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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2003

OR

FOR THE TRANSITION PERIOD FROM              TO              .

COMMISSION FILE NUMBER: 0-20418

KENNEDY-WILSON, INC.

(Exact name of registrant as specified in its charter)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 887-6400

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

None

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

COMMON STOCK, $.01 PAR VALUE

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 (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

The aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant, based upon closing sales price of the Common Stock on the NASDAQ Stock Market on June 30, 2003 was approximately $30 million. The number of shares of the registrant’s Common Stock outstanding as of March 1, 2004 was 7,213,327.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant’s proxy statement for its 2003 Annual Meeting of Stockholders, to be held at a future date, are incorporated by reference into Part III of this report.

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KENNEDY-WILSON, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

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ITEM 1. BUSINESS

OVERVIEW

We are an integrated, national real estate services and investment Company. Founded in 1977, we were later incorporated in Delaware and became a public Company in 1992. We deliver a complementary array of real estate services. Headquartered in Beverly Hills, we have approximately 535 employees in offices in the U.S. We initially gained recognition through our real estate auction services. Over time, we diversified our business so that we now provide:

In addition to these real estate related services, we invest primarily through joint venture investments in commercial and residential real estate and discounted loan portfolios. Our clients include large financial institutions, major corporations, pension funds, real estate developers, insurance companies and governmental entities.

Our previously wholly-owned, consolidated subsidiary, Kennedy-Wilson Japan (“KWJ”), has had a presence in Japan for ten years through which we developed significant relationships with Japanese companies and financial institutions. In 2002, the Company completed an initial public offering, a secondary public offering and a private sale of the shares of KWJ. The public offerings and private sale generated gross cash consideration of approximately $35 million. During 2003, the Company completed the sale of its remaining shares of KWJ for total gross cash consideration of approximately $30.3 million. As a result of the public offerings and the sales of shares, the Company recorded net gains of approximately $16.4 million and $12.9 million for the years ended December 31, 2003 and 2002, respectively.

OUR BUSINESS OPERATIONS

FUND MANAGEMENT

KWI Fund Management Group is a vertically integrated real estate services and fund management firm. This group organizes and manages closed-end commingled real estate investment funds that invest in high-quality office, industrial, retail and multifamily income property located in selected markets in the U.S. We serve as the general partner of the funds and co-invest with our pension fund clients as limited partners. We earn fees for services provided to the fund including fees for acquisition, asset management, property management, leasing, and disposition services.

KWI Fund I is a fund with approximately $145 million in assets (at estimated fair market value) comprised of $64 million in equity, which is 5% owned by the Company, and capitalized with limited partners’ capital and $79 million in debt. Through the end of 2003, KWI Fund I owns 10 office properties totaling approximately 1,070,000 square feet. The properties are located in Los Angeles, Orange County, Houston, Austin and Atlanta.

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Future funds are expected to be in the $100 million equity range with $250 million in assets. The funds are expected to have the following principal investment objectives:

PROPERTY MANAGEMENT AND LEASING

We are a nationwide commercial and residential property management and leasing Company. We provide a full range of services relating to property management, including:

We have managers in six regional offices—Beverly Hills, New York, Austin, San Francisco, Seattle, and Chicago—supervising approximately 500 employees who assist in managing more than 300 office and industrial buildings, and multi-unit residential complexes in 18 different states. We have approximately 40 million gross square feet of real estate under management.

As part of our strategy for providing our property management clients with the best services possible, we apply the same approach in managing our clients’ properties as we do in managing our own, where our primary objective is to maximize the return on investment. To this end, we work with each client to ascertain their goals and expectations and to design strategic plans for leasing and improving each property in a way that increases the client’s returns. We also strive to maximize our clients’ returns by reducing property operating expenses through the discounts and lower prices that we generally obtain for vendor services and supplies.

REAL ESTATE BROKERAGE

Through our offices in Beverly Hills and New York, we provide specialized brokerage services for both commercial and residential real estate. We market and sell on behalf of our clients and ourselves:

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We specialize in marketing institutional properties through privately negotiated and sealed bid sales. We develop and implement cost-effective marketing campaigns ranging from local to nationwide in scope. Each marketing campaign is tailored to the client’s objectives and the property’s characteristics, including time parameters, sensitivity to publicity, and cash flow needs. We also investigate and analyze, among other things, the physical condition of the property, its cash flow and tenant characteristics, market rents and market dynamics within submarkets, and comparable transactions.

We also market properties directly to various investors with whom we maintain ongoing business relationships. We believe that through these efforts, we create a sales environment intended to enable our clients to obtain the highest possible prices for their properties. We obtain our commercial brokerage engagements primarily through our existing relationships with over 100 institutional and corporate owners of real estate primarily located in the U.S. and Japan.

We also design marketing programs to sell single-family home developments and condominium projects using conventional sales and auction-marketing programs. We also design and implement sealed bid marketing programs for exclusive estates and land for residential development. Most of the residential properties that we have brokered are located in California. Our clients include builders, developers, private sellers and financial institutions.

On a national basis, we provide our clients with auction marketing services to sell both commercial and residential real estate. Auctions provide a seller an opportunity to concentrate the marketing efforts and sell its holdings on one established date. By doing so, the seller can increase liquidity and avoid long-term carrying costs and the risk of a drop in market value. For these reasons, we believe that the net proceeds to the seller following an auction sale of multiple units often exceeds what the net proceeds would have been had the units been sold individually through conventional brokerage arrangements.

REAL ESTATE INVESTMENTS

We invest in commercial and residential real estate primarily through joint ventures with institutional joint venture partners, who typically contribute the majority of the capital. The investment platforms typically target specific property types. We have joint venture funds for multiple investments with certain institutional partners. These funds enable us to leverage our capital and diversify the risks associated with owning properties. In addition, we earn fees for services provided to the joint venture, including due diligence, acquisition, construction management, asset management, leasing, property management, and disposition services. Profits from fees earned by the Company from entities in which the Company retains an ownership interest are deferred to the extent of the Company’s ownership percentage in amounts capitalized by the joint venture.

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We purchase properties that are subperforming in a manner which we believe can be rectified with our expertise or financial resources. For example, a developer of a residential real estate project may find it difficult or impossible to finish a project because it has insufficient cash. In such a situation, we can purchase the project at a discounted price then apply our marketing expertise and draw on our financial resources to finish the project and sell it as a whole or to individual buyers for a profit. With regard to commercial properties, we acquire subperforming buildings, make the improvements necessary to attract tenants, lease to new tenants and then sell the buildings.

