Plan. These shares had a value of approximately  $465,000 based
on the  closing  price  of the  Company's  common  stock on the  American  Stock
Exchange on December 31, 1995.

      For  1996,  1995,  and  1994,  total  interest  payments  (net of  amounts
capitalized) were $18,599,000,  $23,823,000 and $23,525,000,  respectively,  for
the  Company.  For 1996,  1995 and 1994,  payments  for  income  taxes  totalled
$816,000, $133,000 and $227,000, respectively.

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

      New  Accounting  Standards.   In  March  1995,  the  Financial  Accounting
Standards  Board issued  Statement of Financial  Accounting  Standards  No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"). SFAS 121 establishes  accounting standards for the
impairment of long-lived assets, certain identifiable intangibles,  and goodwill
related  to those  assets  to be held and used  and for  long-lived  assets  and
certain  identifiable  intangibles  to be disposed of. SFAS 121 is effective for
the Company for the year ending  December 31, 1996. The adoption of SFAS 121 did
not have a material effect on the financial statements of the Company.

      In October 1995,  the  Financial  Accounting  Standards  Board also issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation"   ("SFAS  123").  SFAS  123  requires   expanded   disclosures  of
stock-based  compensation  arrangements  with employees and encourages (but does
not  require)  compensation  cost to be measured  based on the fair value of the
equity  instrument  awarded.  Companies are permitted,  however,  to continue to
apply  Accounting  Principles  Board Opinion No. 25 ("APB 25"), which recognizes
compensation cost based on the intrinsic value of the equity instrument awarded.
The Company will continue to apply APB 25 to its stock based compensation awards
to employees  and has  disclosed the required pro forma effect on net income and
earnings per share.

      Reclassification.  Certain 1995 and 1994 amounts have been reclassified to
conform with 1996 presentation.

2.    TRANSACTIONS WITH RELATED PARTIES.

      Three  directors were elected to the Company's Board under the terms of an
agreement  dated October 10, 1996 between the Company and an affiliate of Apollo
Real  Estate  Investment  Fund II,  L.P.  ("Apollo")  pursuant  to which  Apollo
purchased  three  million  shares of common  stock  from the  Company  for $43.5
million ($14.50 per share).  Such agreement grants to Apollo registration rights
and a conditional  exemption from certain of the Company's takeover defenses and
provides that for a period of three years (subject to earlier  termination under
certain  circumstances):  (i)  Apollo  may  purchase  up to 25  percent  of  the
Company's   outstanding   stock;   (ii)   Apollo   will  be  entitled  to  Board
representation  of up to  three  directors  on a  board  of  not  more  than  12
(depending  upon  Apollo's  level of ownership of the common  stock);  and (iii)
Apollo will not acquire more than 25 percent of the Company's  outstanding stock
and will vote its shares as to certain  matters  either in  accordance  with the
recommendation of the Board or proportionately  with other shareholders,  unless


                                       35

<PAGE>



the Company  breaches its agreements or, without Apollo's  consent,  the Company
takes certain  significant  actions such as certain  amendments of the Company's
organizational documents,  liquidation,  termination of REIT status, sale of the
Company,  acquisitions or disposition over a certain size, issuance of more than
9.8 percent of the  outstanding  common stock to a person or group or failure by
the Company to employ its takeover defenses against another person who holds (or
tender for) 15 percent or more of the common stock.

      The  proceeds  of the Apollo  stock  sale were used to retire  debt with a
weighted   average  interest  rate  of  8.04%.  Pro  forma  earnings  per  share
information  assuming  the  debt  was  retired  at the  beginning  of 1996 is as
follows:

          Pro forma net income                    $13,291,000  
          Pro forma  earnings  per share:
                       Primary                    $      0.61
                       Fully diluted              $      0.61

      In connection with the above transaction,  Rothschild Realty,  Inc., which
employs Mr.  Aloian as a Managing  Director,  received  $350,000 for providing a
fairness  opinion to the Company's Board of Directors.  Also, Mr. Hiley received
from the Company a fee of $204,000 for his role in negotiating the  transaction.
Both Mr. Aloian and Mr. Hiley are directors of the Company.

      Pursuant to a Consulting  Agreement with the Company,  which is subject to
periodic  evaluation by the Board of Directors,  Mr. Hiley provides  advice with
respect to the financial aspects of the Company's  strategic plan and was paid a
fee of $146,000 for 1996.

      Mr. Davis retired as an employee of the Company on December 31, 1996,  but
continues  to serve the  Company as a  consultant.  Pursuant  to the  Consulting
Agreement between Mr. Davis and the Company, he will receive a consulting fee of
$50,000 per year through December 31, 1999.

3.    INVESTMENTS IN THE KOGER PARTNERSHIP, LTD.

      General.  Southeast,  a  wholly-owned  subsidiary of the Company,  was the
managing  general  partner  of  TKPL  through  December  26,  1995.  Southeast's
interests in TKPL included (1) 90,360 TKPL General and Limited Partnership Units
(the "Units") and (2) a  restructured  unsecured note from TKPL with a principal
amount  of  approximately  $31  million.   In  light  of  the  terms  of  TKPL's
restructured  debt, the Company had  determined  that these  investments  had no
value. During 1995, TKPL sold all of its operating properties.  The net proceeds
from the sale were  sufficient  to repay in full all  secured  debt and  accrued
interest of TKPL with the remaining  excess sales proceeds and available cash of
TKPL used to pay  Southeast  for amounts  owed on  subordinate  debt and accrued
interest.  During 1995,  TKPL repaid $17.7  million of the  subordinate  debt to
Southeast. On December 4, 1995, the Bankruptcy Court in the TKPL Chapter 11 Case
entered an order  authorizing and directing  Southeast to take all necessary and
advisable  action to wind up TKPL's  affairs and to terminate its existence as a
partnership.  On December 26, 1995, TKPL was dissolved.  The Company  recorded a
gain on the  recovery of the TKPL note to Southeast  of  $11,288,000,  which was
calculated as follows:

     Proceeds from TKPL unsecured note to Southeast              $17,700,000
     Partial Write-off of Cost in Excess of Fair Value of
       Net Assets Acquired                                        (6,412,000)
                                                                  ---------- 
          Gain on TKPL Note to Southeast                         $11,288,000
                                                                 ===========

                                       36

<PAGE>



      Basis of Accounting for the Investment in TKPL.  Southeast had significant
influence over TKPL's  activities  because it owned  approximately 32 percent of
TKPL's outstanding Units. However, Southeast did not control TKPL for accounting
purposes and, accordingly, accounted for its investment using the equity method.
No  losses  of TKPL  were  allocated  to  Southeast  because  Southeast  was not
obligated  to fund losses of TKPL as stated in the Third  Amended  and  Restated
Agreement of Limited Partnership dated August 3, 1993.

      Duties to and  Compensation  from  TKPL.  Southeast,  in its  capacity  as
Managing General Partner, generally had responsibility for all aspects of TKPL's
operations and received as compensation  for its services a management fee equal
to nine percent of the gross rental  revenues  derived  from the  properties  it
managed for TKPL. All third-party leasing commissions incurred on TKPL buildings
were the  responsibility  of the Company.  During 1995 and 1994,  the management
fees earned were approximately $1,685,000 and $3,288,000,  respectively.  During
the fourth quarter of 1995,  approximately $500,000 of management fees from TKPL
previously recorded were written off because collection of these fees could have
potentially affected the Company's REIT status.

      Purchase of TKPL Mortgage  Notes.  During 1995, KE acquired  $27.8 million
principal amount of TKPL New Secured Notes and $4.5 million  principal amount of
TKPL  Converted  Loan Notes for  approximately  $18.2 million in the  aggregate.
During 1995,  the TKPL New Secured Notes and the TKPL  Converted Loan Notes were
retired by TKPL. The Company recorded $13,066,000 of interest revenue related to
these notes  during 1995 which  represented  repayment  proceeds on the notes in
excess of the Company's  cost basis.  These excess  proceeds were recorded as an
interest yield adjustment on the notes.

4.    MORTGAGES AND LOANS PAYABLE.

      On  December  18,  1996,  the Company  closed on $175.9  million of a $190
million  non-recourse  loan with  Northwestern  Mutual  Life  Insurance  Company
("Northwestern")  which is secured by 10 office parks. This loan is divided into
(i) a tranche  in the amount of $100.5  million  ($86.4  million  which has been
drawn) with a 10 year  maturity and an interest  rate of 8.25 percent and (ii) a
tranche  in the  amount  of $89.5  million  with a  maturity  of 12 years and an
interest  rate of 8.33 percent.  The Company  plans to draw the  remaining  loan
proceeds  when the  existing  indebtedness  on two  buildings  matures.  Monthly
payments  on  this  loan  include  principal  amortization  based  on a 25  year
amortization period. This indebtedness  requires the Company to maintain certain
financial  ratios and is  collateralized  by properties with a carrying value of
approximately $253.8 million at December 31, 1996.

