<PAGE>


          This Form 10-Q consists of 15 sequentially numbered pages.

                                  FORM 10-Q

                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C. 20549
              --------------------------------------------------
              QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
                       SECURITIES EXCHANGE ACT OF 1934


              For the quarterly period ended SEPTEMBER 30, 1996

                        Commission file number 0-17189


                         KOLL REAL ESTATE GROUP, INC.
            (Exact name of registrant as specified in its charter)


                       DELAWARE                                02-0426634
          (State or other jurisdiction of                    (I.R.S. Employer
          incorporation or organization.)                   Identification No.)



                            4343 Von Karman Avenue
                           NEWPORT BEACH, CALIFORNIA                 92660
                      (Address of principal executive offices)     (Zip Code)

Registrant's telephone number, including area code: (714) 833-3030


     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 
                                ---                ---

The  number  of shares of Class A Common Stock outstanding at November  1,  1996
were 48,932,555.

<PAGE>

                         KOLL REAL ESTATE GROUP, INC.

                                  FORM 10-Q

                   FOR THE QUARTER ENDED SEPTEMBER 30, 1996

                                  I N D E X



                                                                        PAGE NO.
                                                                        --------

Part I - Financial Information:


         Item 1  -  Financial Statements
                    Introduction to the Financial Statements..........        3

                    Balance Sheets -
                    December 31, 1995 and September 30, 1996..........        4

                    Statements of Operations -
                    Three Months and Nine Months Ended
                       September 30, 1995 and  1996...................        5

                    Statements of Cash Flows -
                    Nine Months Ended September 30, 1995 and 1996.....        6

                    Notes to Financial Statements.....................        7


         Item 2  -  Management's Discussion and Analysis of Financial
                    Condition and Results of Operations...............       11


PART II - Other Information:

          Item 1 - Legal Proceedings..................................       14

          Item 6 - Exhibits and Reports on Form 8-K...................       14


SIGNATURE.............................................................       15


<PAGE>


                         KOLL REAL ESTATE GROUP, INC.

                        PART I - FINANCIAL INFORMATION


ITEM 1  -   FINANCIAL STATEMENTS


                   INTRODUCTION TO THE FINANCIAL STATEMENTS


     The condensed financial statements included herein have been prepared by
Koll Real Estate Group, Inc. and its consolidated subsidiaries (the 
"Company"), without  audit,  pursuant to the rules and regulations  of  the 
 Securities  and Exchange  Commission.  Certain  information and  footnote  
disclosures  normally included  in financial statements prepared in 
accordance with generally accepted accounting principles have been condensed 
or omitted pursuant to such rules  and regulations. The Company believes that 
the disclosures are adequate to make  the information presented not 
misleading when read in conjunction with the financial statements  included 
in the Company's Annual Report on Form 10-K  for  the  year ended  December  
31,  1995, and the current year's previously  issued  Quarterly Reports on 
Form 10-Q.

     The  financial  information  presented herein  reflects  all  adjustments,
consisting  only of normal recurring adjustments, which are, in the  opinion  of
management,  necessary for a fair presentation of the results  for  the  interim
periods   presented.  The  results  for  interim  periods  are  not  necessarily
indicative of the results to be expected for the full year.

<PAGE>


                        KOLL REAL ESTATE GROUP, INC.
                             BALANCE SHEETS

                              (in millions)


                                             December 31,        September 30,
                                                 1995                1996
    ASSETS                                      -----               -----

Cash and cash equivalents                    $    4.9           $     1.2
Restricted cash                                   2.5                  .6
Real estate held for development or sale         28.1                34.3
Operating properties, net                         4.8                  --
Land held for development                       220.0               222.6
Other assets                                     16.9                16.6
                                               ------              ------
                                               $277.2              $275.3
                                               ======              ======
   LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
  Accounts payable and accrued
   liabilities                                 $  4.9              $  6.2
  Senior bank debt                               16.6                11.7
  Project debt                                      -                 6.8
  Subordinated debentures                       173.2               189.9
  Other liabilities                              52.9                53.3
                                               ------              ------
  Total liabilities                             247.6               267.9
                                               ======              ======
Stockholders' equity:
  Series A Preferred Stock                         .4                  .4
  Class A Common Stock                            2.4                 2.4
  Capital in excess of par value                229.9               229.4
  Deferred proceeds from stock issuance          (1.1)                (.6)
  Minimum pension liability                      (1.0)               (1.0)
  Accumulated deficit                          (201.0)             (223.2)
                                               ------               -----
  Total stockholders' equity                     29.6                 7.4
                                               ------               -----
                                               $277.2              $275.3
                                               ======              ======

                See accompanying notes to financial statements.


