<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
      OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 1996

                                       OR

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

For the transition period from _______________ to _______________

Commission File Number: 1-8063

                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
             (Exact name of registrant as specified in its charter)

          CALIFORNIA                                            94-6181186
(State or other jurisdiction of                              (I.R.S. Employer
 incorporation or organization)                             Identification No.)

131 STEUART STREET, SUITE 200, SAN FRANCISCO, CA                   94105
(Address of principal executive offices)                         (Zip Code)

                                 (415) 905-0288
              (Registrant's telephone number, including area code)

      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 [    ]
<PAGE>   2
                      APPLICABLE ONLY TO CORPORATE ISSUERS:

      Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the close of the latest practical date.

                Class                          Outstanding at September 30, 1996
Common Shares of Beneficial Interest
$1.00 par value ("Common Shares")                           9,156,970



<PAGE>   3
 ------------------------------------------------------------------------------

                     CALIFORNIA REAL ESTATE INVESTMENT TRUST

 ------------------------------------------------------------------------------

INDEX                                                                       PAGE

PART I.  FINANCIAL INFORMATION

         Item 1: Financial Statements

                 Consolidated Balance Sheets -
                    September 30, 1996 and December 31, 1995                  1

                 Consolidated Statements of Operations -
                    For the Three Months and Nine Months Ended
                    September 30, 1996 and 1995                               2

                 Consolidated Statements of Cash Flows -
                    For the Nine Months Ended September 30, 1996 and 1995     3

                 Notes to Consolidated Financial Statements                4-11


         Item 2: Management's Discussion and Analysis of
                    Financial Condition and Results of Operations        12-17  


PART II. OTHER INFORMATION

         Item 1: Legal Proceedings                                          18

         Item 2: Changes in Securities                                      18

         Item 3: Defaults Upon Senior Securities                            18

         Item 4: Submission of Matters to a Vote of Security Holders        18

         Item 5: Other Information                                          18

         Item 6: Exhibits and Reports on Form 8-K                           18
<PAGE>   4
                          PART I. FINANCIAL INFORMATION

                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                         SEPTEMBER 30,        DECEMBER 31,
                                                                              1996               1995
                                                                          (UNAUDITED)          (AUDITED)
                                                                         -------------        ------------
<S>                                                                      <C>                  <C>         
                  ASSETS

INVESTMENTS, GENERALLY HELD FOR SALE:
   Rental properties, net of accumulated depreciation of $2,777,000
      and valuation allowance of $6,898,000 at December 31, 1995          $  8,562,000        $ 17,215,000
   Notes receivable, net of deferred gains of $239,000 and
      $1,103,000 at September 30, 1996 and December 31, 1995,
      respectively, and valuation allowance of $8,048,000
      at December 31, 1995                                                   1,582,000          10,502,000
   Marketable securities available-for-sale                                 15,606,000                  --
                                                                          ------------        ------------
                                                                            25,750,000          27,717,000
Cash                                                                         3,248,000           4,778,000
Receivables, net of allowance of $877,000 and $700,000
   at September 30, 1996 and December 31, 1995, respectively                   673,000             680,000
Other assets, net of valuation allowance of $310,000 at
   December 31, 1995                                                           374,000             357,000
                                                                          ------------        ------------
         Total Assets                                                     $ 30,045,000        $ 33,532,000
                                                                          ============        ============
                  LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
   Long-term notes payable, collateralized by deeds of trust
      on rental properties                                                $  5,192,000        $  8,335,000
   Accounts payable and accrued expenses                                       147,000             209,000
   Other liabilities                                                            72,000              81,000
                                                                          ------------        ------------
         Total Liabilities                                                   5,411,000           8,625,000
                                                                          ------------        ------------
SHAREHOLDERS' EQUITY:
   Shares of beneficial interest, par value $1 a share; unlimited
      authorization, 9,157,000 shares outstanding at
      September 30, 1996 and December 31, 1995                               9,157,000           9,157,000
   Additional paid-in capital                                               55,098,000          55,098,000
   Unrealized holding gains on marketable securities                            14,000                  --
   Accumulated deficit                                                     (39,635,000)        (39,348,000)
                                                                          ------------        ------------
         Total Shareholders' Equity                                         24,634,000          24,907,000
                                                                          ------------        ------------
         Total Liabilities and Shareholders' Equity                       $ 30,045,000        $ 33,532,000
                                                                          ============        ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                        1
<PAGE>   5
                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED            NINE MONTHS ENDED
                                                  SEPTEMBER 30,                 SEPTEMBER 30,
                                               1996           1995           1996           1995
                                           -----------     ----------    -----------     ----------
<S>                                        <C>             <C>           <C>             <C>       
REVENUES:
   Rent                                    $   482,000     $  537,000    $ 1,585,000     $1,572,000
   Interest                                    289,000        361,000        837,000      1,041,000
   Hotel                                            --         44,000             --         44,000
                                           -----------     ----------    -----------     ----------
                                               771,000        942,000      2,422,000      2,657,000
                                           -----------     ----------    -----------     ----------
EXPENSES:
   Operating expenses                          149,000        149,000        475,000        433,000
   Property management                          20,000         27,000         76,000         71,000
   Depreciation and amortization 20,000        163,000         45,000        474,000
   Interest                                    136,000        220,000        410,000        648,000
   General and administrative                  293,000        283,000      1,073,000        711,000
                                           -----------     ----------    -----------     ----------
                                               618,000        842,000      2,079,000      2,337,000
                                           -----------     ----------    -----------     ----------
      Income before gain on
         foreclosure or sale of
         investments and valuation
         losses                                153,000        100,000        343,000        320,000