One of our strengths is our ability to quickly identify and acquire desirable real estate assets in privately negotiated transactions. We do so by capitalizing on the institutional knowledge we have developed through our brokerage, property management, and investment business and by conducting quick and thorough investigations and analyses of the properties, their financial condition and what we believe to be their financial potential. We have extensive experience in identifying and analyzing the factors that impact property values in the regions in which we do business, such as new construction, the marketability of certain neighborhoods, leasing trends and the types of businesses seeking various types of commercial space. Our due diligence is conducted by our experienced in house team.

Most of the real estate in which we and our joint venture investment platform have invested is located in California and Texas. The current cycle of the U.S. real estate market presents value-added investment potential. Our brokerage and property management operations are the source of many of our real estate acquisitions. These operations provide us with unique investment opportunities in the form of close relationships with our institutional clients that have substantial real estate investments. For example, a financial institution client that has acquired a property through a foreclosure may desire to sell it in less time than it would take for a conventional brokerage sale. We are often able to meet the needs of these types of clients by purchasing their properties quickly and discretely for one of our joint venture funds.

NOTES RECEIVABLE INVESTMENTS

In 2001, we began acquiring discounted loan portfolios that were performing and were secured primarily by real estate. These assets are accounted for under the interest method, which provides that the accretable discount be recorded as interest income over the life of the loans.

Through 1999 our note portfolio acquisitions consisted primarily of pools of assets that contained bankruptcy claims, judgments, credit guarantees, and other residual claims arising from defaulted credit transactions. These assets were typically purchased from financial institutions. Our strategy to collect the asset balances consists of negotiating a cash payoff, restructuring the asset to a performing note, or foreclosing and selling any related collateral. Our last acquisition of these types of assets was in 1999. Most of these notes have been settled, with the majority being paid off in less than two years.

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KENNEDY-WILSON JAPAN

The Company had a presence in Japan for over ten years through its formerly wholly-owned subsidiary, Kennedy-Wilson Japan (“KWJ”). The operations in Japan included investment in real estate, the acquisition of pools of discounted Japanese notes and asset management and brokerages services. The notes were typically secured by real estate and personal property. The investment strategy was to acquire the notes on a privately negotiated basis from Japanese financial institutions. KWJ’s investments were typically acquired in joint venture funds with institutional investors who contributed the majority of the capital. Subsequent to the secondary public stock offering of KWJ in September 2002, KWJ became an unconsolidated subsidiary in the Company’s financial statements and was accounted for as an equity method investment. The Company sold its remaining shares of KWJ in 2003.

GOVERNMENT REGULATIONS

Our brokerage and property management operations are subject to various federal, state and local regulations. We must have an officer licensed as a real estate broker or we must associate with a broker licensed by each state within the U.S. in which we provide brokerage or property management services. Each of our employees that performs certain brokerage functions in any particular state must be a licensed real estate salesperson in that state and he or she must work under the supervision of a broker licensed by that state. We are in compliance with all material licensing requirements and regulations in states and countries in which licenses are required and in which we are engaged in brokerage and property management activities.

In various states, governmental entities license individual auctioneers and/or administer various regulations governing their activities and may require that auctioneers post bonds. We are in compliance with all material licensing and bonding requirements in all states in which auctioning licenses and bonds are required and in which we are engaged in material auction activities.

COMPETITION

Because of our unique combination of businesses, we compete with brokerage and property management companies as well as companies that invest in real estate and distressed notes. The brokerage and property management businesses are both highly fragmented and competitive. We compete with real estate brokerage companies on the basis of our relationship with property owners, quality of service, and commissions charged. We compete with property management and leasing firms also on the basis of our relationship with clients, the range and quality of services provided, and fees and commissions charged. Our investment operations compete to varying degrees with real estate investment partnerships and other investment companies. We compete with these other investors on the basis of our relationship with the sellers and the amounts that we pay for the investments acquired.

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EMPLOYEES

We have approximately 535 employees. Our compensation policies are designed to attract, retain and motivate employees that are an integral part of our profitability. Our employees typically receive a base salary and performance based incentives including bonuses based primarily on the cash flow of their operational units. As a result, employees are encouraged to meet individual goals as well as to contribute their expertise and efforts on behalf of their group. In addition to promoting the generation of revenues, our compensation structure also encourages our employees to control costs.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities Exchange Act of 1934 that require the Company to file, most often electronically, reports, proxy and information statements, and other information with the Securities and Exchange Commission (SEC). The public may read and copy the Company’s filings at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public can obtain information on the operation of the Public Reference Room by calling 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.

ITEM 2. PROPERTIES

Our executive and administrative offices are leased and located at 9601 Wilshire Boulevard, Suite 220, Beverly Hills, California. We also lease space for our regional and branch offices and sublease space to third parties. These facilities, including our Beverly Hills headquarters, comprise a total of approximately 100,000 square feet of leased space, with an annual aggregate base rental of approximately $2 million. Each of these leases is scheduled to expire within the next seven years. We believe that we will be able to renew any expiring lease or obtain suitable office space to replace such leased facility, as necessary, without any material increase in our rental costs.

As described above, we also buy and sell real estate, primarily through joint venture investments, in the ordinary course of our business.

ITEM 3. LEGAL PROCEEDINGS

We are involved in various legal proceedings generally incidental to our business. These matters are generally covered by insurance. While the ultimate disposition of these proceedings is not known, based upon current available information, we believe that the outcomes will not have a material adverse effect on our financial position or results of operations.

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

There were no matters submitted to a vote of our stockholders during the fourth quarter of 2003.

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PART II

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

Our Company’s Common Stock trades on The NASDAQ National Market under the symbol “KWIC”. The following table sets forth the high and low closing prices of our Common Stock as reported on The Nasdaq National Market.

As of March 1, 2004, there were approximately 1,200 holders of our Common Stock.

EQUITY COMPENSATION PLAN TABLE

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ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial data as of and for each of the five fiscal years ended December 31, 2003. The data set forth below should be read in conjunction with the Consolidated Financial Statements and related Notes to Consolidated Financial Statements appearing elsewhere herein and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

OVERVIEW

We are an integrated real estate services and investment Company with headquarters in Beverly Hills, California. Through our subsidiaries, we provide a complementary array of real estate services, including fund management, property management and leasing, real estate brokerage services including auction marketing, and asset management. We also invest in commercial and residential real estate and discounted loan portfolios. Our investments in real estate are made primarily through joint venture funds.