      At December  31,  1996,  the Company had other  mortgages  payable with an
outstanding  balance of $27,142,000  which is net of a $369,000  discount.  Such
mortgages  are  generally  amortizing,  bear  interest at rates ranging from 8.5
percent to 10.125 percent,  and are  collateralized  by office  buildings with a
carrying value of approximately $50.2 million at December 31, 1996.

      With the proceeds of a private  placement of three  million  shares of the
Company's common stock and the Northwestern  loan, the Company repaid all of its
debt which had been restructured during 1993.

      The Company has signed a  commitment  for a $50 million  revolving  credit
facility, subject to sufficient collateral being provided to fund this facility.
Based on the  Company's  election,  the interest rate on this  revolving  credit
facility  will be either (i) the  lender's  LIBOR rate plus 200 basis  points or
(ii) the  lender's  prime rate.  Interest  payments  will be due monthly on this


                                       37

<PAGE>



credit  facility  which has a term of two years.  At the election of the lender,
the term of this credit  facility may be extended for additional  periods of one
year each.

      The annual maturities of loans and mortgages  payable,  which are gross of
$369,000 of  unamortized  discounts,  as of December 31, 1996, are summarized as
follows:

               Year Ending                                Amount
               December 31,                            (In thousands)
               ------------                            ---------------
                    1997                                 $  11,333
                    1998                                     3,909
                    1999                                     3,502
                    2000                                    17,971
                    2001                                     3,184
                    Subsequent Years                       163,514
                                                         ---------
                        Total                             $203,413
                                                          ========

5.    LEASES.

      The  Company's  operations  consist  principally  of owning and leasing of
office  space.  Most of the  leases  are  for  terms  of  three  to five  years.
Generally, the Company pays all operating expenses,  including real estate taxes
and insurance.  At December 31, 1996,  approximately 94 percent of the Company's
annualized  rentals  were  subject to rent  escalations  based on changes in the
Consumer  Price Index or increases  in real estate  taxes and certain  operating
expenses.  A substantial  number of leases contain  options that allow leases to
renew for varying periods.

      The  Company's  leases are  operating  leases and expire at various  dates
through 2014.  Minimum future rental  revenues from leases in effect at December
31, 1996,  determined  without  regard to renewal  options,  are  summarized  as
follows:

                    Year Ending                                  Amount
                    December 31,                           (In  thousands)
                    ------------                           ---------------
                         1997                                 $  88,825
                         1998                                    66,783
                         1999                                    46,759
                         2000                                    34,423
                         2001                                    21,693
                         Subsequent Years                        61,470
                                                             ----------
                             Total                             $319,953
                                                               ========

      The above  minimum  future  rental  revenue  does not  include  contingent
rentals  that  may  be  received  under  provisions  of  the  lease  agreements.
Contingent  rentals  amounted to  $2,886,000,  $1,792,000 and $2,172,000 for the
years 1996, 1995, and 1994, respectively.

      At December 31, 1996,  annualized rental revenues  totalled  approximately
$13,500,000  for the State of Florida,  when all of its departments and agencies
which lease space in the Company's buildings were combined.  Also, at that date,
annualized  rental revenues  totalled  approximately  $10,498,000 for the United
States of America, when all of its departments and agencies which lease space in
the Company's buildings were combined.

                                       38

<PAGE>



6.    STOCK OPTIONS AND RIGHTS.

      1988 Stock  Option Plan.  The  Company's  Amended and Restated  1988 Stock
Option Plan (the "1988  Plan")  provides for the granting of options to purchase
up to 500,000 shares of its common stock to key employees of the Company and its
subsidiaries.  To exercise  the option,  payment of the option price is required
before the option shares are  delivered.  These options  expire seven years from
the date of grant and are generally exercisable beginning one year from the date
of the grant at the rate of 20 percent  per annum of the shares  covered by each
option on a cumulative  basis being fully  exercisable five years after the date
of grant.

      1993 Stock Option Plan.  The  Company's  1993 Stock Option Plan (the "1993
Plan")  provides for the granting of options to purchase up to 1,000,000  shares
of its common  stock to key  employees  of the  Company and its  affiliates.  To
exercise the option,  payment of the option price is required  before the option
shares are delivered.  These options expire ten years from the date of grant and
are generally  exercisable  beginning one year from the date of the grant at the
rate  of 20  percent  per  annum  of the  shares  covered  by each  option  on a
cumulative basis being fully exercisable five years after the date of grant.

      1996 Stock Option Plan.  The  Company's  1996 Stock Option Plan (the "1996
Plan")  provides for the granting of options to purchase up to 650,000 shares of
its common  stock to key  employees  of the  Company.  To  exercise  the option,
payment of the option price is required  before the option shares are delivered.
These  options  expire  ten  years  from the date of grant  and are  exercisable
beginning  one year  from the date of the  grant at the rate of 20  percent  per
annum of the shares  covered by each  option on a  cumulative  basis being fully
exercisable five years after the date of grant.

      Information  Concerning Options Granted.  Substantially all of the options
granted have been  granted  with an exercise  price equal to the market value at
the date of  grant.  If  compensation  cost for  stock  option  grants  had been
determined  based  on the  fair  value  at the  grant  dates  for  1996 and 1995
consistent  with the method  prescribed  by SFAS 123, the Company's net earnings
and  earnings  per share  would  have  been  adjusted  to the pro forma  amounts
indicated below:

                                                       1996           1995
                                                  -----------    -----------
     Net Income - As reported                     $10,501,000    $28,990,000
                  - Pro forma                     $10,139,000    $28,960,000

     Primary Earnings per share - As reported     $      0.54    $      1.61
                                  - Pro forma     $      0.52    $      1.61

      Under SFAS 123,  the fair value of each option  grant is  estimated on the
date of grant  using  the  binomial  option-pricing  model  with  the  following
weighted-average assumptions used for grants in 1996 and 1995:

                                                       1996           1995
                                                  -----------    -----------
                1988 Plan
                     Dividend Yield                   5.00%          5.00%
                     Expected Volatility             28.09%         43.70%
                     Risk-free Interest Rates         6.52%          7.35%
                     Expected Lives (Months)            61             69

                                       39

<PAGE>



                                                        1996           1995
                                                  -----------    -----------
                1993 Plan and 1996 Plan
                     Dividend Yield                    5.00%            5.00%
                     Expected Volatility              24.17%           43.60%
                     Risk-free Interest Rates          6.29%            7.37%
                     Expected Lives (Months)             86               69

      A summary of the status of fixed stock  option  grants as of December  31,
1996,  1995 and 1994,  and  changes  during the years  ending on those  dates is
presented below:
<TABLE>
<CAPTION>

                                                  1996                        1995                           1994
                                                  ----                        ----                           ----
                                                       Weighted                     Weighted                       Weighted
                                                       Average                      Average                        Average
                                                       Exercise                     Exercise                       Exercise
                                         Options         Price        Options        Price          Options         Price
                                         -------         -----        -------        -----          -------         -----
<S>                                     <C>              <C>         <C>              <C>          <C>               <C>    
Outstanding - beginning of year         1,251,862        $ 7.04      1,557,412        $  9.54        758,576         $14.39
   Granted                                923,981         14.39        311,800           7.53        973,282           7.63
   Exercised                             (146,268)         7.33         (5,470)          6.96         (1,200)          5.13
   Expired                                      0             -       (299,180)         20.00              0              -
   Forfeited                             (100,616)         7.69       (312,700)          7.60       (173,246)         20.00
                                       ----------                   ----------                    ----------
Outstanding - end of year               1,928,959        $10.51      1,251,862        $  7.04      1,557,412         $ 9.54
                                        =========        ======      =========        =======      =========        =======

</TABLE>

      The weighted  average fair values of options  granted during 1996 and 1995
were $3.79 and $3.44 per option, respectively.