Gain on foreclosure or sale of
   investments                                 517,000             --      1,113,000         66,000
                                           -----------     ----------    -----------     ----------
      Income before
         valuation losses                      670,000        100,000      1,456,000        386,000

Valuation losses                            (1,184,000)            --     (1,743,000)            --
                                           -----------     ----------    -----------     ----------
      Net (loss) income                    $  (514,000)    $  100,000    $  (287,000)    $  386,000
                                           ===========     ==========    ===========     ==========
Net (loss) income per share of
   beneficial interest                     $     (0.06)    $     0.01    $     (0.03)    $     0.04
                                           ===========     ==========    ===========     ==========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       2
<PAGE>   6
                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                     NINE MONTHS ENDED
                                                                        SEPTEMBER 30,
                                                                    1996            1995
                                                                ------------     -----------
<S>                                                             <C>              <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net (loss) income                                            $   (287,000)    $   386,000
                                                                ------------     -----------
   Adjustments to reconcile net income to net
      cash provided by operating activities:
      Depreciation and amortization                                   45,000         474,000
      (Gain) on foreclosure or sale of investments                (1,113,000)        (66,000)
      Valuation losses                                             1,743,000              --
   Changes in assets and liabilities:
      (Increase) decrease in receivables, net                         (5,000)        (80,000)
      Increase in other assets                                       (61,000)       (215,000)
      Increase in accounts payable
         and accrued expenses                                         48,000         157,000
      Increase in other liabilities                                       --           7,000
                                                                ------------     -----------
         Total adjustments to net (loss) income                      657,000         277,000
                                                                ------------     -----------
         Net cash provided by operating activities                   370,000         663,000
                                                                ------------     -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from sale of investments                              13,841,000              --
   Purchases of marketable securities                            (15,849,000)             --
   Improvements to rental properties                                (123,000)       (204,000)
   Principal collections on notes receivable                          29,000         840,000
   Principal collections on marketable securities                    257,000              --
                                                                ------------     -----------
         Net cash (used in) provided by investing activities      (1,845,000)        636,000
                                                                ------------     -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Principal payments on long-term notes payable                     (55,000)       (392,000)
                                                                ------------     -----------
      Net cash used in financing activities                          (55,000)       (392,000)
                                                                ------------     -----------
         Net (decrease) increase in cash                          (1,530,000)        907,000
Cash, beginning of period                                          4,778,000       3,366,000
                                                                ------------     -----------
Cash, end of period                                             $  3,248,000     $ 4,273,000
                                                                ============     ===========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       3
<PAGE>   7
                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

1.    Organization and Basis of Presentation:


                                  Organization

      California Real Estate Investment Trust (Trust) was organized under the
      laws of the State of California pursuant to a Declaration of Trust dated
      September 15, 1966.