In 2002, the Company completed two public stock offerings and two private sales of shares of its formerly wholly-owned subsidiary, Kennedy-Wilson Japan (“KWJ”). The sale of stock reduced the Company’s ownership in the Japan subsidiary to 37%. This change in ownership necessitated a change in the accounting treatment for KWJ from a consolidated entity to an equity investment beginning in the fourth quarter of 2002. Instead of including the various components of KWJ’s revenue and expenses in the individual revenue and expense categories on the income statement, the Company’s 37% of the net income of the Japan subsidiary is shown as a single separate line item. Likewise, on the balance sheet the Company’s investment in KWJ is shown as a single separate line item.

Our current real estate investment strategy favors joint venture investments; however, we occasionally continue to acquire and sell residential and commercial real estate on a wholly owned basis. We are no longer involved in single-family residential development and sales but are investing, through joint venture partnerships, in multi-family apartment projects. We also invest in discounted loan portfolios secured primarily by real estate on our own account and through joint venture partnerships. The discounted asset portfolios acquired prior to 2001 consisted primarily of claims, judgements and guarantees.

COMPARISON OF YEARS ENDED DECEMBER 31, 2003 AND 2002

Our revenues in 2003 and 2002 were $27.1 million and $44.7 million, respectively. Total operating expenses in 2003 and 2002 were $34.8 million and $48.6 million, respectively. Operating income includes combined equity in income of joint ventures and Kennedy-Wilson Japan of $2.6 million and $9.0 million, respectively. Our net income for the same periods was $5.4 million and $6.2 million, respectively.

REVENUE

In 2003 property management and leasing generated revenue of $18.2 million (including related party fees of $3.7 million), representing 67% of our total revenue, compared to approximately $25.8 million (including approximately $4.1 million in related party fees) and 58% of total revenue in 2002. Excluding Kennedy-Wilson Japan’s property management revenue of approximately

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$1.8 million in 2002 (prior to the deconsolidation noted above), total property management revenue in the U.S. declined 24%. Property management and leasing revenue includes asset management, construction management, leasing services, engineering and other services to property operators. Property management fees declined approximately 8% due in part to the sale of some of the buildings managed by the Company where property management services were taken “in-house” by the new owners. The Company has obtained new property management assignments, but often at lower rates because of the competitive market. In some cases the new property management assignments have not included leasing assignments. The impact of the past several years’ economic decline has led to a decline in occupancy and rental rates, while the recovery has not yet resulted in significant leasing improvements. Additionally, the terms of new leases and renewals are often at lower rates and for shorter terms than current leases. All of these factors have resulted in a 35% reduction in leasing commissions, construction development fees and engineering services. The Company is aggressively pursuing third party property management and leasing assignments as well as investment opportunities, which should increase revenue in all of the property related services.

Brokerage commission revenues in 2003 decreased 67% to $4.9 million (including approximately $1.5 million in related party fees), representing 18% of total revenues compared to brokerage commission revenues in 2002 of $14.8 million (including related party fees of approximately $9.0 million). Brokerage commissions earned by KWJ accounted for approximately $8.2 million or 55% of the total commission revenue in 2002. Excluding KWJ, brokerage commissions declined by 26% due to a decrease in the number of sales transactions. In connection with our brokerage activities we provide property valuations, development and implementation of marketing plans, sealed bid auctions and open bid auctions.

Interest and other income totaled approximately $4.0 million or 15% of total revenues in 2003, compared to approximately $4.1 million in 2002. Interest and other income includes accretion of discounts on acquired loan portfolios, interest on corporate notes receivable that are held as a result of investment sales, interest on cash investments and other miscellaneous sources of revenue. The accretion of discounts on loan portfolios are accounted for under the interest method, which provides that the accretable discount be recorded as interest income over the life of the loans. The portion of interest and other income from loan portfolios and other sources earned in Japan during 2002 was approximately $2.1 million which, when deducted from the 2002 revenue shows an increase of 98% in the revenue earned in the U.S. in 2003. During 2003, the Company purchased five loan portfolios secured by real property and business assets for approximately $26.7 million.

OPERATING EXPENSES

Operating expenses in 2003 were approximately $34.8 million, representing a decrease of 29% from $48.6 million in 2002. The company has experienced a decrease in all categories of operating expenses during 2003 realizing the results of an aggressive, company-wide expense reduction program that has been in place over the past several years.

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Commissions and marketing expenses decreased to $3.8 million in 2003 from $5.5 million in 2002. The reduction in commission expense corresponds with a reduction in leasing and brokerage commission revenue earned by the Company. Typically, the Company pays out approximately 40% to 60% of the gross commission to brokers and employees.

Cost of residential real estate sold was $220,000 in 2002, which related to the sale of real estate by KWJ. As previously discussed, the Company has exited the residential real estate development business resulting in no cost of real estate expense for 2003.

Compensation and related expenses were approximately $18.1 million in 2003, down 30% from $26 million in 2002. The decrease was primarily a result of cost reduction initiatives, bonus reductions and the impact of not consolidating KWJ which accounted for approximately $3.2 million of compensation expense in 2002.

General and administrative expenses were $9.9 million in 2003 representing a 7% decrease from 2002 expenses of $10.7 million. General and administrative expenses in the U.S. increased by 9%, for the most part, relating to the write-off of notes receivable in 2003 in the amount of $850,000 compared to $146,000 in 2002.

Depreciation and amortization expense decreased to $3 million in 2003, a 17% decrease from $3.7 million in 2002. The expense in 2003 was reduced by approximately $633,000 of costs that were amortized during 2002 associated with KWJ.

There were no non-cash write-down of investments during 2003 as compared to approximately $1.5 million for 2002. During 2002, management concluded that the cost basis of a real estate investment was not probable of recovery. Based on the analysis performed by management, the basis of the real estate investment was reduced by approximately $1.5 million, resulting in a cost basis of the associated asset of zero.

There was no non-recurring, non-cash Japan IPO expense in 2003 as compared to the 2002 expense of $1.1 million relating to the discounted stock issued to employees of KWJ. This expense was associated with the gain on sale of stock of subsidiary of $12.9 million classified in non-operating income in 2002.