<PAGE>

                         KOLL REAL ESTATE GROUP, INC.
                           STATEMENTS OF OPERATIONS
                   (in millions, except per share amounts)


                                   Three Months Ended         Nine Months Ended
                                      September 30,              September 30,
                                   1995          1996         1995         1996
                                   ----          ----         ----         ----
REVENUES:
  Asset Sales                     $ 3.6          $ 3.6       $12.9        $17.6
  Operations                        3.2            2.8         6.0          7.5
                                  -----          -----       -----        -----
                                    6.8            6.4        18.9         25.1
                                  -----          -----       -----        -----

COSTS OF:
  Asset Sales                       3.1            2.2        10.9         14.9
  Operations                        2.8            3.0         7.5          7.1
                                   ----           ----        ----         ----
                                    5.9            5.2        18.4         22.0
                                   ----           ----        ----         ----
  Gross operating margin             .9            1.2          .5          3.1

General and 
  administrative expenses           1.8            2.1         5.9          5.8
Interest expense                    5.9            6.3        16.8         18.7
Other expense, net                  8.9             .3         6.2           .6
                                   ----           ----        ----         ----
Loss before income taxes          (15.7)          (7.5)      (28.4)       (22.0)

Provision (benefit) for
  income taxes                     (7.2)            .1       (11.5)          .2
                                   -----          ----       ------         ----
Net Loss                         $ (8.5)         $(7.6)     $(16.9)      $(22.2)
                                 =======         =====      =======      ======
Net loss per common share        $ (.18)         $(.16)      $(.36)       $(.46)
                                 =======         =====      =======      ======




             See the accompanying notes to financial statements.



<PAGE>

                         KOLL REAL ESTATE GROUP, INC.
                           STATEMENTS OF CASH FLOWS
                                 (in millions)

                                                         Nine Months Ended
                                                           September 30,
                                                          1995        1996
                                                          ----        ----
Cash flows from operating activities:
  Net loss                                              $(16.9)     $(22.2)
  Adjustments to reconcile to cash
      used by operating activities:
    Depreciation and amortization                           .9          .7
    Non-cash interest expense                             15.4        17.3
    Asset revaluations                                     7.5          --
    Gains on asset sales                                  (2.0)       (2.7)
    Proceeds from asset sales, net                        12.2        16.0
    Investments in real estate held 
      for development or sale                            (10.5)      (14.7)
    Investments in land held for development              (6.9)       (2.6)
    Decrease (increase) in other assets                    5.5         (.4)
    Increase (decrease) in accounts payable, 
      accrued and other liabilities                      (36.6)        1.1
                                                          -----       -----
         Cash used by operating activities               (31.4)       (7.5)
                                                          -----       -----
Cash flows from financing activities:
  Borrowings of senior bank debt                          20.3         6.2
  Repayments of senior bank debt                          (4.2)      (11.1)
  Borrowings of project debt                                --         6.8
  Use of restricted cash                                    --         1.9
                                                          -----      ------
         Cash provided (used) by
           financing activities                           16.1         3.8
                                                         ------      ------

Net decrease in cash and cash equivalents                (15.3)       (3.7)

Cash and cash equivalents - beginning of period           20.5         4.9
                                                         ------      ------
Cash and cash equivalents - end of period                $ 5.2       $ 1.2
                                                         ======      ======

             See the accompanying notes to financial statements.


<PAGE>

                        KOLL REAL ESTATE GROUP, INC.

                       NOTES TO FINANCIAL STATEMENTS


NOTE 1 - BASIS OF PRESENTATION

     The  accompanying financial statements should be read in conjunction  
with the Financial Statements and Notes thereto included in the Annual Report 
on Form 10-K of Koll Real Estate Group, Inc. (the "Company") for the year 
ended December 31, 1995, and the current year's previously issued Quarterly 
Reports on Form 10-Q.

     Certain prior period amounts have been reclassified to conform with  
their current period presentation.

NOTE 2 - LOSS PER COMMON SHARE

     The  weighted  average number of common shares outstanding for  the  three
months  ended  September  30, 1995 and 1996 were 47.3 million  shares  and  
48.5 million  shares, respectively, and the weighted average number of common 
shares outstanding for the nine months ended September 30, 1995 and 1996 
were 47.0  and 48.0  million shares, respectively. The Series A Preferred 
Stock is not included in the loss-per-share calculations because the effect 
would be anti-dilutive.