      The Trust became a partner of Totem Square, L. P. (Totem), a Washington
      Limited Partnership in which the Trust owns a 59% interest, on November
      30, 1990. The Trust also formed CalREIT Totem Square, Inc. (Cal-CORP) to
      act as general partner of Totem. Cal-CORP has a 1% interest in Totem, and
      Totem Square Associates, an unrelated party, has the remaining 40%.

      On April 14, 1994, The Peregrine Real Estate Trust (formerly Commonwealth
      Equity Trust) as majority shareholder owning 76% of the Trust's
      outstanding Shares of Beneficial Interest, voted its shares to replace the
      Board of Trustees. At that time, the Trust elected a new Board of Trustees
      all of whom were key management personnel of The Peregrine Real Estate
      Trust (Peregrine). Subsequently, the Board has grown to five Trustees of
      which two are independent. Of the three remaining Trustees, one is the
      Chairman of the Board of Trustees and Chief Executive Officer of CalREIT,
      one is the Chairman of the Board of Trustees of Peregrine and one is a
      former Executive Officer of CalREIT and Peregrine.

      On September 19, 1996, Peregrine announced that it had entered into an
      agreement with MDC REIT Holdings LLC (MDC), an affiliate of the investment
      banking firm McCown DeLeeuw & Co., for the sale of Peregrine's 76% stock
      interest in CalREIT. Under the terms of the proposed agreement, MDC would
      purchase the stock for $20.5 million in cash plus a deferred payment
      contingent on the value of one of CalREIT's assets. Closing of the
      transaction is subject to financing and various other closing conditions.


                                       4
<PAGE>   8
                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

1.    Organization and Basis of Presentation, continued:

      At September 30, 1996, the Trust owned two commercial/retail properties
      located in two market areas in the Western United States. The Trust also
      owns a mortgage note portfolio comprised of approximately $7.7 million in
      loans, with an aggregate book value of approximately $1.6 million. These
      loans bear interest at an overall effective rate of approximately 8%. They
      are collateralized by mortgages on real property. Most of the investments
      in the three loans were originated by the Trust in connection with the
      disposition of Trust properties prior to 1996. Additionally, at September
      30, 1996, the Trust had approximately $16 million invested in U.S.
      Government Agency mortgage-backed securities.

                              Basis of Presentation

      The accompanying financial statements are unaudited; however, they have
      been prepared in accordance with generally accepted accounting principles
      for interim financial information and in conjunction with the rules and
      regulations of the Securities and Exchange Commission. Accordingly, they
      do not include all of the disclosures required by generally accepted
      accounting principles for complete financial statements. In the opinion of
      management, all adjustments (consisting solely of normal recurring
      matters) necessary for a fair presentation of the financial statements for
      these interim periods have been included. The results for the interim
      period ended September 30, 1996, are not necessarily indicative of the
      results to be obtained for the full fiscal year. These financial
      statements should be read in conjunction with the December 31, 1995,
      audited financial statements and notes thereto, included in the California
      Real Estate Investment Trust Annual Report on Form 10-K.

      The accompanying unaudited consolidated financial statements of California
      Real Estate Investment Trust include the accounts of the Trust, Cal-Corp
      and Totem.


                                       5
<PAGE>   9
                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

1.    Organization and Basis of Presentation, continued:

                            Stock-Based Compensation

      In 1995, Statement of Financial Accounting Standards No. 123 (SFAS 123),
      "Accounting for Stock-Based Compensation" was issued. This statement
      requires either recognition or disclosure of a hypothetical charge for
      stock options. SFAS 123 also establishes fair value as the measurement
      basis for transactions in which an entity acquires goods or services from
      nonemployees in exchange for equity instruments. This statement is
      effective for transactions entered into after December 15, 1995. The Trust
      does not intend to record this hypothetical charge for stock options, but
      will instead provide required disclosures beginning with the Form 10-K for
      the year ending December 31, 1996.