Equity in joint venture income totaled approximately $2.0 million in 2003, a decrease of 75% compared to $8.1 million realized in 2002. The revenue from joint venture investments includes income from the operation and sale of numerous real estate investments in the U.S. which are owned primarily in joint venture funds with institutional investor partners. During 2003, five residential investments and three commercial investments were sold to third parties and the Company recorded equity in income of approximately $2.1 million related to the sales. Accordingly, no income was deferred in 2003. During 2002, five commercial buildings, and two apartment projects were sold to either third parties or joint ventures in which the Company retained an ownership interest. The Company recorded equity in income of approximately $5.3 million from these sales after deferral of income in the amount of $339,000 related to the Company’s percentage ownership in the acquiring joint venture investment entity. Our current investment portfolio and our plans for future investments focus on commercial buildings and on multiple family residences. Under the Company’s investment strategy, we typically contribute a fully funded initial capital contribution and/or property previously owned by the Company.

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Equity in income of KWJ was $610,000 for 2003 compared $907,000 in 2002. The reduced revenue in 2003 correlates with the reduced ownership in KWJ combined with a reduced period of ownership participation. As of September 30, 2003, the Company had sold all of its ownership interest in KWJ.

NON-OPERATING ITEMS

Gain on sale of stock of subsidiary was approximately $16.4 million for 2003 compared to $12.9 million in 2002. The gain in 2003 resulted from the sale of all of the Company’s remaining 24,600 shares owned in KWJ. During 2002, the Company sold 9,000 shares as part of the initial public offering and secondary offering of KWJ’s stock in Japan.

Interest expense was $1.4 million in 2003 a decrease of 45% compared to approximately $2.6 million in 2002 due, in part, to the reduced average interest rates on variable rate loans and a substantial repayment of debt, including the repayment of the 12% senior unsecured notes. Interest expense includes the amortization of loan fees and related loan costs in the amount of $456,000 and $484,000 for the years 2003 and 2002, respectively. Additionally, in both 2003 and 2002, interest expense was reduced by approximately $2.3 million of interest capitalized on several qualifying real estate investments. These investments were undergoing construction or entitlement activities in preparation for their planned principal operations.

The valuation adjustment for the change in the fair value of warrants issued in connection with the issuance of $15 million of 12% senior unsecured notes resulted in a benefit of $35,000 for 2003 compared to $209,000 for 2002. The fair value of the warrants was estimated using a combination of the Black-Scholes Option Pricing Model and Monte Carlo Simulation.

There was no write-down of technology investments in 2003 compared with a $3.2 million write-down in 2002. In 2002, management concluded that the cost basis of two e-commerce investments were not probable of recovery. Based on the analysis performed by management, the basis of the e-commerce investments was reduced by $3.2 million resulting in the cost basis of one of the associated assets being written down to $1 million and the cost basis of the other associated asset being written down to zero. Because the Company is not in the business of investing in internet start-up companies, the write-down of the technology investments is classified as non-operating, as will any income or loss in future periods.

During 2003, there was a loss on extinguishment of debt of $968,000, as compared to a gain on extinguishment of debt of $750,000 in 2002. The loss in 2003 related to prepayment penalties and the write-off of unamortized, capitalized loan fees associated with the early retirement of the balance of the 12% senior notes payable. The gain in 2002 related to the conversion of the convertible subordinated debentures in the amount of $3,977,000 and the issuance of subordinated debentures in the amount of $2,773,000 to retire the $7,500,000 of convertible subordinated debt. Under recently adopted accounting pronouncements (SFAS 145), such gain is not considered an extraordinary item.

The provision for income taxes was approximately $3.4 million for 2003 compared to $3.2 million in 2002 as a result of the change in income before provision for income taxes. The effective tax rate for 2003 was 37.6% compared to 35.8% in 2002.

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Loss from discontinued operations for 2003 was $195,000, net of tax benefit, compared to income from discontinued operations for 2002 of $423,000, net of tax expense. The discontinued operations include the results of those properties for which management has implemented a plan of disposal that is likely to result in the sale of the properties within one year.

COMPARISON OF YEARS ENDED DECEMBER 31, 2002 AND 2001

Our revenues in 2002 and 2001 were $44.7 million and $60.5 million respectively. Total operating expenses in 2002 and 2001 were $48.6 million and $59.3 million, respectively. Our net income for the same periods was $6.2 million and $2.5 million, respectively.

REVENUE

In 2002 property management and leasing generated revenue of $25.8 million (including related party fees of $4.1 million), representing 58% of our total revenue, compared to approximately $33.4 million (including approximately $5.4 million in related party fees) and 55% of total revenue in 2001. Property management and leasing revenue includes asset management, construction management, leasing services, engineering and other services to property operators. Because KWJ is accounted for as an equity investment, their property management revenue is not included in this category after the secondary sale of our investment in the stock of KWJ in September 2002. Property management revenue in the U.S. declined due, in part, to the decrease in the total square footage of properties under management. Lower interest rates and favorable loan terms, resulted in an increased number of building sale transactions including some of the buildings managed by the Company. Similarly, the overall downturn of the economy has led to lower occupancy rates in many markets of the country and has negatively impacted leasing revenue and the other services offered by the Company.

Brokerage commission revenues in 2002 increased 15% to $14.8 million (including approximately $9.0 million in related party fees), representing 33% of total revenues compared to brokerage commission revenues in 2001 of $12.8 million (including related party fees of approximately $4.5 million). Brokerage commissions earned by KWJ prior to the deconsolidation increased 23%, in part, due to an increased number and size of transactions resulting from Japanese financial institutions being motivated to liquidate assets. Because KWJ is accounted for as an equity investment, commissions earned in Japan are not included in this category after September 2002. Brokerage commissions in the U.S. decreased 8% due to the decrease in the number and size of sales transactions. In connection with our brokerage activities we provide property valuations, development and implementation of marketing plans, sealed bid auctions and open bid auctions.

There were no sales of residential real estate in 2002 compared to approximately $11 million in 2001. During 2002, the Company sold two small pieces of land resulting in a loss of approximately $200,000, which was offset by a gain of approximately $200,000 from KWJ. The Company has chosen to exit the development and sales of single family residential real estate projects as a business component in favor of investing, with joint venture partners, in

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multi-family apartment projects in selected areas of the country. The sales of residential real estate completed during 2001 included 44 homes in a 109-home development in the Palm Springs area.