<TABLE>
<CAPTION>

      The  following  table  summaries  information  about fixed  stock  options
outstanding at December 31, 1996:

                  Exercise                Options                    Options               Weighted Average
                  Price                  Outstanding                Exercisable             Remaining Life
                  -----                  -----------                -----------             --------------
                                                                                             (Months)
<S>                <C>                     <C>                          <C>                       <C>
                   $  5.125                  266,786                    209,536                    25
                      7.500                  182,500                     19,972                    96
                      7.625                  572,879                    227,426                    78
                      8.125                    6,000                      1,200                   100
                     11.500                  189,294                    135,744                   103
                     15.375                  711,500                          0                   119
                                          ----------                   --------
                                           1,928,959                    593,878                    90
                                           =========                    =======                 =====

</TABLE>

      Remaining   non-exercisable   options  as  of  December  31,  1996  become
exercisable as follows:

                                           Number
                    Year                 of Options
                    ----                 ----------
                    1997                    387,243
                    1998                    329,993
                    1999                    329,993
                    2000                    164,842
                    2001                    123,010
                                         ----------
                                          1,335,081
                                          =========

                                       40

<PAGE>



      Warrants.  The Company had 1,110,887 and 1,114,217 Warrants outstanding on
December  31, 1996 and 1995,  respectively.  Each  Warrant  gives the holder the
right to purchase one share of common stock at a price of $8.00 per share,  such
rights to be  exercisable  until June 30,  1999.  The  Warrants  are  subject to
redemption at the option of the Company at prices  currently  ranging from $3.48
to $5.24 per Warrant.

      Shareholder  Rights  Plan.  Pursuant  to a  Shareholder  Rights  Plan (the
"Rights  Plan"),  on September  30, 1990,  the Board of Directors of the Company
declared a dividend  of one Common  Stock  Purchase  Right for each  outstanding
share of common  stock of the Company.  Under the terms of the Rights Plan,  the
rights which were distributed to the shareholders of record on October 11, 1990,
trade  together  with the  Company's  common  stock (the  "Shares")  and are not
exercisable  until the occurrence of certain events (none of which have occurred
through  December 31, 1996),  including  acquisition  of, or  commencement  of a
tender  offer for, 15 percent or more of the  Company's  common  stock.  In such
event,  each right  entitles  its holder  (other  than the  acquiring  person or
bidder) to acquire  additional  shares of the Company's  common stock at a fifty
percent  discount  from the  market  price.  The  rights  are  redeemable  under
circumstances  as  specified  in the Rights  Plan.  The Rights  Plan was amended
effective  October 10, 1996 for a certain  shareholder and its  affiliates.  See
Note 2 for further discussion of this amendment.

7.    STOCK INVESTMENT PLAN.

      During 1994,  the Company  adopted a Monthly  Stock  Investment  Plan (the
"SIP") which provides for regular purchases of the Company's common stock by all
employees and  directors.  The SIP provides for monthly  payroll and  directors'
fees  deductions  up to  $1,700  per  month  with  the  Company  making  monthly
contributions for the account of each participant as follows:  (i) 25 percent of
amounts up to $50; (ii) 20 percent of amounts between $50 and $100; and (iii) 15
percent  of  amounts  between  $100 and  $1,700,  which  amounts  are used by an
unaffiliated Administrator to purchase shares from the Company.

      The Company has reserved a total of 200,000  Shares for issuance under the
SIP. The Company's  contribution and the expenses  incurred in administering the
SIP totalled approximately $36,700,  $34,800 and $7,900 for 1996, 1995 and 1994,
respectively.  Through  December 31, 1996,  45,016 Shares have been issued under
the SIP.

8.     EMPLOYEE BENEFIT PLANS.

      During 1994,  the Company  adopted a 401(k) plan (the "401(k) Plan") which
permits contributions by employees.  The Company's Board of Directors approved a
Company  contribution to the 401(k) Plan for 1994. This  contribution was in the
form of the  Company's  common  stock and was made during  February,  1995.  The
contribution totalled 122,441 Shares which had a value of approximately $888,000
on December 31, 1994.  For 1995,  the  Company's  Board of Directors  approved a
Company  contribution  to the 401(k)  Plan in the form of the  Company's  Shares
(43,804 Shares which had a value of approximately $465,000 on December 31, 1995)
and cash ($443,000).  The contribution for 1995 was made during February,  1996.
For 1996, the Company's  Board of Directors  approved a Company  contribution to
the 401(k) Plan in the form of the Company's  Shares  (23,657 Shares which had a
value of approximately $444,000 on December 31, 1996). The contribution for 1996
was made on January 6, 1997.

                                       41

<PAGE>



      The  Company's  Board of Directors  has adopted a  supplemental  executive
retirement plan (the "SERP"),  an unfunded  defined benefit plan. The purpose of
the SERP is to facilitate  the  retirement of select key executive  employees by
supplementing  their  benefits  under the  Company's  401(k) Plan.  The document
establishing  the SERP, which became effective on June 28, 1995, was executed by
the Company on August 18,  1995.  The benefits are based on years of service and
the  employee's  average  base salary  during the last three  calendar  years of
employment.

      Net  periodic  pension  cost for the SERP for 1996 and 1995 was as follows
(in thousands) :

                                             1996             1995
                                             ----             ----
     Service Cost                           $  28           $   25
     Interest Cost                            242               94
     Amortization of Unrecognized
          Prior Service Cost                  219              109
                                            -----             ----
                  Total                      $489             $228
                                             ====             ====

      Assumptions  used in the computation of net periodic  pension cost for the
SERP were as follows:

           Discount rate                      7.5%
           Rate of increase in salary levels  5.0%

      The  following  table sets forth the status of the  unfunded  SERP and the
amounts included in accrued  liabilities-other in the Consolidated Balance Sheet
at December 31, 1996 and 1995 (in thousands):


                                                         1996          1995
                                                         ----          ----
     Accumulated benefit obligation                   $  2,370      $ 1,884
     Effect of projected future salary increases         1,126          624
                                                     ---------    ---------
     Projected benefit obligation                     $  3,496      $ 2,508
                                                      --------      -------
     Actuarial present value of projected benefit
          obligations in excess of plan assets        $(3,496)      $(2,508)
     Unrecognized prior service cost                    2,779         2,280
     Additional minimum liability                      (1,653)       (1,656)
                                                     --------       -------
     Accrued pension cost                             $(2,370)      $(1,884)
                                                      =======       =======

9.    DIVIDENDS.

      The Company  paid no dividends  during the three years ended  December 31,
1996. The Company intends that the quarterly dividend payout in the last quarter
of each year will be adjusted to reflect the distribution of at least 95 percent
of the Company's REIT taxable income as required by the Federal income tax laws.
During  December  1996,  the Company's  Board of Directors  declared a quarterly
dividend of $0.05 per share  payable on February 10, 1997,  to  shareholders  of
record on January 6, 1997.

10.   FEDERAL INCOME TAXES.

      The  Company is  operated in a manner so as to qualify and has elected tax
treatment as a REIT.  The  Company's  taxable loss prior to the  dividends  paid


                                       42

<PAGE>



deduction  for  the  years  ended   December  31,  1996,   1995,  and  1994  was
approximately   $401,000,   $23,265,000  and  $15,954,000,   respectively.   The
difference  between  net income for  financial  reporting  purposes  and taxable
income/loss  results  primarily  from  different  methods of accounting  for bad
debts, depreciable lives related to the properties owned, advance rents received
and net operating loss  carryforwards.  At December 31, 1996, the net book basis
of the Company's assets and liabilities exceeded the net tax basis of assets and
liabilities in the amount of approximately $11.9 million.

      The Company utilized  approximately $323,000 and $593,000 of net operating
loss  carryforwards  to  eliminate  REIT  taxable  income  for  1994  and  1995,
respectively.  The Company's net operating loss carryforward available to offset
REIT  taxable  income  for  1996 is  approximately  $14,949,000.  The use of net
operating loss  carryforwards and other tax attributes by the Company is subject
to certain  limitations  imposed by Internal  Revenue Code Sections 382 and 383.
These limitations apply to both regular and alternative minimum taxes. These net
operating  loss  carryforwards  and other tax  attributes can be used in varying
degrees to offset REIT taxable income or tax through 2007. For 1995, the Company
paid  alternative  minimum  taxes  of  approximately  $103,000  and  recorded  a
provision for alternative minimum taxes of approximately $300,000 for 1996.

      During  1996,  the  Internal   Revenue  Service   ("IRS")   completed  its
examination  of the Company's  1992 and 1993 Federal  income tax returns and the
Koger  Properties,  Inc.  ("KPI")  final  Federal  income  tax  return.  The IRS
submitted  their  Report  to  the  Company  and  proposed   disallowing  certain
deductions on KPI's final Federal income tax return, the result of which reduced
the net operating loss  carryforwards  acquired from KPI from  approximately $98
million to $30 million and  required  the payment of  approximately  $169,000 of
alternative minimum tax plus interest.  Management believes this was a favorable
settlement with respect to KPI's final Federal income tax return.  There were no
proposed adjustments to the Company's 1992 and 1993 tax returns.