NOTE 3 - LAND HELD FOR DEVELOPMENT

REAL ESTATE

     Real  estate  held for development or sale and land held  for  
development (real  estate  properties) are carried at the lower of  cost  or 
estimated  net realizable  value  based  on  undiscounted cash flows.  The  
estimation  process involved  in  the determination of net realizable value 
is inherently  uncertain since  it  requires  estimates as to future events 
and market  conditions.  Such estimation  process  assumes the Company's 
ability to complete  development  and dispose  of its real estate properties 
in the ordinary course of business  based on  management's  present plans and 
intentions. Economic, market,  environmental and  political  conditions  may 
affect management's  development  and  marketing plans.  In addition, the 
implementation of such development and marketing  plans could  be  affected 
by the availability of future financing for development  and construction 
activities. Accordingly, the ultimate net realizable values of  the Company's 
real estate properties are dependent upon future economic and  market 
conditions,  the  availability of financing, and the  resolution  of  
political, environmental and other related issues.

     In  March  1995, the Financial Accounting Standards Board issued Statement
No.  121  "Accounting  for the Impairment of Long-Lived  Assets  and  
Long-Lived Assets  to be Disposed of" ("SFAS 121"), which requires an 
impaired asset  (real property  or  intangible)  to be written down to fair 
value.  If  an  impairment occurs, the fair value of an asset for purposes of 
SFAS 121 is deemed to be  the amount  a  willing buyer would pay a willing 
seller for such asset in a  current transaction.  As required, the Company 
adopted SFAS 121 during the quarter ended March  31, 1996, which did not have 
any effect on its financial statements.  Any potential future revaluation of 
the Bolsa Chica property that could result if  a recapitalization is 
implemented by the Company would be based on the  facts  and circumstances at 
that time.

     Land  held for development consists of approximately 1,200 acres known  as 
Bolsa Chica located in Orange County, California, adjacent to the Pacific 
Ocean, surrounded by the City of Huntington Beach and



<PAGE>

approximately 35 miles south  of downtown Los Angeles. In January 1996 the
California Coastal Commission approved Orange County's Local Coastal Program
("LCP") which provides for development  of up  to  2,500 homes on the mesa
(high ground) portion of the property and up  to 900  homes on the lowland
portion of the property, not to exceed 3,300 homes  in the  aggregate, and a
wetlands restoration plan for this property, which remains subject to further 
governmental approvals, as further described below.

     The  Coastal Commission approval in January 1996 was subject to  suggested 
modifications. These suggested modifications were approved by the Orange  
County Board  of Supervisors in June 1996, and on July 11, 1996 the 
California  Coastal Commission certified the LCP for the Company's Bolsa 
Chica property. The Company is  pursuing the secondary permitting process for 
the mesa through the County of Orange  in  order  to implement the approved 
development plan. This  process  is currently  expected  to be completed in 
the second half  of  1997.  The  Company expects, subject to its ability to 
obtain financing on a commercially reasonable and  timely  basis, and subject 
to obtaining the secondary permits, to  commence infrastructure  construction 
on the mesa in the second half of  1997.   However, due  to  certain  factors 
beyond  the  Company's  control,  including  possible objections  of various 
environmental and so-called public interest  groups  that may  be  made  in 
legislative, administrative or judicial forums, the  start  of construction  
could be delayed substantially. In this regard, on March  6,  1996 and  March 
11, 1996, two lawsuits were filed against the Coastal Commission, the Company 
and other Bolsa Chica landowners as real parties in interest,  alleging that 
the  Coastal  Commission's  approval of  the  3,300-unit  LCP  is  not  in 
compliance with the Coastal Act and other statutory requirements. These 
lawsuits seek  to  set  aside the approval of the Bolsa Chica project, and 
are  currently expected  to  be tried in the first half of 1997. The Company 
does  not  believe that  these  lawsuits will be successful in permanently 
preventing  the  Company from  completing the Bolsa Chica project, however 
there can be no  assurance  in this regard or that these suits will not 
result in delays.