Interest and other income totaled approximately $4.1 million or 9% of total revenues compared to approximately $3.3 million in 2001. Interest and other income includes accretion of discounts on acquired loan portfolios, interest on corporate notes receivable that are held as a result of investment sales, interest on cash investments and other miscellaneous sources of revenue. The accretion of discounts on loan portfolios are accounted for under the interest method, which provides that the accretable discount be recorded as interest income over the life of the loans. In 2002 and 2001, $3.4 million and $1.4 million, respectively, was recorded as interest income earned from loan portfolios accounted for under the interest method previously discussed. The portion of interest and other income from loan portfolios and other sources earned in Japan during 2002 and 2001 was $2.1 million and $983,000 respectively. Interest earned on a large note relating to the sale of land in Hawaii earned $353,000 of interest in 2002 and $407,000 in 2001. During 2002, the land collateralizing this note was foreclosed upon and sold to a new joint venture investment entity in which the Company maintains a 50% ownership interest. No gain was recognized on this transaction.

OPERATING EXPENSES

As discussed above, KWJ was consolidated through September 2002. Subsequent to September 2002, the investment is accounted for on the equity method. Therefore, operating expenses for 2002 include nine months of consolidated activity for KWJ compared to a full year of activity included in 2001.

Operating expenses in 2002 were approximately $48.6 million, representing a decrease of 18% from $59.3 million in 2001. Most of the decrease represents the approximately $11.1 million cost associated with the sales of residential real estate in 2001 compared to $220,000 in 2002. As discussed above, the Company has exited the single-family residential real estate development business.

Commissions and marketing expenses decreased to $5.5 million in 2002 from $6.9 million in 2001. The expense represents 37% of the commission revenue in 2002 down from 54% of the commission revenue in 2001. The reduction in the percentage of commission expense to commission revenue represents a reduction in brokerage commissions earned by the property management division of the Company which typically pays out approximately 40% to 60% of the gross commission to brokers and employees as commission expense.

Cost of residential real estate sold was $220,000 in 2002, compared to $11.1 million in 2001. The expense in 2002 relates to the sale of real estate by KWJ. The expense in 2001 related to the sales of 44 homes in a 109-home development in the Palm Springs area. As previously discussed, the Company has exited the residential real estate development business.

Compensation and related expenses were approximately $26.0 million in 2002, down 1% from $26.3 million in 2001. The decrease was primarily a result of cost reduction initiatives, staff reductions and the impact of not consolidating KWJ during the fourth quarter of 2002 versus a full year in 2001. The total number of employees, excluding KWJ was approximately 530 at December 31, 2002 compared to 593 at December 31, 2001.

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General and administrative expenses were $10.7 million in 2002 representing a 4% decrease from 2001 expenses of $11.2 million. General and administrative expenses in the U.S. increased by 2%, offset by a decrease from KWJ of 27% through September 2002. Included in general and administrative expense in 2002 is the write-off of notes receivable in the amount of $146,000 compared to $136,000 in 2001.

Depreciation and amortization expense decreased to $3.6 million in 2002, a 4% decrease from $3.8 million in 2001. In the U.S., the reduction results from the elimination of goodwill amortization in accordance with SFAS 142, offset by depreciation of capitalized costs relating to the consolidation of our technology-based real estate auction brokerage and related services business that was previously reported under the equity method of accounting. Depreciation and amortization for KWJ through September 2002 increased due to depreciation related to several properties acquired during 2002 for their own account.

Non-cash write-down of investment was approximately $1.5 million for 2002, compared to no write-down in 2001. During 2002, management concluded that the cost basis of a real estate investment was not probable of recovery. Based on the analysis performed by management, the basis of the real estate investment was reduced by approximately $1.5 million, resulting in a cost basis of the associated asset of zero.

Non-recurring, non-cash Japan IPO expense of $1.1 million relates to the discounted stock issued to employees of KWJ and is associated with the gain on sale of stock of subsidiary of $12.9 million classified in non-operating income.

Equity in joint venture income totaled approximately $8.1 million in 2002, compared to $5.4 million realized in 2001. The revenue from joint venture investments includes income from the operation and sale of numerous real estate investments in the U.S. which are owned primarily in joint venture funds with institutional investor partners. Additionally, as previously discussed, income earned on note pool assets owned in joint venture partnerships is also included in this operating income category. During 2002, five commercial buildings, and two apartment projects were sold to either third parties or joint ventures in which the Company retained an ownership interest. The Company recorded equity in income of approximately $5.3 million from these sales after deferral of income in the amount of $339,000 related to the Company’s percentage ownership in the acquiring joint venture investment entity. During 2001, two apartment projects were sold and the Company’s equity in this income was approximately $1.0 million. Our current investment portfolio and our plans for future investments focus on commercial buildings and on multiple family residences. Under the Company’s investment strategy, we typically contribute a fully funded initial capital contribution and/or property previously owned by the Company.

Equity in income of KWJ was $907,000 in 2002. This represents the equity in the income of the Company’s formerly consolidated subsidiary, KWJ, subsequent to the September 2002 deconsolidation of the entity.

NON-OPERATING ITEMS

Gain on sale of stock of subsidiary was approximately $12.9 million for 2002 compared to no gain in 2001. The gain resulted from the sale of shares owned in KWJ as part of the successful initial public offering, the secondary offering of KWJ’s shares in Japan, and the private sales of shares owned by the Company. The initial public offering consisted of 4,500 newly issued shares and 2,500 shares sold by the Company at a price of approximately $3,319 per

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share, for total gross cash consideration of approximately $23 million. The secondary public stock offering consisted of 4,900 shares of KWJ at a price of $1,700 per share, and the private sale of 2,000 shares of the stock of the subsidiary, for total gross cash consideration of approximately $11.7 million. The Company retained ownership of 37% of the subsidiary’s shares after the transactions. Effective with the completion of the secondary offering, KWJ became an unconsolidated subsidiary in the Company’s financial statements and is accounted for as an equity method investment.

Interest expense was $2.6 million in 2002 a decrease of 7% compared to approximately $2.8 million in 2001 due, in part, to the reduced average interest rates on variable rate loans. Interest expense includes the amortization of loan fees and related loan costs in the amount of $484,000 and $302,000 for the years 2002 and 2001, respectively. Additionally, in both 2002 and 2001, interest expense was reduced by approximately $2.3 million of interest capitalized on several qualifying real estate investments. These investments were undergoing construction or entitlement activities in preparation for their planned principal operations.