11.   LITIGATION.

      A  derivative  action  against  the Company in the U. S.  District  Court,
Middle  District of Florida (the "District  Court"),  which commenced on October
29, 1990, has been resolved in favor of the Company. Various amended filings and
counter-claims have been filed against the Company of which the Company does not
believe  that the outcome will  materially  affect its  operations  or financial
position.  The  Company  and the other  parties to this  derivative  action have
agreed on a settlement of all claims and have submitted documentation thereof to
the District  Court.  On January 10, 1996,  the District Court entered its order
approving this settlement (the "Approval Order") after notice to stockholders of
the Company.  The Approval Order became final on or about February 12, 1996, and
the parties are now required to exchange documentation and effect other steps to
consummate this settlement. During 1995, the Company paid $50,000 for settlement
of this litigation.

      During 1994, the Company  settled a pending class action  proceeding  (the
"Securities Action"). The Company recorded a provision of $1,685,000 relating to
the settlement of the Securities Action and incurred additional costs related to
the settlement which totalled $217,000.

      Under the terms of the merger  agreement  between the Company and KPI, the
Company agreed to indemnify the former  non-officer  directors of KPI other than
Ira M. Koger  (the  "Indemnified  Persons")  in respect of amounts to which such
Indemnified Person would be otherwise entitled to indemnification  under Florida


                                       43

<PAGE>



law, the articles of  incorporation or the by-laws of KPI arising out of acts or
omissions prior to September 25, 1991 (the  "Indemnity").  The  obligations,  if
any, of the Company under such  indemnification  do not exceed (i) $1,000,000 in
the  aggregate  and (ii)  $200,000  per  Indemnified  Person and are  subject to
certain other conditions precedent.  Certain of the former non-officer directors
of KPI were  defendants  in a Pension Plan class action suit (the "Roby  Case").
The  Company was not named in this suit.  However,  certain  former  non-officer
directors of KPI may be Indemnified  Persons. The Company signed an agreement to
settle the Roby Case and placed in escrow  $100,000 as its  contribution to such
settlement for the Indemnified  Persons.  On January 9, 1997, the District Court
entered the Order and Final Judgment  approving the agreement to settle the Roby
Case.  The time for appeal of the Order and Final  Judgment  has passed  with no
appeal  having  been  taken.  No  provision  has been  made in the  Consolidated
Financial  Statements  for any  additional  liability  that may result  from the
Indemnity.

12.   COMMITMENTS AND CONTINGENCIES.

      At December 31, 1996, the Company had commitments for the  construction of
buildings and improvements to existing buildings of approximately $6.7 million.

      On February 27, 1997, the Company sold 8.1 acres of unimproved  land, with
a carrying value of $2 million, located in Miami, Florida for an aggregate sales
price of $2.97 million.

<TABLE>
<CAPTION>

13.   INTERIM FINANCIAL INFORMATION (UNAUDITED).

      Selected  quarterly  information  for the two  years in the  period  ended
December 31, 1996, is presented below (in thousands except per share amounts):

                                            Rental                Total                  Net                   Earnings  Per
Quarters Ended                             Revenues              Revenues               Income                  Common Share
--------------                             --------              --------             ---------                 ------------
<S>                                         <C>                   <C>                <C>                     <C>     
March 31, 1995                              $23,482               $25,446            $   2,204               $    .12
June 30, 1995                                24,255                26,125                2,026                    .11
September 30, 1995 (1)                       23,762                44,934               18,983                   1.05
December 31, 1995 (2)                        23,366                29,245                5,777                    .32
March 31, 1996                               23,985                25,177                3,016                    .16
June 30, 1996                                24,160                25,384                2,214                    .12
September 30, 1996                           24,515                25,751                2,261                    .12
December 31, 1996(3)                         25,682                27,760                3,010                    .14

</TABLE>

(1)   The results for the quarter ended  September 30, 1995 were affected by (i)
      the interest revenue associated with the Company's  investment in the TKPL
      mortgage notes,  (ii) the gain associated with the partial  repayment of a
      TKPL note to Southeast and (iii) the write-off of deferred offering costs.

(2)   The results  for the  quarter  ended  December  31, 1995 were  affected by
      additional gain  associated  with the partial  repayment of a TKPL note to
      Southeast.

(3)   The results for the quarter  ended  December 31, 1996 were  affected by an
      extraordinary   loss  on  early   retirement   of  debt.   Income   before
      extraordinary  item was  $4,396  and  earnings  per  common  share  before
      extraordinary item was $0.21.




                                       44

<PAGE>

<TABLE>
<CAPTION>


                                                                                                           SCHEDULE II

                                             KOGER EQUITY, INC. AND SUBSIDIARIES
                                              VALUATION AND QUALIFYING ACCOUNTS
                                         FOR THE THREE YEARS ENDED DECEMBER 31, 1996
                                                       (In Thousands)



                                                                          Additions
                                                    Balance at      Charged to    Charged to                      Balance at
                                                   beginning of     costs and       other                          end of
Description                                          period           expenses     accounts         Deductions     period
----------------------------------------------------------------------------------------------------------------------------
1996
----
<S>                                                     <C>            <C>          <C>               <C>            <C>    
Allowance for uncollectible accounts                    $   391        $    50      $      0          $  210(a)      $   231
                                                        =======       --------       -------          ------         =======
Valuation allowance - land held
   for sale                                             $ 1,520        $     0      $      0          $  500(b)      $ 1,020
                                                         ======      =========       =======          ======          ======

1995
Allowance for uncollectible accounts                    $   362        $   172      $      0          $  143(a)      $   391
                                                        -------        -------      --------          ------         -------
Valuation allowance - land held
   for sale                                             $   550        $   970      $      0          $    0         $ 1,520
                                                        -------        -------      --------          ------          ------

1994
Allowance for uncollectible accounts                    $   651        $   212      $      0          $  501(a)      $   362
                                                        -------        -------      --------          ------         -------
Valuation allowance - land held
   for sale                                             $     0        $   996      $      0          $  446(b)      $   550
                                                        -------        -------      --------          ------         -------

</TABLE>

(a)   Receivable   balance  which  was  determined  to  be   uncollectible   and
      written-off in the applicable year.

(b)   Land parcel was sold for which valuation allowance had been recorded.



                                       45

<PAGE>

<TABLE>
<CAPTION>


                                                 KOGER EQUITY, INC. AND SUBSIDIARIES                                    Schedule III
                                              REAL ESTATE AND ACCUMULATED DEPRECIATION
                                                          DECEMBER 31, 1996
                                                           (in thousands)

                                                                    COSTS CAPITALIZED
                                                                        SUBSEQUENT
                                                 INITIAL COST         TO ACQUISITION       TOTAL COST       

                                                 BLDGS &    IMPROVE    CARRYING               BLDGS &      (b)(c)   
CENTER                                   LAND    IMPROV.    MENTS      COSTS          LAND    IMPROV.      TOTAL    
------                                   ----    ------- ---------- ------------      ----    -------      -----    
<S>                                  <C>        <C>         <C>               <C>  <C>        <C>       <C>         
OPERATING REAL ESTATE:
   ATLANTA CHAMBLEE                  $ 13,145   $ 63,211    $  7,507$         0    $13,145    $70,718   $ 83,863    
   ATLANTA GWINNETT                         0          3           0          0          0          3          3    
   AUSTIN                               4,274     13,650       2,255          0      4,274     15,905     20,179    
   CHARLOTTE CARMEL                       910      9,993          75          0        910     10,068     10,978    
   CHARLOTTE EAST                       5,788     25,078       2,175          0      5,788     27,253     33,041    
   EL PASO                              3,108     10,107       3,021          0      3,108     13,128     16,236    
   GREENSBORO SOUTH                     6,384     38,700       3,501          0      6,384     42,201     48,585    
   GREENSBORO WENDOVER                      0         11           0          0          0         11         11    
   GREENVILLE                           3,833     16,104       2,635          0      3,833     18,739     22,572    
   JACKSONVILLE BAYMEADOWS              7,625     23,716         422          0      7,625     24,138     31,763    
   JACKSONVILLE CENTRAL                 6,755     34,806       5,585          0      6,755     40,391     47,146    
   MEMPHIS GERMANTOWN                   3,518     21,821       1,753          0      3,518     23,574     27,092    
   ORLANDO CENTRAL                      8,342     30,575       5,912          0      8,342     36,487     44,829    
   ORLANDO UNIVERSITY                   2,900     12,218         634          0      2,900     12,852     15,752    
   RICHMOND SOUTH                           0         16           0          0          0         16         16    
   ST. PETERSBURG                       6,657     29,525       3,969          0      6,657     33,494     40,151    
   SAN ANTONIO                          9,638     29,649       7,719          0      9,638     37,368     47,006    
   TALLAHASSEE APALACHEE PKWY           6,063     28,043       4,502          0      6,063     32,545     38,608    
   TALLAHASSEE CAPITAL CIRCLE           3,561     22,903       1,168          0      3,561     24,071     27,632    
   TULSA                                6,066     17,134       2,294          0      6,066     19,428     25,494    
                                        -----     ------       -----         ---     -----     ------     ------    
         SUBTOTALS                     98,567    427,263      55,127          0     98,567    482,390    580,957    
   FURNITURE & EQUIPMENT                           1,569                                        1,569      1,569    
   IMPROVEMENTS IN PROGRESS                                      446                                         446    
                                        -----     ------       -----         ---     -----     ------     ------    
         TOTAL OPERATING
               REAL ESTATE           $ 98,567   $428,832     $55,573$         0    $98,567   $484,405   $582,972    
                                        -----     ------       -----           -     -----     ------     ------    