                                Reclassifications

      Certain reclassifications have been made in the presentation of the 1995
      financial statements to conform to the 1996 presentation.

2.    Investments in Rental Properties and Notes Receivable:

      At September 30, 1996, and December 31, 1995, the Trust was in the process
      of repositioning or monetizing its assets, principally investments.
      Therefore, all investments are classified as held for sale.

      In 1995, Statement of Financial Accounting Standards No. 121, "Accounting
      for the Impairment of Long-Lived Assets to Be Disposed Of," (SFAS 121) was
      issued. SFAS 121, requires that an impairment be recognized to reduce the
      carrying amount of long-lived assets to their estimated fair value
      whenever events or changes in circumstances indicate that such carrying
      amount may not be recoverable. After an impairment is recognized, the
      reduced carrying amount of the asset is accounted for as its new cost. In
      1996, the Trust adopted the provisions of SFAS 121. Generally, fair values
      are estimated using discounted cash flow, direct capitalization, and
      market comparison analyses.

      As of the end of the third quarter of 1996, the Trust reported total
      valuation losses of $1,743,000, attributable to an impairment in the value
      of the Fulton Square Shopping Center in Sacramento, California, and the
      Totem Square property in Kirkland, Washington. The reduction in the book
      value of these properties reflects the change in value of the assets as
      they are no longer held for investment but held for sale, the current
      physical conditions of the properties and changed market conditions.
      Valuation losses totaled $994,000 for the Fulton Square Shopping Center
      and $749,000 for Totem Square.


                                       6
<PAGE>   10
                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

3.    Investments in Marketable Securities:

      At September 30, 1996, the Trust had $15,606,000 invested in government
      mortgage-backed securities classified as "available-for-sale."

      Statement of Financial Accounting Standards No. 115, "Accounting for
      Certain Investments in Debt and Equity Securities," (SFAS 115) issued in
      May 1993 requires that at the date of acquisition and at each reporting
      date, debt and equity securities be classified as "held-to-maturity,"
      "trading," or "available for sale." Investments in debt securities in
      which the Trust has the positive intent and ability to hold to maturity
      are required to be classified as "held-to-maturity." "Held-to-maturity"
      securities are required to be stated at cost and adjusted for amortization
      of premiums and discounts to maturity in the statement of financial
      position. Investments in debt and equity securities that are not
      classified as "held-to-maturity" and equity securities that have readily
      determinable fair values are to be classified as "trading" or
      "available-for-sale" and are measured at fair value in the statement of
      financial position. Securities that are bought and held principally for
      the purpose of selling them in the near term are classified as "trading."
      Unrealized holding gains and losses for "trading" securities are included
      in earnings.

      Investments that are not classified as "held-to-maturity" or "trading"
      securities are classified as "available-for-sale." Unrealized holding
      gains and losses for "available-for-sale" securities are excluded from
      earnings and reported as a separate component of shareholders' equity
      until realized.

      In accordance with SFAS 115, the Trust determines the appropriate
      classification at the time of purchase and reevaluates such designation at
      each balance sheet date.


                                       7
<PAGE>   11
                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

3.    Investments in Marketable Securities, continued:

      At September 30, 1996, the Trust's "available-for-sale" securities
      consisted of the following:

<TABLE>
<CAPTION>
                                                                    (In thousands)
                                                                      Unrealized              Estimated
                                                       Cost       Gains         Losses       Fair Value
                                                     -------      -----        --------      ----------
<S>                                                  <C>           <C>         <C>             <C>    
      Federal National Mortgage
        Association, adjustable rate interest
        currently at 7.623%, due April 1, 2024       $ 3,095         --        $    (13)       $ 3,082

      Federal Home Loan Mortgage
        Corporation, adjustable rate interest
        currently at 6.656%, due June 1, 2024          1,024         --              (4)         1,020