The valuation adjustment for the change in the fair value of warrants issued in connection with the issuance of $15 million of 12% senior unsecured notes resulted in a benefit of $209,000 for 2002 compared to an expense of $158,000 in 2001. The Company issued the warrants to the purchasers of the notes for 597,888 shares of the common stock of the Company at an exercise price of $6.25 per share. The warrants expire June 22, 2008. The warrants contain a put provision that requires the Company, at the option of the note holders, to repurchase the common shares issued upon exercise of the warrants, at the prevailing market price, during years four through six of the warrant term. The fair value of the warrants was estimated using a combination of the Black-Scholes Option Pricing Model and Monte Carlo Simulation. A liability was recorded for the fair value of the warrants, which is adjusted quarterly to record the warrants at their estimated fair value while they are outstanding, with the change in value recorded as valuation adjustment—warrants. As a result of the partial repayment of $5 million of the notes in 2002, warrants for the purchase of 199,296 shares of common stock were cancelled and the liability for the value of the warrants was reduced by $222,000. The estimated fair value of the warrants was $283,000 and $714,000 at December 31, 2002 and 2001, respectively, and is included in accrued expenses and other liabilities.

Write-down of technology investments in 2002 was $3.2 million compared to no write-down in 2001. Management concluded that the cost basis of two e-commerce investments were not probable of recovery. Based on the analysis performed by management, the basis of the e-commerce investments was reduced by $3.2 million resulting in the cost basis of one of the associated assets being written down to $1 million and the cost basis of the other associated asset being written down to zero. Because the Company is not in the business of investing in Internet start-up companies, the write-down of the technology investments is classified as non-operating, as will any income or loss in future periods.

Gain on extinguishment of debt was $750,000 for 2002 compared to no gain in 2001. The gain on extinguishment of debt related to the conversion of the convertible subordinated debentures in the amount of $3,977,000 and the issuance of subordinated debentures in the amount of $2,773,000 to retire the $7,500,000 of convertible subordinated debt. Under recently adopted accounting pronouncements (SFAS 145), such gain is not considered an extraordinary item.

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The provision for income taxes was approximately $3.2 million for 2002 compared to $1.3 million in 2001 as a result of the change in income before provision for income taxes. The effective tax rate for 2002 was 35.8% compared to 34.5% in 2001.

Income from discontinued operations, net of tax expense, was $423,000 for 2002 compared to $110,000 for 2001. The discontinued operations include the results of those properties for which management has implemented a plan of disposal that is likely to result in the sale of the properties within one year.

CRITICAL ACCOUNTING POLICIES

Management’s discussion and analysis of financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its significant judgments and estimates used in the preparation of its consolidated financial statements. All material intercompany balances and transactions have been eliminated in the consolidated financial statements.

Revenue Recognition

The Company’s real estate services revenues are recorded when the related services are performed. In the case of real estate sales commissions, this generally occurs when the sale closes escrow. Property management fees are recognized over time as earned based upon the terms of the management agreement.

Leasing commission revenues are accounted for in accordance with the provisions of SAB 104. Accordingly, leasing commissions that are payable upon tenant occupancy, payment of rent or other events beyond the Company’s control are recognized upon the occurrence of such events. In accordance with EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, the Company records brokerage commission revenues and expenses on a gross basis. Of the criteria listed in the EITF, the Company is the primary obligor in the transaction, does not have inventory risk, performs all, or part, of the service, has credit risk, and has wide latitude in establishing the price of services rendered and discretion in selection of agents and determination of service specifications. Due to these factors, gross reporting is appropriate.

Residential real estate sales revenue and gains on sale of commercial property are recognized at the close of escrow when title to the real property passes to the buyer. The Company follows the requirements for profit recognition as set forth by Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate. Residential real estate is accounted for as inventory because these properties are generally held for less than one year and do not generate income during the holding period. Accordingly, gross revenue and cost of sales are presented separately on the statements of income.

Revenues on notes receivable are recognized on an effective interest basis under the provisions of Practice Bulletin 6 where cash received is accreted into interest income over the estimated holding period. When the future cash flows of a note can not be reasonably estimated, cash payments are applied to the cost basis until fully recovered before any revenue is recognized.

Profit on sales to joint ventures in which the Company retains an ownership interest results in partial sales treatment in accordance with the provisions of SFAS 66 and Statement of Position 78-9, thus deferring a portion of the gain on the Company’s continuing ownership percentage in the joint ventures.

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Valuation of Notes Receivable

The Company accounts for any impairment to the basis of notes receivable in accordance with Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, as amended by Statement of Financial Accounting Standards No. 118, Accounting by Creditors for Impairment of a Loan—Income Recognition and Disclosures. Accordingly, an impaired loan is measured based upon the present value of expedited future cash flows, discounted at the loan’s effective interest rate or, if readily determinable, the loan’s observable market price or the fair value of the collateral if the loan is collateral dependant.

Impairment of the Company’s basis is infrequent because the Company acquired these notes at a substantial discount, and actively seeks to restructure the notes in a short period of time. Typically the event that causes a write-off and the related bad debt expense occur in the same accounting period. As a result, substantial valuation allowances have historically not been required. The loans are reviewed on a quarterly basis for impairment. Based on the Company’s evaluation, if a loan is deemed to be impaired, a specific write-off is taken. In 2003, 2002 and 2001, the write-off of uncollectable notes receivable was $850,000, $146,000 and $136,000, respectively, and is included in general and administrative expense.

Valuation of Investments

The Company reviews each of its investments in joint ventures on a periodic basis for evidence of impairment. Impairment losses are recognized whenever events or changes in circumstances indicate declines in value of an investment below carrying value and the related discounted cash flows are not sufficient to recover the asset’s carrying amount. The Company accounts for any impairment to the basis of notes receivable in accordance with Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, as amended by Statement of Financial Accounting Standards No. 118, Accounting by Creditors for Impairment of a Loan—Income Recognition and Disclosures. At December 31, 2003, no investments were deemed to be impaired as a result of this evaluation. In 2002, the Company recorded impairment losses of approximately $3.2 million on remaining technology investments and approximately $1.5 million on a real estate investment based on this evaluation.