     Under the 3,300-unit LCP the Company is committed to restoring the 
wetlands at  Bolsa Chica provided that federal agencies approve development 
of up to 900 homes in the lowlands. Wetlands restoration and development on 
the lowlands remains  subject  to  approval of a federal permit by the  U.S.  
Army  Corps  of Engineers,  which  the  Company continues to pursue. The 
Company's  goal  is  to obtain  such approval in 1997, however, the Corps of  
Engineers could  delay  or decline its approval. In the meantime, the Company 
has continued to work closely with the various state and federal agencies 
which have expressed an interest  in acquiring  the Bolsa Chica lowlands and 
restoring the wetlands. In  March  1996, the  Company  entered into a letter 
of intent to sell approximately 880  lowland acres  owned  by  the  Company  
at Bolsa Chica to  the  California  State  Lands Commission  for  $25  
million. On October 4, 1996,  various  state  and  federal agencies, led by 
the State Resources Agency, the State Lands Commission and  the U.S.  
Department  of the Interior, entered into an interagency  agreement  which 
provides a funding mechanism for acquisition and restoration of the Bolsa  
Chica lowlands.  On  October 8, 1996 the California Coastal Commission  also  
approved this  proposal.  Under the interagency agreement, the Ports of Los  
Angeles  and Long  Beach  have agreed to fund an aggregate of $67 million for 
an  acquisition and  wetlands  restoration  escrow account in exchange  for  
habitat  mitigation credits  required for their on-going facilities' 
expansion. The sale of the lowlands is targeted to close by year-end but the 
ability of the Company to complete any such  transaction  remains  subject   
to   various contingencies,  including:  (i) finalizing acquisition terms; 
(ii)  analysis  of the  results of an environmental site assessment by state 
and federal  agencies; (iii)  negotiation and execution of an oil field 
cleanup agreement  between  the oil operator  and the State Lands Commission; 
(iv) satisfactory completion  and analysis  of  an  appraisal  and title 
report; and (v)  State  Lands  Commission approval. Of course, there can be 
no assurance that a definitive agreement  will be entered into or that any 
transaction will be completed.

NOTE 4 - DEBT

    SENIOR BANK DEBT

      During  the  first nine months of 1996, the Company borrowed approximately
$6.2  million  and  repaid approximately $6.5 million under a construction  
loan agreement  with  Nomura Asset Capital Corporation


<PAGE>


("Nomura") to partially fund infrastructure  construction at Rancho San Pasqual,
the Company's golf/residential  property in San Diego County. In June 1996, the
Company  also repaid  approximately  $4.6 million under a letter of credit and
reimbursement agreement  with Nomura. The amount borrowed includes
approximately $2.5  million borrowed  under  the  agreement's one-time right to
reborrow  $5  million  after repayment  of the initial $5 million construction
loan, which occurred  in  June 1996.  As of September 30, 1996, the Company's
remaining availability under  the construction loan was approximately
$2.5 million. The Company currently  expects to  exercise its option to extend
the initial maturity date under the loans from December 20, 1996 to
December 20, 1997. As required under the construction loan agreement,
in January  1995 the Company deposited $5 million into an escrow account to be
used solely for funding of infrastructure construction costs at
Rancho San Pasqual, of which $.6 million remains as restricted cash as
of September 30, 1996.

     Cash  payments  for  interest on senior bank debt were  approximately  $.9
million and $1.2 million for the nine months ended September 30, 1995 and  
1996, respectively.

     PROJECT DEBT

     In the third quarter of 1996, a subsidiary of the Company obtained a $20 
million construction loan, guaranteed by the Company, for a build-to-suit 
corporate headquarters facility.  The initial interest rate on the loan was 
8.25%.  The Company elected to convert the interest rate to 30-day LIBOR plus 
2% after the first construction draw.  The maturity date of the loan is the 
earlier of July 1, 1997 or 15 days after substantial completion of the 
building.  As of September 30, 1996, the total amount borrowed was $6.7 
million.  The Company has entered into a purchase and sale agreement with a
financial institution which will purchase the building upon completion.

     Also during the third quarter, a subsidiary of the Company obtained a $2 
million non-revolving line of credit, guaranteed by the Company, for 
construction of a build-to-suit distribution facilty.  The line of credit 
bears interest at prime plus .75% and is due August 12, 1997.  As of 
September 30, 1996, the total amount borrowed was $.1 million.  The Company 
is negotiating with a prospective purchaser which would acquire the building 
upon completion.

    SUBORDINATED DEBT

     Subordinated debt was comprised of the following (in millions):



                                                 December 31,     September 30,
                                                     1995              1996
                                                 ------------     -------------
  Senior subordinated debentures                    $138.2           $155.3
  Subordinated debentures                             34.6             38.8
                                                    ------            -----
    Total face amount                                172.8            194.1
  Less unamortized discount                           (5.6)            (5.2)
  Plus accrued interest                                6.0              1.0
                                                    ------            -----
                                                    $173.2           $189.9
                                                    ======           ======


     The Company is continuing to negotiate with its Debentureholders for an
acceptable solution to de-leverage its capital structure; however, unless 
these negotiations are completed to the Company's satisfaction on a timely 
basis, the Company will consider other alternatives.