                                       46
<PAGE>



                                                 KOGER EQUITY, INC. AND SUBSIDIARIES                                    Schedule III
                                              REAL ESTATE AND ACCUMULATED DEPRECIATION
                                                          DECEMBER 31, 1996
                                                           (in thousands)


                                        (d)       (a)
                                        ACCUM.    MORT-          DATE           DEPRECIABLE
CENTER                                   DEPR.    GAGES        ACQUIRED            LIFE
------                                   -----    -----        --------            ----
OPERATING REAL ESTATE:
<S>                                  <C>         <C>           <C>              <C>     
   ATLANTA CHAMBLEE                  $12,858     $ 14,809      1988 - 1993      3 - 40 YRS.
   ATLANTA GWINNETT                        1            0      1993                  7 YRS.
   AUSTIN                              1,982       17,000      1990 - 1993      3 - 40 YRS.
   CHARLOTTE CARMEL                      784            0      1993             3 - 40 YRS.
   CHARLOTTE EAST                      3,766            0      1989 - 1993      3 - 40 YRS.
   EL PASO                             2,844        9,000      1990 - 1993      3 - 40 YRS.
   GREENSBORO SOUTH                    6,375            0      1988 - 1993      3 - 40 YRS.
   GREENSBORO WENDOVER                     4            0      1993                  7 YRS.
   GREENVILLE                           3,567      11,000      1988 - 1993      3 - 40 YRS.
   JACKSONVILLE BAYMEADOWS              1,974      27,500      1993             3 - 40 YRS.
   JACKSONVILLE CENTRAL                 7,216         401      1989 - 1993      3 - 40 YRS.
   MEMPHIS GERMANTOWN                   4,384      22,018      1988 - 1993      3 - 40 YRS.
   ORLANDO CENTRAL                      7,734      25,000      1988 - 1993      3 - 40 YRS.
   ORLANDO UNIVERSITY                   1,750           0      1990 - 1993      3 - 40 YRS.
   RICHMOND SOUTH                          12           0        1993                4 YRS.
   ST. PETERSBURG                       5,944      17,194      1988 - 1993      3 - 40 YRS.
   SAN ANTONIO                          7,437      20,203      1990 - 1993      3 - 40 YRS.
   TALLAHASSEE APALACHEE PKWY           6,201      17,194      1988 - 1993      3 - 40 YRS.
   TALLAHASSEE CAPITAL CIRCLE           3,406      20,582      1988 - 1993      3 - 40 YRS.
   TULSA                                3,515       1,512      1990 - 1993      3 - 40 YRS.
                                        -----      -----                        
          SUBTOTALS                    81,754     203,413
   FURNITURE & EQUIPMENT                  724                                   3  - 7 YRS.
   IMPROVEMENTS IN PROGRESS              
                                        -----      -----                        
         TOTAL OPERATING
               REAL ESTATE           $ 82,478    $203,413
                                     ========    ========


                                       46
<PAGE>



                                                 KOGER EQUITY, INC. AND SUBSIDIARIES                                    Schedule III
                                              REAL ESTATE AND ACCUMULATED DEPRECIATION
                                                          DECEMBER 31, 1996
                                                           (in thousands)


                                                               COSTS CAPITALIZED
                                                               SUBSEQUENT
                                         INITIAL COST          TO ACQUISITION       TOTAL COST         
                                                 BLDGS &  IMPROVE  CARRYING            BLDGS &   (b)(c)
CENTER                                 LAND      IMPROV.   MENTS    COSTS    LAND      IMPROV.   TOTAL 
------                                 ----      -------   -----    -----    ----      -------   ----- 
<S>                                  <C>        <C>       <C>      <C>   <C>       <C>       <C>       
PROPERTIES UNDER CONSTRUCTION:
  CHARLOTTE CARMEL                   $    886   $    502  $    0   $   0 $    886  $    502  $  1,388  
  MEMPHIS GERMANTOWN                    1,197        428       0       0    1,197       428     1,625  
                                     --------   -------- -------   ----- --------  --------  --------  
      TOTAL UNDER CONSTRUCTION          2,083        930       0       0    2,083       930     3,013  
                                     --------   -------- -------   ----- --------  --------  --------  

UNIMPROVED LAND:
  ATLANTA GWINNETT                      5,780          0       0       0    5,780         0     5,780  
  CHARLOTTE CARMEL                      2,364          0       0       0    2,364         0     2,364  
  CHARLOTTE EAST                          468          0       0       0      468         0       468  
  COLUMBIA SPRING VALLEY                  100          0       0       0      100         0       100  
  GREENSBORO WENDOVER                   1,491          0       0       0    1,491         0     1,491  
  GREENVILLE                              949          0       0       0      949         0       949  
  JACKSONVILLE BAYMEADOWS               2,318          0       0       0    2,318         0     2,318  
  JACKSONVILLE CENTRAL                    160          0       0       0      160         0       160  
  MEMPHIS GERMANTOWN                    3,308          0       0       0    3,308         0     3,308  
  MIAMI                                 2,000          0       0       0    2,000         0     2,000  
  ORLANDO UNIVERSITY                    2,880          0       0       0    2,880         0     2,880  
  RICHMOND SOUTH                        1,860          0       0       0    1,860         0     1,860  
  ST. PETERSBURG                        1,000          0       0       0    1,000         0     1,000  
  SAN ANTONIO                           1,430          0       0       0    1,430         0     1,430  
  TULSA                                 1,000          0       0       0    1,000         0     1,000  
                                     --------   -------- -------   ----- --------  --------  --------  
        TOTAL UNIMPROVED LAND          27,108          0       0       0   27,108         0    27,108  
                                     --------   -------- -------   ----- --------  --------  --------  
                   TOTAL             $127,758   $429,762 $55,573   $   0 $127,758  $485,335  $613,093  
                                     ========   ======== =======   ===== ========  ========  ========  



</TABLE>

                                       47

<PAGE>



                KOGER EQUITY, INC. AND SUBSIDIARIES Schedule III
                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 1996
                                 (in thousands)


                                                               
                                   (d)        (a)
                                    ACCUM.      MORT-   DATE         DEPRECIABLE
CENTER                              DEPR.       GAGES   ACQUIRED        LIFE
------                              -----       -----   --------        ----
------                             
PROPERTIES UNDER CONSTRUCTION:
  CHARLOTTE CARMEL                $     0   $      0
  MEMPHIS GERMANTOWN                    0          0
                                  
      TOTAL UNDER CONSTRUCTION          0          0
                                  

UNIMPROVED LAND:
  ATLANTA GWINNETT                      0          0    1993
  CHARLOTTE CARMEL                      0          0    1993
  CHARLOTTE EAST                        0          0    1993
  COLUMBIA SPRING VALLEY                0          0    1993
  GREENSBORO WENDOVER                   0          0    1993
  GREENVILLE                            0          0    1993
  JACKSONVILLE BAYMEADOWS               0          0    1993
  JACKSONVILLE CENTRAL                  0          0    1989
  MEMPHIS GERMANTOWN                    0          0    1993
  MIAMI                                 0          0    1993
  ORLANDO UNIVERSITY                    0          0    1993
  RICHMOND SOUTH                        0          0    1993
  ST. PETERSBURG                        0          0    1993
  SAN ANTONIO                           0          0    1993
  TULSA                                 0          0    1993
                                  --------   -------- 
        TOTAL UNIMPROVED LAND           0          0
                                  --------   -------- 
                   TOTAL          $82,478   $203,413
                                  =======   ========




                                       47
<PAGE>

                                                                    Schedule III


                       KOGER EQUITY, INC. AND SUBSIDIARIES
                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 1996
                                 (in thousands)


(a)       At December 31, 1996, the outstanding balance of mortgages payable was
          $203,413, which is gross of $369 of unamortized discounts.