      Federal National Mortgage
        Association, adjustable rate interest
        currently at 7.320%, due April 1, 2025           761         --              (4)           757

      Federal National Mortgage
        Association, adjustable rate interest
        currently at 5.155%, due May 1, 2026           3,681          2              --          3,683

      Federal National Mortgage
        Association, adjustable rate interest
        currently at 5.151%, due June 1, 2026          7,031         33              --          7,064
                                                     -------       ----        --------        -------
                                                     $15,592       $ 35        $    (21)       $15,606
                                                     =======       ====        ========        =======
</TABLE>

      The maturity dates above are not necessarily indicative of expected
      maturities as principal is often prepaid on such instruments.


                                       8
<PAGE>   12
                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

4.    Income Taxes:

      The Trust has elected to be taxed as a real estate investment trust and as
      such, is not taxed on that portion of its taxable income which is
      distributed to shareholders, provided that at least 95% of its real estate
      trust taxable income is distributed and that the Trust meets certain other
      REIT requirements.

5.    Related-Party Transactions:

      The Trust and Peregrine are both self-administered. However, they share
      certain costs, including personnel costs, for which the Trust reimburses
      Peregrine pursuant to a cost allocation agreement based on each trust's
      respective asset values that is subject to negotiation annually. During
      the nine month periods ended September 30, 1996, and September 30, 1995,
      reimbursable costs charged to the Trust by Peregrine approximated $188,000
      and $333,000, respectively.

      At September 30, 1996, and December 31, 1995, respectively, the Trust had
      $46,000 and $45,000 due to Peregrine.

6.    Statement of Cash Flows Supplemental Information:

      In connection with the sale and foreclosure of properties, notes
      receivable, and property, plant and equipment the Trust entered into
      various non-cash transactions as follows:

<TABLE>
<CAPTION>
                                                    (In thousands)
                                              For the Nine Months Ended

                                               Sept 30,        Sept 30,
                                                 1996            1995
                                               --------        -------
<S>                                            <C>             <C>    
      Sales price less selling costs           $ 13,898        $    --
      Liabilities applied to sales price            (57)            --
                                               --------        -------
      Net cash received                        $ 13,841        $    --
                                               --------        -------
</TABLE>

      One property which collateralized notes payable of $3,089,000 was
      foreclosed upon during the quarter ended March 31, 1996, resulting in no
      gain or loss as the net book value of the property was equal to its debt.


                                       9
<PAGE>   13
                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

6.    Statement of Cash Flows Supplemental Information, continued:

      Cash paid for interest during the three month periods ended September 30,
      1996 and 1995, was $135,000 and $165,000, respectively. Cash paid for
      interest during the nine month periods ended September 30, 1996, and
      September 30, 1995, was $411,000 and $591,000, respectively.

7.    Per Share Data:

      Per share data is for the three month and nine month periods ended
      September 30, 1996, and September 30, 1995, based on the weighted average
      number of shares of beneficial interest outstanding during each period.
      The weighted average number of shares used in the computation was
      9,157,000.

8.    Gain on Foreclosure or Sale of Investments:

      Components of the gain on foreclosure or sale of investments for the three
      and nine months ended September 30, 1996, and September 30, 1995, were as
      follows:

<TABLE>
<CAPTION>
                                                             (In thousands)
                                                       For the            For the
                                                  Three Months Ended Nine Months Ended
                                                     September 30,     September 30,
                                                    1996     1995       1996     1995
                                                    ----    ------    -------    ----
<S>                                                 <C>     <C>       <C>         <C>
      Sale of Fountain View Office Building Note    $130    $   --    $   130     $--
      Sale of Aster Ave. Industrial Complex Note     387        --        387      --
      Sale of Bekins property                         --        --       (164)     --
      Sale of Pavilions at Mesa Note                  --        --        430      --
      Sale of Spacesaver Mini-Storage Note            --        --         30      --
      Sale of Van                                     --        --          1      --
      Sale of Redfield property                       --        --        299      --
      Recognition of deferred gains                   --        --         --     $66
                                                    ----    ------    -------     ---
                                                    $517    $   --    $ 1,113     $66
                                                    ====    ======    =======     ===
</TABLE>


                                       10
<PAGE>   14
                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

9.    Stock Option Plans:

      On November 15, 1995, the Board of Trustees approved two stock option
      plans (Plans) which may be submitted to shareholders for ratification at
      the 1996 Annual Meeting of Shareholders. Options granted under the Plans
      may not be exercised until the plans are approved by the Shareholders.