<PAGE>


NOTE 5 - INCOME TAXES

     The Internal Revenue Service ("IRS") has completed its examinations of 
the tax returns of the Company and its consolidated subsidiaries, including 
formerly affiliated entities, for the years ended December 31, 1989, 1990 and 
1991.  With respect  to  each examination, the IRS has proposed material 
audit  adjustments. The  Company  disagrees with the positions taken by the  
IRS  and  has  filed  a protest  with  the  IRS  to vigorously contest the 
proposed  adjustments.  After review of the IRS's proposed adjustments, the 
Company estimates that, if upheld, the  adjustments  could  result in Federal 
tax liability,  before  interest,  of approximately  $17  million  (net of 
amounts which  may  be  payable  by  former affiliates pursuant to tax 
sharing agreements). The IRS proposed adjustments, if upheld,  could  result 
in a disallowance of up to $147 million of available  net operating  loss 
carryforwards, of which none are recognized after  consideration of  the  
valuation  allowance, as of September 30, 1996.  The  Company  has  not 
determined  the extent of potential accompanying state tax liability 
adjustments should  the proposed IRS adjustments be upheld. The Company's 
protest was  filed in  August  1995 and is being considered by the IRS 
Appeals Division. Management currently  believes that the IRS's positions 
will not ultimately result  in  any material  adjustments  to  the Company's 
financial statements.  The  Company  is prepared  to pursue all available 
administrative and judicial appeal  procedures with regard to this matter and 
the Company is advised that its dispute with  the IRS could take up to five 
years to resolve.

     Any potential future recapitalization implemented by the Company could
have an  effect  on  the amount of net operating loss carryforwards available
to offset future taxable income.

     Cash payments for federal, state and local income taxes were 
approximately $.2  million  and $.1 million for the nine months ended 
September 30,  1995  and 1996,  respectively. Tax refunds received were $.4 
million and $0 for  the  nine months ended September 30, 1995 and 1996, 
respectively.

NOTE 6 - COMMITMENTS AND CONTINGENCIES

     The  United States Environmental Protection Agency ("EPA") has  
designated Universal Oil Products ("UOP"), among others, as a Potentially 
Responsible Party ("PRP")  with respect to an area of the Upper Peninsula of 
Michigan (the  "Torch Lake Site") under the Federal Comprehensive 
Environmental Response, Compensation and Liability Act of 1980, as amended 
("CERCLA"). UOP is allegedly the successor in  interest  to  one of the 
companies that conducted mining operations  in  the Torch  Lake  area and an 
affiliate of Allied Signal Inc., a predecessor  of  the Company.  The  
Company has not been named as a PRP at the site. However,  Allied Signal  
has,  through UOP, asserted a contractual indemnification claim  against the  
Company  for all claims that may be asserted against UOP by  EPA  or  other 
parties  with respect to the site. EPA has proposed a clean-up plan which  
would involve  covering  certain real property both contiguous and  
non-contiguous  to Torch Lake with soil and vegetation in order to address 
alleged risks posed  by copper  tailings  and slag at an estimated cost of 
$6.2 million.  EPA  estimates that  it  has spent approximately $3.9 million 
to date in performing studies  of the  site.  Under CERCLA, EPA could assert 
claims against the Torch  Lake  PRPs, including  UOP, to recover the cost of 
these studies, the cost of  all  remedial action  required at the site, and 
natural resources damages. In June  1995,  EPA proposed  a  CERCLA  
settlement pursuant to which UOP pay approximately  between $2.6  and $3.3 
million in exchange for a limited covenant by EPA not to sue  UOP in  the  
future.  The Company, without admission of any obligation to  UOP,  has 
determined  to vigorously defend UOP's position that the EPA's proposed  
cleanup plan  is unnecessary and inconsistent with the requirements of CERCLA 
given that the  EPA's own Site Assessment and Record of Decision found no 
immediate  threat to  human health. In the Company's view the proposed 
remediation costs would  be in excess of any resulting benefits.