The Company has classified separately on the balance sheet the real estate assets which are held for sale. Assets held for sale principally include those which management, having the proper level of authority to effect a plan of disposal, has implemented such plan, which is likely to result in the sale of the property within one year. As of December 31, 2003, the Company held four properties as available for sale, in accordance with SFAS 144, and the results of the operations of those properties has been reported “net” as discontinued operations for the years ended December 31, 2003, 2002 and 2001.

Valuation of Intangibles

The Company’s intangible assets substantially consist of property management contracts which are amortized on a straight-line basis over seven years, and goodwill representing costs paid in excess of net assets of acquired businesses. Through December 31, 2001, the Company used an undiscounted cash flow methodology to determine whether underlying operating cash flows were sufficient to recover the carrying amount of goodwill.

Beginning January 1, 2002, goodwill is no longer amortized, but is evaluated annually for impairment based on a reporting unit fair value approach as required by SFAS 142. In determining fair value of a reporting unit, the Company relies on the application of generally accepted valuation approaches. During the year ended December 31, 2003, no impairment was indicated by application of the valuation analysis. The effects on earnings and earnings per share of excluding such goodwill amortization from 2001 is as follows:

LIQUIDITY AND CAPITAL RESOURCES

Our liquidity and capital resources requirements include expenditures for joint venture fund investments, real estate held for sale, discounted loan portfolios and working capital needs. Historically, we have not required significant capital resources to support our brokerage and property management operations. We finance our operations with internally generated funds and borrowings under our revolving lines of credit. Our investments in real estate are typically financed by mortgage loans secured primarily by that real estate. These mortgage loans are generally nonrecourse in that, in the event of default, recourse will be limited to the mortgaged property serving as collateral. In some cases, the Company guarantees a portion of the loan related to a joint venture investment, usually until some condition, such as completion of construction or leasing or certain net operating income criteria, has been met. The Company does not expect these guarantees to materially affect liquidity or capital resources. Management estimates the fair value of all guarantees made subsequent to December 31, 2003 to be zero.

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In 2003, the Company entered into a second loan agreement with Pacific Western National Bank in the amount of $5 million. The loan bears interest at the bank’s base rate plus 1%. The proceeds of this borrowing were used to repay the balance of the 12% Senior Notes which were issued in 2000.

During 2002, we entered into three credit agreements. The first agreement is an unsecured revolving credit facility for $30 million with US Bank and East-West Bank for use in acquisitions and working capital purposes. This facility replaces the loans from East-West Bank and United California Bank in the total amount of $28 million. We also entered into a loan agreement with Pacific Western National Bank in the amount of $5 million. This borrowing was used to repay a portion of the 12% senior notes and carry a much more favorable rate of interest of prime plus 1%. Lastly, the Company entered into a revolving loan agreement for $30 million with Foothill Capital Corporation for use in the expansion of our loan portfolio acquisition business.

Cash used in operating activities was about $5.3 million in 2003, compared to approximately $3.5 million provided by operating activities in 2002. Although net income for 2003 was approximately $5.4 million, net cash generated from operations excludes gains on the sale of the shares KWJ of approximately $16.4 million, which is included as an investing activity. For the year 2002, the Company had net income of approximately $6.2 million, net cash generated from operations also excludes the approximate $12.9 million gain on the sale of shares in KWJ. The change resulted primarily from the decrease in net income, including the decrease in equity income, offset by the decrease in accounts receivable and contracts and other assets and an increase in accrued expenses and other liabilities. Cash provided by operating activities was about $3.5 million in 2002, compared to approximately $5.2 million in cash used in operating activities in 2001. The change resulted primarily from an increase in net income, including the increase in equity income, offset by the decrease in accounts receivable and contracts and other assets and an increase in accrued expenses and other liabilities.

Cash provided by investing activities was approximately $20.3 million, compared to approximately $11.8 million in cash used in investing activities for 2002. In 2003, approximately $44.3 million in proceeds was received from the sale of shares in KWJ and collections of notes receivable, offset by the acquisition of note pools and the redemption of a joint venture partner in a note receivable venture. Cash used in investing activities was about $11.8 million in 2002, compared to $11.1 million provided by investing activities in 2001. The change resulted primarily from the reduction in cash held by KWJ at deconsolidation, as discussed above, and contributions to joint ventures, offset by the proceeds from the sale of a portion of the Company’s investment in KWJ and a reduction in proceeds from sale of real estate.

Cash used in financing activities was approximately $20.2 million, compared to approximately $8.8 million in cash provided by financing activities for 2002. In 2003, the proceeds from the sale of shares in KWJ described above were used to repay debt and repurchase shares of the Company’s common stock. Cash provided by financing activities was about $8.8 million in 2002, compared to approximately $9,000 used in 2001. The change resulted primarily by the increase in borrowings under notes payable, offset by the decrease in borrowings of mortgages notes payable.

To the extent that we engage in additional strategic investments, including real estate, note portfolio, or acquisitions of other property management companies, we may need to obtain third party financing which could include bank financing or the public sale or private placement of debt or equity securities. We believe that existing cash, plus capital generated from property management and leasing, brokerage, sales of real estate owned, collections from notes receivable, as well as our current lines of credit, will provide us with sufficient capital requirements for the foreseeable future.

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Under our current joint venture strategy, we generally contribute property, expertise, and typically a fully funded initial cash contribution (without commitment to additional funding by the Company). Capital required for additional improvements and supporting operations during lease-up and stabilization periods is generally obtained at the time of acquisition via debt financing or third party investors. Accordingly, the Company generally does not have significant capital commitments with unconsolidated entities. Infrequently, there may be some circumstances when the Company, usually with the other members of the joint venture entity, may be required to contribute additional capital for a limited period of time. The Company believes that it has the capital resources, generated from our business activities and our borrowing capacity, to finance any such capital requirements, and does not believe that any additional capital contributions to joint ventures will materially affect liquidity.