      The Plans provide the members of the Board of Trustees (Plan I) and
      certain employees and independent contractors (Plan II) an opportunity to
      purchase Shares of Beneficial Interest. The aggregate number of Shares of
      Beneficial Interest which may be issued upon exercise of all options
      granted under Plan I and Plan II shall not exceed 500,000 and 500,000,
      respectively.

      Under the terms of Plan I, options may be granted to members of the Board
      of Trustees who are not full-time employees or officers of the Trust or
      Peregrine. The option price granted under Plan I shall be the fair market
      value of the Shares of Beneficial Interest on the grant date. On the
      effective date, each participant was granted an initial option to purchase
      100,000 Shares of Beneficial Interest. Each participant whose commencement
      of service is after the effective date shall be granted an initial option
      to purchase 100,000 Shares of Beneficial Interest as of the date of
      participant's commencement of service. Each participant shall also be
      granted additional options to purchase 10,000 Shares of Beneficial
      Interest on each anniversary of the grant date of the initial option. On
      November 15, 1995 (the effective date), Stock Options to purchase 200,000
      Shares of Beneficial Interest were granted to participants under Plan I.
      On the grant date, the fair market value of the Shares of Beneficial
      Interest was $1.38.

      Under the terms of Plan II, options may be granted to certain key
      employees of the Trust and Peregrine, including officers and trustees who
      are employees of Peregrine, Trustees who are also Trustees of Peregrine,
      and consultants and advisors of the Trust. Options may be granted in any
      of the following forms: Incentive Stock Options, Nonqualified Stock
      Options, or any combination of Incentive Stock Options and Nonqualified
      Stock Options. The Stock Option Committee has the authority and discretion
      in fixing the option price for Nonqualified Stock Options. The option
      price for Incentive Stock Options shall not be less than 100% of the fair
      market value of the shares on the date of grant. Each option agreement
      shall state the number of shares and the option price. On November 15,
      1995, the Stock Option Committee granted Nonqualified Stock Options to
      purchase 330,000 Shares of Beneficial Interest to certain key employees of
      the Trust and Peregrine, Trustees who are also Trustees of Peregrine, and
      consultants and advisors of the Trust. The option price for the
      Nonqualified Stock Options granted was the fair market value of the Shares
      of Beneficial Interest on the grant date, which was $1.38.


                                       11
<PAGE>   15
------------------------------------------------------------------------------

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

------------------------------------------------------------------------------

The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Form 10-Q.
Historical results set forth are not necessarily indicative of future financial
position and results of operations of the Trust.

Overview

During the first three quarters of 1996, California Real Estate Investment Trust
continued to implement its strategy to monetize the Trust's assets to implement
a growth strategy through merger or acquisitions.

As part of the Trust's strategy, the Trustees reviewed the past, present and
expected future performance of the Casa Grande Motor Inn in Arroyo Grande,
California. Despite significant improvements in operations under a professional
management company, the hotel's current and projected financial performance was
insufficient to cover its debt service requirements. The Trust suspended debt
service payments and contacted the lender on the property with a proposal to
renegotiate financing. The proposal was rejected and in February 1996, the Casa
Grande Motor Inn was returned to the lender through foreclosure at no gain or
loss to the Trust.

Simultaneously, the Trust's four commercial properties were readied for sale.
Leasing, capital and tenant improvement expenditures were approved as they
related to their impact on potential sales prices. As of the end of the second
quarter, Redfield Commerce Center in Scottsdale, Arizona, and the Bekins Storage
Facility in Pasadena, California had been sold. Proceeds from these sales have
been invested in diversified, unleveraged pools of U.S. Government Agency
mortgage-backed securities which satisfy REIT asset qualification requirements.