<PAGE>

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
         FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

     The principal activities of the Company include: (i) obtaining zoning  
and other  entitlements  for land it owns and  improving the  land  for  
residential development; (ii) single and multi-family residential 
construction  in  Southern California;  and (iii) providing commercial, 
industrial, retail and  residential development   services   to  third  
parties,  including   feasibility   studies, entitlement coordination, 
project planning, construction management,  financing, marketing, 
acquisition, disposition and asset management services on a  national and  
international  basis,  through its offices throughout  California,  and  in 
Dallas,  Phoenix,  Seattle,  Shanghai,  China  and  Taipei,  Taiwan.  Once   
the residential  land  owned  by  the  Company is entitled,  the  Company  
may  sell unimproved  land  to  other  developers or  investors;  sell  
improved  land  to homebuilders; or participate in joint ventures with other 
developers,  investors or  homebuilders to finance and construct 
infrastructure and homes. The  Company intends  to  consider  additional  
real estate  acquisition  and  joint  venture opportunities;  however,  the 
Company's immediate strategic  goals  are  to  (i) obtain new financing for 
development of the Bolsa Chica mesa; (ii) complete  the secondary  permitting 
for development of the Bolsa Chica  mesa  and  secure  all federal  permits  
for development and restoration of the Bolsa  Chica  lowlands; (iii)  
continue working with state and federal agencies in an effort to complete the 
proposed  sale  of the Bolsa Chica lowlands to the California  State  Lands 
Commission,  as described in Note 3; (iv) complete negotiations with its 
Debentureholders to  de-leverage the  Company's  capital structure  as 
described in Note 4; and (v) to maintain adequate liquidity to cover general 
and administrative, liability  management and interest  costs.  There  can  
be  no assurance that the Company will accomplish, in whole or in part, all 
or  any  of these strategic goals.

     Real  estate  held for development or sale and land held  for  development 
(real  estate  properties) are carried at the lower of  cost  or  estimated  
net realizable  value  based on undiscounted cash flows. The Company's  real  
estate properties are subject to a number of uncertainties which can affect 
the  future values  of  those assets. These uncertainties include litigation 
or  appeals  of regulatory  approvals and availability of adequate capital, 
financing  and  cash flow.  In  addition,  future values may be adversely 
affected  by  increases  in property  taxes,  increases  in  the costs of  
labor  and  materials  and  other development  risks,  changes  in general 
economic conditions,  including  higher mortgage  interest  rates, and other 
real estate risks such as  the  demand  for housing generally and the supply 
of competitive products. Real estate properties do  not constitute liquid 
assets and, at any given time, it may be difficult  to sell  a  particular 
property for an appropriate price. The state of California's economy  has had 
a negative impact on the real estate market generally,  on  the availability  
of  potential  purchasers  for  such  properties  and   upon   the 
availability   of  sources  of  financing  for  carrying  and  developing   
such properties. However, over the past year, the number of potential 
purchasers  and capital sources interested in Southern California residential 
properties appears to have increased.

LIQUIDITY AND CAPITAL RESOURCES

      The principal assets in the Company's portfolio are residential land
which must be held over an extended period of time in order to be developed to 
a condition that, in management's opinion, will ultimately maximize the 
return  to the  Company. Consequently, the Company requires significant 
capital to  finance its real estate development operations.

     During the nine months ended September 30, 1996, the Company borrowed $6.2 
million  under  its  construction  loan  agreement  with  Nomura  Asset  
Capital Corporation  ("Nomura") to fund infrastructure improvements at  its 
Rancho  San Pasqual  golf  and  residential community in San Diego county.  
During  the  nine months  ended September 30, 1996, the Company completed 
sales of 138 residential lots  at  Rancho San Pasqual to four homebuilders 
for gross proceeds aggregating approximately $6.3 million.  These four 
homebuilders have rolling options  which if  exercised would result in the 
sale of an additional 310 lots over  the  next two  years





<PAGE>


for aggregate gross proceeds approximating $13.4 million. In  October 1996, 
one of the homebuilders purchased an additional 19 lots under the terms of 
such  an  option agreement. In June 1996, the Company sold its Eagle Crest  
Golf Course at Rancho San Pasqual to a nationally recognized owner/operator 
of  high-end  daily  fee golf courses and private country clubs for $6.1 
million.   After paying  termination related costs to the operator of the 
golf course and closing costs, the Company realized net proceeds of 
approximately $5 million. Under loan agreements  with Nomura, the Company 
utilized 90% of such sales proceeds,  along with  50%  of  the  net  proceeds 
from Rancho San  Pasqual  assessment  district reimbursements, to prepay 
approximately $11.1 million of outstanding senior bank debt. During the 
second and third quarters, after full repayment of the original $5  million  
construction loan, the Company reborrowed $2.5  million  under  the 
construction  loan  agreement's one-time right to reborrow $5  million.   As  
of September  30, 1996, the Company's remaining availability under the 
construction loan was approximately $2.5 million.