(b)       Aggregate  cost basis for Federal  income tax purposes was $647,605 at
          December 31, 1996.

(c)       Reconciliation of total real estate carrying value for the years ended
          December 31, 1996, 1995 and 1994 is as follows:

                                               1996        1995         1994
                                               ----        ----         ----
     Balance at beginning of year            $601,594    $614,249     $606,806
          Acquisitions and construction         1,058         330          384
          Improvements                         12,568      14,371       11,083
          Transfer from/to other assets          (257)         16
          Sale of unimproved land              (1,250)     (4,761)      (3,028)
          Sale or disposition
          operating real estate                  (620)    (21,539)
          Investment in KRSI                                 (102)
          Provision for loss - land parcels                  (970)        (996)
                                             --------     -------     --------
                  Balance at close of year   $613,093    $601,594     $614,249
                                             ========    ========     ========

          For 1995,  the  provision  for loss was based upon a contract  for the
          sale of the Miami  land  parcel  held for sale for which the  contract
          price  ranges  between  $2,000 and $2,970  contingent  upon the square
          footage  of office  buildings  which can be  constructed  on this land
          parcel.  For 1994, the provision for loss was based upon contracts for
          the sale of two land  parcels.  The sale of one of these land  parcels
          was  consummated  during 1994,  while the contract for the sale of the
          other land parcel expired.

(d)       Reconciliation  of  accumulated   depreciation  for  the  years  ended
          December 31, 1996, 1995 and 1994 is as follows:

                                               1996        1995         1994
                                               ----        ----         ----
     Balance at beginning of year            $ 62,845    $ 46,106     $ 30,706
          Depreciation expense:
           Operating real estate               19,538      17,363       15,202
           Furniture and equipment                292         258          198
          Investment in KRSI                                  (31)
          Sale or disposition of
           operating real estate                 (197)       (851)
                                             --------     -------     --------
     Balance at close of year                $ 82,478     $62,845     $ 46,106
                                             ========     =======     ========

                                       48

<PAGE>



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

      None.

                                    PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      Information about directors of the Company who are not executive  officers
is contained in the Company's Proxy  Statement (the "1997 Proxy  Statement") and
is incorporated herein by reference.

      The  following  tabulation  lists the  executive  officers of the Company,
their ages and their occupations for the past five years:
<TABLE>
<CAPTION>

<S>                                            <C> 
Victor A. Hughes, Jr. ......................   Chairman of the Board, President, Chief Executive Officer,
                                                    Chief  Financial Officer and Director
James C. Teagle.............................   Executive Vice President, Chief Operating Officer and Director
W. Lawrence Jenkins ........................   Vice President of Administration and Corporate Secretary
James L. Stephens...........................   Vice President and Chief Accounting Officer
</TABLE>

      Mr. Hughes,  age 61, was elected Chairman and CEO on June 21, 1996. He has
served as President of the Company since August 22, 1995, and as Chief Financial
Officer of the Company  since March 31,  1991.  He held the  positions of Senior
Vice  President of the Company from May 20, 1991  through  August 21, 1995,  and
Vice  President  from April 1, 1990  through May 20, 1991.  Mr.  Hughes was also
Assistant  Secretary  of the Company  from March 11, 1991  through  December 21,
1993.  Mr.  Hughes was elected to the Board of  Directors of the Company on July
27, 1992.

      Mr. Teagle,  age 55, has been Executive Vice President and Chief Operating
Officer since June 21, 1996. He had previously held the positions of Senior Vice
President of the Company since May 10, 1994,  and Vice  President  from December
21, 1993 to May 10, 1994. Mr. Teagle was a Vice President of KPI from July, 1973
to December  21, 1993.  Mr.  Teagle was elected to the Board of Directors of the
Company on October 10, 1996.

      Mr. Jenkins, age 53, has been the Corporate Secretary of the Company since
December 21, 1993,  and Vice  President of the Company  since May 10, 1994.  Mr.
Jenkins served as Corporate  Secretary of KPI from June 7, 1973 through December
21,  1993,  and as Vice  President/Administration  of KPI from  August  7,  1990
through December 21, 1993.

      Mr. Stephens,  age 39, has been Vice President of the Company since May 7,
1996,  and was the  Treasurer of the Company from March 31, 1991 to May 7, 1996.
He has served as Chief  Accounting  Officer of the Company since March 31, 1991.
He held the  position of  Assistant  Secretary  of the Company from May 20, 1991
through December 21, 1993.

      Section  16(a) of the  Securities  Exchange Act of 1934  requires that the
Company's directors and executive officers file with the Securities and Exchange
Commission  (the  "SEC") and the  American  Stock  Exchange  initial  reports of
ownership  and  reports  of  changes  in  ownership  of  the  Company's   equity
securities.  Executive officers and directors are required by regulations of the
SEC to furnish the Company with copies of all Section 16(a) forms they file.


                                       49

<PAGE>



      To the Company's  knowledge,  based solely on review of the copies of such
reports  furnished  to the  Company and  written  representations  that no other
reports were  required,  during the fiscal year ended  December  31,  1996,  the
Company's  executive  officers and  directors  complied  with all Section  16(a)
filing requirements.

Item 11. EXECUTIVE COMPENSATION

      Information regarding executive  compensation is incorporated by reference
to the  section  headed  "Executive  Compensation"  in the 1997 Proxy  Statement
(except for  information  contained under the headings  "Compensation  Committee
Report on Executive Compensation" and "Shareholder Return
Performance Presentation").

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The  stock  ownership  of  each  person  known  to the  Company  to be the
beneficial owner of more than five percent (5%) of its outstanding  common stock
is incorporated by reference to the section headed "Principal  Holders of Voting
Securities"  of the 1997 Proxy  Statement.  The  beneficial  ownership of Common
Stock of all  directors  of the  Company is  incorporated  by  reference  to the
section headed "Election of Directors" contained in the 1997 Proxy Statement.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Reference is made to Item 1. "Business," 2. "Properties," 7. "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
Note 2  "Transactions  With  Related  Parties"  to  the  Notes  to  Consolidated
Financial  Statements  contained  in this  Report  and to the  heading  "Certain
Relationships  and  Transactions"  contained  in the 1997  Proxy  Statement  for
information  regarding  certain  relationships  and related  transactions  which
information is incorporated herein by reference.

                                       50

<PAGE>



                                     PART IV

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

         (a)(1)    See "Item 8 - Financial  Statements and Supplementary  Data -
                   Index to  Consolidated  Financial  Statements  and  Financial
                   Statement  Schedules" for a list of the financial  statements
                   included in this report.

             (2)   The consolidated  supplemental  financial statement schedules
                   required by  Regulation  S-X are included on pages 45 through
                   48 in this Form.

         (b)       Reports on Form 8-K:
                   On October 10, 1996,  the Company  filed a Form 8-K reporting
                   under Item 5, Other Events, that the Company had issued a New
                   Release and providing under Item 7, Financial  Statements and
                   Exhibits,  a copy of the Koger  Equity,  Inc.  News  Release,
                   dated October 10, 1996.

         (c)       The following exhibits are filed as part of this report:

               Exhibit
               Number       Description
--------------------------------------------------------------------------------
               2            Agreement  and Plan of Merger,  dated as of December
                            21, 1993  between the Company and Koger  Properties,
                            Inc.  Incorporated by reference to Exhibit 2 of Form
                            10-K filed by the  Registrant  for the period  ended
                            December 31, 1993 (File No. 1-9997).
               
               3(a)         Amended and Restated  Articles of  Incorporation  of
                            Koger  Equity,  Inc.  Incorporated  by  reference to
                            Exhibit 3 of the Form 8-K, dated May 10, 1994, filed
                            by  the  Registrant  on  June  17,  1994  (File  No.
                            1-9997).
               