Our need, if any, to raise additional funds to meet our capital requirements will depend on many factors, including the success and pace of the implementation of our strategy for growth. We regularly monitor capital raising alternatives to be able to take advantage of other available avenues to support our working capital and investment needs, including strategic partnerships and other alliances, bank borrowings, and the sale of equity or debt securities. The Company expects to meet the repayment obligations of notes payable and borrowings under lines of credit from cash generated by our business activities, including the sale of assets and the refinancing of debt. We intend to retain earnings to finance our growth and, therefore, do not anticipate paying dividends.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

At December 31, 2003, the Company’s contractual cash obligations, including debt, lines of credit, capital lease obligations and operating leases include the following:

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IMPACT OF INFLATION AND CHANGING PRICES

Inflation has not had a significant impact on the results of operations of the Company in recent years and is not anticipated to have a significant impact in the foreseeable future. The Company’s exposure to market risk from changing prices consists primarily of fluctuations in rental rates of commercial and residential properties, market interest rates on residential mortgages and debt obligations and real estate property values. The revenues associated with the commercial services businesses are impacted by fluctuations in interest rates, lease rates, real property values and the availability of space and competition in the market place. Commercial service revenues are derived from a broad range of services that are primarily transaction driven and are therefore volatile in nature and highly competitive. The revenues of the property management operations with respect

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to rental properties are highly dependent upon the aggregate rents of the properties managed, which are affected by rental rates and building occupancy rates. Rental rate increases are dependent upon market conditions and the competitive environments in the respective locations of the properties. Employee compensation is the principal cost element of property management. Economic trends in 2003 were characterized by general slowdowns in commercial leasing volume in the U.S.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2002, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB 51 (“FIN 46”). The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting right (variable interest entities, or VIEs) and how to determine when and which business enterprise should consolidate the VIE (the primary beneficiary). In December 2003, the FASB modified and issued a revised Interpretation (“FIN 46R”). FIN 46R clarifies the interpretation’s scope and also extends the requirement to apply its provisions to investments created prior to January 31, 2003 until the end of the Company’s first quarter in 2004. The Company is continuing its study of investments created prior to January 31, 2003 and plans to implement the provisions of FIN 46R in connection with its first quarter in 2004. The implementation extension does not apply to special purpose entities. Consequently, the Company’s sole special purpose entity has been consolidated prospectively as of and for the year ended December 31, 2003 under the provisions of the updated interpretation. This investment is engaged in the development, operation and ultimate disposition of two industrial properties located in San Antonio, Texas.

Summarized balance sheet data for the VIEs, as of December 31, 2003 and 2002 includes total assets of $488.5 million and $559.4 million, respectively, and total liabilities of $334.4 million and $368.9 million, respectively. Summarized income statement data for the years ended December 31, 2003 and 2002 includes total revenues of $49.7 million and $69.5 million, respectively, and total expenses of $47.5 million and $52.1 million, respectively.

Amounts consolidated as of and for the year ended December 31, 2003 include:

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (“SFAS 149”). The standard amends and clarifies financial reporting for derivative instruments and for hedging activities accounted for under SFAS 133 and was effective for contracts entered into or modified, and for hedges designated, after June 30, 2003. The Company’s adoption of the standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity (“SFAS 150”). The standard establishes how an issuer classifies and measures certain freestanding financial instruments with characteristics of liabilities and equity and requires that such instruments be classified as liabilities. The standard was effective for financial instruments entered into or modified after May 31, 2003. The Company’s adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

Certain statements contained in this document may constitute “forward-looking statements” within the meaning of the federal securities laws. Forward-looking statements are statements containing a projection of revenues, income, earnings, capital expenditures, dividends, capital structure or other financial terms or our plans and objectives for future operations.

The forward-looking statements in this document are based on our management’s beliefs, assumptions, and expectations of our future economic performance, taking into account the information currently available to them. These statements are not statements of historical fact. Forward-looking statements involve risks and uncertainties that may cause our actual results, performance or financial condition to be materially different from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements. Some of the important risk factors that could cause our actual results, performance or financial condition to differ materially from our expectations are:

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When used in our documents or oral presentations, the words “plan”, “believe”, “anticipate”, “estimate”, “expect”, “objective”, “projection”, “forecast”, “goal”, or similar words, are intended to identify forward-looking statements. We qualify any and all such forward-looking statements entirely by these cautionary risk factors.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The table below represents contractual balances of our financial instruments at the expected maturity dates as well as the fair value at December 31, 2003. The expected maturity categories take into consideration actual amortization of principal and do not take into consideration reinvestment of cash. The weighted average interest rate for the various assets and liabilities presented are actual as of December 31, 2003. (See Consolidated Financial Statements—Note 2—Fair Value of Financial Instruments) Management closely monitors the fluctuation in interest rates, and if rates were to increase significantly, the Company believes that it would be able either to hedge the change in the interest rate or to refinance the loans with fixed interest rate debt. All instruments included in this analysis are non-trading.

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The Company does not have any derivative financial instruments as of December 31, 2003.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

Index to Financial Statements

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INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders

Kennedy-Wilson, Inc.:

We have audited the accompanying consolidated balance sheets of Kennedy-Wilson, Inc. and subsidiaries (the “Company”) as of December 31, 2003 and 2002, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the two-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of certain unconsolidated investee companies (the Investees) for the year ended December 31, 2002. The Company’s investment in the Investees at December 31, 2002, was $17,629,000, and its equity in earnings of the Investees was $2,498,000 for the year ended December 31, 2002. Additionally, one of the unconsolidated Investees was consolidated by the Company through September 20, 2002 and generated revenues of $12,493,000 during the period from January 1, 2002 through September 20, 2002. The 2002 financial statements of the Investees were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for the Investees in 2002, is based solely on the reports of the other auditors.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the 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, based on our audits and the reports of the other auditors for 2002, the 2003 and 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kennedy-Wilson, Inc. as of December 31, 2003 and 2002 and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, effective December 31, 2003, the Company adopted the applicable provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities. The Company implemented FIN 46 prospectively.

KPMG LLP

Los Angeles, California

March 29, 2004

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INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders

Kennedy-Wilson, Inc.

Beverly Hills, California

We have audited the accompanying consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows of Kennedy-Wilson, Inc. and subsidiaries (the “Company”) for the year ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Kennedy-Wilson, Inc. and subsidiaries for the year ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 24 to the consolidated financial statements, consolidated retained earnings as of January 1, 2001, has been restated.

DELOITTE & TOUCHE LLP

Los Angeles, California

March 22, 2002, except for the effects of a restatement of the Company’s 2001 financial statements presented in previously issued financial statements, as to which the date is April 14, 2003 and except for Note 24 and the reclassification of certain property as discontinued operations as discussed in Note 5, as to which the date is March 29, 2004

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Kennedy-Wilson, Inc. and Subsidiaries

Consolidated Balance Sheets