     Historically,  sources  of capital have included  bank  lines  of  
credit, specific  property  financings, asset sales and available  internal  
funds.  The Company has reported losses since 1991, with the exception of 
1993 results which included gains on dispositions and extinguishment of debt, 
and expects to report losses in the foreseeable future. While a significant 
portion of such losses  is attributable   to  non-cash  interest  expense  on 
the  Company's  subordinated debentures,  the  Company's  capital expenditures
for  project  development  and infrastructure  are  significant. The Company 
will  continue  to  be  dependent primarily on real estate asset sales,
existing financing arrangements  (Note  4) and  cash and cash equivalents
on-hand to fund infrastructure construction costs at  Rancho  San Pasqual, a
minimum level of project development costs for  Bolsa Chica, cash interest
payments and general and administrative expenses during the remainder  of
1996. At September 30, 1996, the Company's unrestricted  cash  and cash
equivalents aggregated $1.2 million and restricted cash of $.6 million  was
available  to  fund  infrastructure improvements at  the Company's  Rancho
San Pasqual  project.  With the recent approval of the Bolsa Chica  project
by  the California  Coastal Commission, the Company is also seeking  new
financing  for development of Bolsa Chica and continuing to negotiate
with its Debentureholders for an acceptable solution to de-leverage the
Company's  capital  structure,  as described  in Note 4.  While the Company
expects to complete the sale of the Bolsa Chica lowlands by December 31, 1996
as described in Note 3, in the event that such sale is not completed on a
timely basis, the Company believes it would be able to secure new
financing, or complete other asset sales in order to be able to meet  its
obligations as they become due during 1997.

FINANCIAL CONDITION

SEPTEMBER 30, 1996 COMPARED WITH DECEMBER 31, 1995

     The  $3.7 million decrease in cash and cash equivalents primarily reflects
spending   for   Bolsa  Chica  project  development  costs,  and   general   
and administrative  expenses,  partially offset by  approximately  $2.5  
million  in proceeds  from  land  sales  at  the Company's  
resort/residential  property  in Michigan  during  the nine months ended 
September 30, 1996,  as  well  as  other activity  presented  in  the 
Statements of Cash Flows. Restricted  cash  of  $.6 million at September 30, 
1996 reflects funds deposited into escrow accounts  for funding certain 
infrastructure costs at Rancho San Pasqual.

     The $6.2 million increase in real estate held for development or sale 
primarily reflects construction costs for a build-to-suit project in Phoenix, 
Arizona. The Company has contracted for the building to be sold upon 
completion of construction in the second half of 1997.

     The  $4.8 million decrease in operating properties reflects the June  1996
sale of the Eagle Crest Golf Course at Rancho San Pasqual.

     The $4.9 million decrease in senior bank debt reflects net prepayments  on 
the Nomura loans, resulting primarily from sales of 138 residential lots and 
the Eagle  Crest Golf Course at Rancho San Pasqual, partially offset by 
construction borrowings during the nine months ended September 30, 1996. 

     The $6.8 million increase in project debt reflects borrowing from banks 
for two build-to-suit projects by subsidiaries of the Company.  The Company 
has entered into a purchase and sale agreement with a financial institution 
for the sale of one of the buildings upon completion, and is negotiating with 
a potential purchaser for the sale of the other building upon completion.

<PAGE>

RESULTS OF OPERATIONS

     The  nature of the Company's business is such that individual transactions 
often cause significant fluctuations in operating results from year to year.

THREE  MONTHS  ENDED  SEPTEMBER 30, 1996 COMPARED WITH THE  THREE  MONTHS  
ENDED SEPTEMBER 30, 1995

     Asset  sales  revenues during the third quarter of 1996  of  $3.6  million 
primarily  reflect $1.2 million in sales of resort/residential lots in  
Michigan and  $1.9 million of residential sales at the Company's Oceanside 
Hills  project in  San  Diego  County, California. The $3.6 million of asset 
sales  during  the third  quarter  of  1995 primarily reflect residential 
sales  at  the  Wentworth project  in  New Hampshire and the sale of a 
leasehold interest in Grand  Caribe Island  in Coronado, California, along 
with $.5 million in residential sales  at the  Oceanside  project.  The $.9 
improvement in gross  margin  on  asset  sales reflects the lower cost of 
sales of Michigan lots.