               3(b)         Koger Equity,  Inc. By Laws, as Amended and Restated
                            on August 21,  1996.  Incorporated  by  reference to
                            Exhibit  3(ii) of the Form 8-K/A,  dated  August 22,
                            1996  filed by the  Registrant  on August  22,  1996
                            (File No. 1-9997).
               
               4(a)         Common  Stock  Certificate  of  Koger  Equity,  Inc.
                            Incorporated   by   reference  to  Exhibit  4(a)  to
                            Registration  Statement  on Form S-11  (Registration
                            No. 33-22890).
               
               4(b)(1)(A)   Koger Equity,  Inc.  Rights  Agreement  (the "Rights
                            Agreement")  dated as of September  30, 1990 between
                            the Company  and  Wachovia  Bank and Trust  Company,
                            N.A. as Rights  Agent  ("Wachovia").Incorporated  by
                            reference to Exhibit 1 to a  Registration  Statement
                            on  Form  8-A,  dated  October  3,  1990  (File  No.
                            1-9997).
               
               4(b)(1)(B)   First Amendment to the Rights Agreement, dated as of
                            March 22, 1993,  between the Company and First Union
                            National  Bank of North  Carolina,  as Rights  Agent
                            ("First  Union"),  entered  into for the  purpose of
                            replacing  Wachovia.  Incorporated  by  reference to
                            Exhibit  4(b)(4)  of  the  Form  10-Q  filed  by the
                            Registrant  for the  quarter  ended  March 31,  1993
                            (File No. 1-9997).
               
               4(b)(1)(C)   Second Amendment to the Rights  Agreement,  dated as
                            of December 21, 1993,  between the Company and First
                            Union.  Incorporated by reference to Exhibit 5 to an
                            Amendment on Form 8-A/A, dated December 21, 1993, to
                            a  Registration  Statement of the Registrant on Form
                            8-A, dated October 3, 1990 (File No. 1-9997).
               
               4(b)(1)(D)   Third  Amendment  to Rights  Agreement,  dated as of
                            October 10, 1996,  between  Koger  Equity,  Inc. and
                            First Union.  Incorporated by reference to Exhibit 6
                            to an  Amendment  on Form 8-A/A,  dated  November 7,
                            1996, to a Registration  Statement of the Registrant
                            on  Form  8-A,  dated  October  3,  1990  (File  No.
                            1-9997).
               
               4(b)(1)(E)   Fourth  Amendment to Rights  Agreement,  dated as of
                            February 27, 1997,  between Koger  Equity,  Inc. and
                            First Union.  Incorporated by reference to Exhibit 8
                            to an Amendment on Form 8-A/A, dated March 17, 1997,
                            to a  Registration  Statement of the  Registrant  on
                            Form 8-A, dated October 3, 1990 (File No. 1-9997).
               
               4(b)(2)      Form of Common  Stock  Purchase  Rights  Certificate
                            (attached  as  Exhibit A to the  Rights  Agreement).
                            Pursuant  to the Rights  Agreement,  printed  Common
                            Stock  Purchase  Rights  Certificates  will  not  be
                            mailed  until the  Distribution  Date (as defined in
                            the Rights Agreement).
               
               4(b)(3)      Summary of Common Stock Purchase Rights (attached as
                            Exhibit   B  to  the   Rights   Agreement,   Exhibit
                            4(b)(1)(A)).

                                       51

<PAGE>



               Exhibit
               Number       Description
--------------------------------------------------------------------------------
               4(c)(1)      Warrant  Agreement,  dated as of December  21, 1993,
                            between the  Company  and First Union (the  "Warrant
                            Agreement").  Incorporated by reference to Exhibit 2
                            to an  Amendment on Form 8-A/A,  dated  December 21,
                            1993, to a Registration Statement on Form 8-A, dated
                            September 30, 1993 (File No. 1-9997).

               4(c)(2)      Form  of a  Common  Share  Purchase  Warrant  issued
                            pursuant to the Warrant  Agreement.  Incorporated by
                            reference  to  Exhibit  1 to an  Amendment  on  Form
                            8-A/A,  dated  December 21, 1993, to a  Registration
                            Statement  on Form 8-A,  dated  September  30,  1993
                            (File No. 1-9997).

               10(a)(1)(A)  Koger Equity,  Inc.  Amended and Restated 1988 Stock
                            Option  Plan.  Incorporated  by reference to Exhibit
                            10(e)(1)(A) of Form 10-Q filed by the Registrant for
                            the quarter ended June 30, 1992 (File No. 1-9997).

               10(a)(1)(B)  Form of Stock  Option  Agreement  pursuant  to Koger
                            Equity,  Inc. Amended and Restated 1988 Stock Option
                            Plan.   Incorporated   by   reference   to   Exhibit
                            10(e)(2)(A) of Form 10-Q filed by the Registrant for
                            the quarter ended June 30, 1992 (File No. 1-9997).
               
               10(a)(1)(C)  Form of Amendment to Stock Option Agreement pursuant
                            to Koger  Equity,  Inc.  Amended and  Restated  1988
                            Stock Option Plan.*

               10(a)(2)(A)  Koger   Equity,   Inc.   1993  Stock   Option  Plan.
                            Incorporated   by   reference   to   Exhibit  II  to
                            Registrant's  Proxy  Statement  dated June 30,  1993
                            (File No. 1-9997).
               
               10(a)(2)(B)  Form of Stock  Option  Agreement  pursuant  to Koger
                            Equity, Inc. 1993 Stock Option Plan. Incorporated by
                            reference to Exhibit  10(e)(3)(B) of Form 10-K filed
                            by the  Registrant for the period ended December 31,
                            1994 (File No. 1-9997).
               
               10(a)(2)(C)  Form of Amendment to Stock Option Agreement pursuant
                            to Koger Equity, Inc. 1993 Stock Option Plan.*
               
               10(a)(3)(A)  Koger Equity, Inc. 1996 Stock Option Plan.*
               
               10(a)(3)(B)  Form of Stock  Option  Agreement  pursuant  to Koger
                            Equity, Inc. 1996 Stock Option Plan.*
               
               10(b)(1)     Shareholders   Agreement,   dated  August  9,  1993,
                            between  the  Company  and TCW  Special  Credits,  a
                            California  general  partnership.   Incorporated  by
                            reference to Exhibit 10(o) of Form 10-K filed by the
                            Registrant  for the period  ended  December 31, 1993
                            (File No. 1-9997).
              
               10(b)(2)     Registration Rights Agreement, dated as of August 9,
                            1993, between the Company and TCW Special Credits, a
                            California  general  partnership.   Incorporated  by
                            reference to Exhibit 10(p) of Form 10-K filed by the
                            Registrant  for the period  ended  December 31, 1993
                            (File No. 1-9997).
               
               10(c)        License  Agreement,  dated  as  of  July  28,  1995,
                            between   Koger   Equity,   Inc.  and  Koger  Realty
                            Services,  Inc. Incorporated by reference to Exhibit
                            10(v) of Form 10-Q filed by the  Registrant  for the
                            quarter ended June 30, 1995 (File No. 1-9997).
               
               10(d)        Supplemental  Executive Retirement Plan, dated as of
                            August 18, 1995 to be effective as of June 28, 1995.
                            Incorporated  by reference to Exhibit  10(w) of Form
                            10-Q filed by the  Registrant  for the quarter ended
                            September 30, 1995 (File No. 1-9997).
              
               10(e)        Form  of  Indemnification  Agreement  between  Koger
                            Equity,  Inc. and its  Directors  and certain of its
                            officers. Incorporated by reference to Exhibit 10(x)
                            of Form 10-K  filed by the  Registrant  for the year
                            ended December 31, 1995 (File No. 1-9997).
               
               10(f)(1)     Employment  Agreement between Koger Equity, Inc. and
                            Victor A. Hughes, Jr. effective as of June 21, 1996.
                            Incorporated  by  reference  to Exhibit  10(y)(1) of
                            Form 10-Q filed by the  Registrant  for the  quarter
                            ended September 30, 1996 (File No. 1-9997).
              
               10(f)(2)     Employment  Agreement between Koger Equity, Inc. and
                            James C.  Teagle,  effective  as of June  21,  1996.
                            Incorporated  by  reference  to Exhibit  10(y)(2) of
                            Form 10-Q filed by the  Registrant  for the  quarter
                            ended September 30, 1996 (File No. 1-9997).
               
               10(g)(1)(A)  Stock  Purchase  Agreement,  dated as of October 10,
                            1996,  between  Koger  Equity,   Inc.  and  AP-  KEI
                            Holdings, LLC, a Delaware limited liability company.
                            Incorporated   by  reference  to  Exhibit  7  to  an
                            Amendment on Form 8-A/A,  dated November 7, 1996, to
                            a  Registration  Statement of the Registrant on Form
                            8-A, dated October 3, 1990 (File No. 1-9997).



                                       52

<PAGE>



               Exhibit
               Number       Description
--------------------------------------------------------------------------------
               10(g)(1)(B)  Registration  Rights Agreement,  dated as of October
                            10,  1996,  between  Koger  Equity,  Inc. and AP-KEI
                            Holdings, LLC, a Delaware limited liability company.
                            Incorporated  by reference to Exhibit A of the Stock
                            Purchase  Agreement,  dated as of October 10,  1996,
                            between Koger Equity, Inc. and AP-KEI Holdings, LLC,
                            which is Exhibit 7 to an  Amendment  on Form  8-A/A,
                            dated November 7, 1996, to a Registration  Statement
                            on  Form  8-A,  dated  October  3,  1990  (File  No.
                            1-9997).
              
               10(g)(2)(A)  Amendment No. 1 to Stock Purchase  Agreement,  dated
                            as of February 27, 1997, between Koger Equity,  Inc.
                            and AP-KEI Holdings,  LLC. Incorporated by reference
                            to Exhibit 9 to an  Amendment  on Form 8-A/A,  dated
                            March 17, 1997, to a  Registration  Statement of the
                            Registrant on Form 8-A,  dated October 3, 1990 (File
                            No. 1-9997).
              
               10(g)(2)(B)  Assignment  and  Assumption  Agreement,  dated as of
                            February 27, 1997,  among and between  Koger Equity,
                            Inc.  and AP-KEI  Holdings,  LLC and AREIF II Realty
                            Trust, Inc.  Incorporated by reference to Exhibit 10
                            to an Amendment on Form 8-A/A, dated March 17, 1997,
                            to a  Registration  Statement of the  Registrant  on
                            Form 8-A, dated October 3, 1990 (File No. 1-9997).
              
               10(h)        Consulting  Agreement,  dated as of June  21,  1996,
                            between  Koger  Equity,  Inc.  and  Irvin H.  Davis.
                            Incorporated  by reference to Exhibit 10(ab) of Form
                            10-Q filed by the  Registrant  for the quarter ended
                            September 30, 1996 (File No. 1-9997).
               
               10(i)        Consulting  Agreement,  dated as of March 14,  1996,
                            between  Koger  Equity,  Inc.  and  David B.  Hiley.
                            Incorporated  by reference to Exhibit 10(ac) of Form
                            10-Q filed by the  Registrant  for the quarter ended
                            September 30, 1996 (File No. 1-9997).
               
               10(j)(1)     Loan  Application,  dated  July 29,  1996,  by Koger
                            Equity,   Inc.  to  The  Northwestern   Mutual  Life
                            Insurance  Company.  Incorporated  by  reference  to
                            Exhibit  10(j)(1) on Form 8-K,  dated  December  16,
                            1996,  filed by the  Registrant  on March  10,  1997
                            (File No. 1-9997).
              
               10(j)(2)(A)  Koger Equity,  Inc. Tranche A Promissory Note, dated
                            December  16,  1996,  in  the  principal  amount  of
                            $100,500,000 payable to The Northwestern Mutual Life
                            Insurance  Company.  Incorporated  by  reference  to
                            Exhibit  10(j)(2)(A) on Form 8-K, dated December 16,
                            1996,  filed by the  Registrant  on March  10,  1997
                            (File No. 1-9997).
               
               10(j)(2)(B)  Koger Equity,  Inc. Tranche B Promissory Note, dated
                            December  16,  1996,  in  the  principal  amount  of
                            $89,500,000  payable to The Northwestern Mutual Life
                            Insurance  Company.  Incorporated  by  reference  to
                            Exhibit  10(j)(2)(B) on Form 8-K, dated December 16,
                            1996,  filed by the  Registrant  on March  10,  1997
                            (File No. 1-9997).
               
               10(j)(3)(A)  Master Lien  Instrument  from Koger Equity,  Inc. to
                            The  Northwestern  Mutual  Life  Insurance  Company,
                            dated  December  16,  1996,  (1) with  Mortgage  and
                            Security  Agreement  for  Duval,  Leon,  Orange  and
                            Pinellas  Counties,  Florida  and (2)  with  Deed of
                            Trust and Security  Agreement for Greenville County,
                            South Carolina,  Shelby County, Tennessee and Bexar,
                            El Paso and Travis Counties,  Texas. Incorporated by
                            reference to Exhibit  10(j)(3)(A) on Form 8-K, dated
                            December 16, 1996,  filed by the Registrant on March
                            10, 1997 (File No. 1-9997).
               
               10(j)(3)(B)  Absolute  Assignment  of Leases and Rents from Koger
                            Equity,   Inc.  to  The  Northwestern   Mutual  Life
                            Insurance  Company,  dated  December 16,  1996,  for
                            Duval,  Leon,   Orange,   and  Pinellas,   Counties,
                            Florida,  Greenville County, South Carolina,  Shelby
                            County,  Tennessee  and  Bexar,  El Paso and  Travis
                            Counties,   Texas.   Incorporated  by  reference  to
                            Exhibit  10(j)(3)(B) on Form 8-K, dated December 16,
                            1996,  filed by the  Registrant  on March  10,  1997
                            (File No. 1-9997).
              
               10(j)(4)     Environmental  Indemnity  Agreement,  dated December
                            16,  1996,  between  Koger  Equity,   Inc.  and  The
                            Northwestern   Mutual  Life  Insurance  Company  and
                            others.   Incorporated   by   reference  to  Exhibit
                            10(j)(4) on Form 8-K, dated December 16, 1996, filed
                            by the  Registrant  on  March  10,  1997  (File  No.
                            1-9997).





                                       53

<PAGE>



              Exhibit
               Number       Description
--------------------------------------------------------------------------------
               10(j)(5)     Certificate of Borrower  contained in letter,  dated
                            December 16, 1996,  from Koger  Equity,  Inc. to The
                            Northwestern    Mutual   Life   Insurance   Company.
                            Incorporated  by  reference  to Exhibit  10(j)(5) on
                            Form 8-K,  dated  December  16,  1996,  filed by the
                            Registrant on March 10, 1997 (File No. 1-9997).
               
               11           Earnings Per Share Computations.*
              
               21           Subsidiaries of the Registrant.*
               
               23           Independent Auditors' Consent.*
               
               27           Financial Data Schedule.*


*Filed with this Report.

                                       54

<PAGE>



                                   SIGNATURES
        Pursuant to the  requirements  of Section 13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant,  Koger Equity,  Inc., has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

                               KOGER EQUITY, INC.
By:     VICTOR A.  HUGHES, JR.
        ----------------------
        Victor A. Hughes, Jr.
        Chairman of the Board  and   Chief Executive Officer
Date:  March 19, 1997

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

              Signature             Title                             Date
     VICTOR A. HUGHES, JR.        Chairman of the Board, and      March 19, 1997
----------------------------
     (Victor A. Hughes, Jr.)      Chief Executive Officer

     JAMES C. TEAGLE              Executive Vice President, Chief March 19, 1997
----------------------------
     (James C. Teagle)            Operating Officer and Director

     JAMES L. STEPHENS            Vice President  and Chief       March 19, 1997
----------------------------
     (James L. Stephens)          Accounting Officer

     D.  PIKE ALOIAN              Director                        March 19, 1997
     (D. Pike Aloian)

     BENJAMIN C. BISHOP           Director                        March 19, 1997
     (Benjamin C. Bishop)

     IRVIN H. DAVIS               Director                        March 19, 1997
     (Irvin H. Davis)

     DAVID B.  HILEY              Director                        March 19, 1997
----------------------------
     (David B. Hiley)

     G.  CHRISTIAN LANTZSCH       Director                        March 19, 1997
     (G. Christian Lantzsch)

     WILLIAM L. MACK              Director                        March 19, 1997
----------------------------
     (William L. Mack)

      LEE S. NEIBART              Director                        March 19, 1997
     (Lee S. Neibart)

     W. EDWARD SCHEETZ            Director                        March 19, 1997
     (W. Edward Scheetz)

     GEORGE F. STAUDTER           Director                        March 19, 1997
----------------------------
     (George F. Staudter)

     S.  D.  STONEBURNER          Director                        March 19, 1997
----------------------------
     (S. D. Stoneburner)

                                       55


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