     Revenues  from  operations in 1996 reflect a $.6 million increase  in  the 
commercial  development business which was more than offset by  a  $1.3  
million decrease  due  to  the absence of Wentworth marina and Eagle Crest  
Golf  Course revenues in the recent quarter due to the sale of these assets.

     The  $.3 million increase in general and administrative expense from  
$1.8 million in 1995 to $2.1 million in 1996 primarily reflects costs related 
to the  evaluation of recapitalization alternatives with respect to the 
subordinated debentures.

     The $.4 million increase in interest expense from $5.9 million in 1995  to 
$6.3  million  in  1996 primarily reflects compounded noncash  interest  on  
the Company's subordinated debentures.

     The  $8.6 million decrease in other expense, net from $8.9 million in 1995
to $.3 million in 1996 primarily reflects $7.5 million in asset write-downs  in 
1995  on  the Company's Wentworth project and Eagle Crest Golf Course at  
Rancho San  Pasqual to reflect estimated net realizable values and $1.0 
million of non-recurring income in 1996 from a reduction in litigation 
reserves due to a recent settlement.

     The benefit for income taxes for the three months ended September 30, 1996
has been offset by a corresponding valuation allowance.

NINE  MONTHS  ENDED  SEPTEMBER 30, 1996 COMPARED  WITH  THE  NINE  MONTHS  
ENDED SEPTEMBER 30, 1995


     The  $4.7  million increase in asset sales revenues from $12.9 million  in 
1995 to $17.6 million in 1996 and the related $4.0 million increase in costs  
of asset  sales  from  $10.9  million in 1995 to $14.9 million  in  1996  
primarily reflect  the sale of the residential lots and Eagle Crest Golf 
Course at  Rancho San  Pasqual  and sales of resort/residential lots in 
Michigan during  the  nine months  ended September 30, 1996. These increases 
were partially offset  by  the absence  in 1996 of Wentworth residential 
sales as a result of the sale  of  the entire  Wentworth  project  in  the 
fourth quarter  of  1995.  The  $.7  million improvement in gross margin on 
asset sales primarily reflects gains on sales  of Michigan lots, partially 
offset by the absence in 1996 of the gains on sales  of the Coronado wharfage 
rights and leasehold interest in 1995.

     The  $1.5 million and $1.9 million increases in revenues and gross margin,
respectively, from operations primarily reflect higher revenues in the 
Company's commercial development business during the nine months ended 
September 30, 1996, partially offset by the absence of Wentworth marina 
revenues throughout 1996 and the sale of the Eagle Crest Golf Course in June 
1996.

     The $1.9 million increase in interest expense from $16.8 million in 1995 to
$18.7  million in 1996 principally reflects compounded noncash interest  on  
the Company's subordinated debentures.


<PAGE>

     The  $5.6  million decrease in other expense, net primarily  reflects  the
absence  of  1995 asset write-downs described above, partially  offset  by  
$3.0 million of non-recurring income in 1995 from a reduction in excess 
environmental reserves.

     The  benefit for income taxes for the nine months ended September 30, 1996 
has been offset by a corresponding valuation allowance.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 
1995

     Certain  of  the foregoing information is forward looking  in  nature  
and involves risks and uncertainties that could significantly impact the 
ability  of the  Company  to  achieve its currently anticipated goals and 
objectives.  These risks and uncertainties include, but are not limited to, 
litigation or  appeals  of  regulatory  approvals and  availability  of  
adequate  capital, financing and cash flow. In addition, future values may be 
adversely affected by increases  in property taxes, increases in the costs of 
labor and materials  and other  development risks such as the demand for 
housing generally and the supply of  competitive products. Real estate 
properties do not constitute liquid assets and, at any given time, it may be 
difficult to sell a particular property for an appropriate  price. Other 
significant risks and uncertainties are  discussed  in the Company's Annual 
Report on Form 10-K for the year ended December 31, 1995.

                         PART II - OTHER INFORMATION

ITEM 1 -  LEGAL PROCEEDINGS

     See "Item 3 - Legal Proceedings" in the Company's Annual Report on
Form 10-K for the Year Ended December 31, 1995.


ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

    (a)  Exhibits:

     27.1  Financial Data Schedule.

    (b)  Reports on Form 8-K:

            None.


                                  SIGNATURE


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


                                       KOLL REAL ESTATE GROUP, INC.



Date:  November 14, 1996                /s/  Raymond J. Pacini
                                        ----------------------------
                                        RAYMOND J. PACINI
                                        Executive Vice President and
                                        Chief Financial Officer