During this year, the Trust has reduced the book value of the Fulton Square
Shopping Center in Sacramento by $994,000 to $1,200,000, and the book value of
Totem Square in Kirkland by $749,000 to $7,400,000. Since these properties are
no longer being held for investment, but rather for sale, their book value was
reduced to more accurately reflect the actual market value of the assets. The
decline in Fulton Square Shopping Center's value is primarily the result of the
Trust's relatively short lease term on the land underlying the center, the
physical condition of the property and changed market conditions in the
Sacramento area. Disposition efforts on behalf of Totem Square also indicated
the need to reduce this property's book value as it was no longer being held for
investment purposes but actively marketed for sale.


                                       12
<PAGE>   16
As the above activities are completed, the Trust continues to generate
substantial amounts of liquid assets with which to pursue an expansion
transaction. With a strong cash position, coupled with New York Stock Exchange
and Pacific Stock Exchange listings, the Trust is well-positioned to consider a
variety of business opportunities. Concurrent with the search for merger or
acquisition candidates, the Trust has pursued discussions with outside financing
sources, including investment banking firms, to provide either debt or equity
financing for CalREIT's expansion plans. At this time, the Trust believes if a
potential transaction were to enter the final stages of negotiation such
financing would be available.

During the third quarter of this year, Peregrine announced an agreement
regarding the potential sale of its 76% ownership interest (6,959,593 shares) in
CalREIT to MDC REIT Holdings LLC, an affiliate of the investment banking firm of
McCown DeLeeuw & Co. There is no assurance such a transaction will ultimately be
consummated with MDC REIT Holdings LLC and any other action that Peregrine might
take while it remains a majority shareholder in the Trust is unknown.


                                       13
<PAGE>   17
Comparison of the Nine Months and Three Months Ended September 30, 1996 to
the Nine Months and Three Months Ended September 30, 1995

Net loss of $287,000 was reported by the Trust for the nine months ended
September 30, 1996, a decrease of $673,000 from the net income of $386,000 for
the nine months ended September 30, 1995. Net loss of $514,000 was reported by
the Trust for the three months ended September 30, 1996, a decrease of $614,000
from the net income of $100,000 for the three months ended September 30, 1995.
These decreases were the result of a decrease in interest and rental revenues,
increased general and administrative expenses, and valuation losses, offset by
decreased interest and depreciation expense.

Total Revenues decreased $235,000, or 9%, to $2,422,000 and $171,000, or 18%, to
$771,000 for the nine and three months ended September 30, 1996, respectively,
down from $2,657,000 and $942,000 for the nine and three months ended September
30, 1995, respectively. The decrease for the nine months ended September 30,
1996, is primarily attributable to a decrease in interest revenue as a result of
the liquidation of a portion of the Trust's note portfolio. The decrease for the
three months ended September 30, 1996, is primarily the result of decreased
interest and rental revenues.

Rental revenues, including hotel revenues, decreased $31,000, or 2%, to
$1,585,000 and $99,000, or 17%, to $482,000 for the nine and three months ended
September 30, 1996, respectively, down from $1,616,000 and $581,000 for the nine
and three months ended September 30, 1995, respectively. These decreases were
primarily the result of decreases in rental revenue due to the sale of the
Redfield Commerce Center in March 1996, the sale of the Bekins Storage Facility
in May 1996, and the foreclosure of the Casa Grande Motor Inn in February 1996.

Interest revenues decreased $204,000, or 20%, to $837,000 and $72,000, or 20% to
$289,000 for the nine months ended September 30, 1996, respectively, down from
$1,041,000 and $361,000 for the nine and three months ended September 30, 1995
respectively. These decreases were primarily due to the decrease in interest
received on mortgage notes offset by an increase in interest earned on cash
accounts and marketable securities.

Total Expenses decreased $258,000, or 11%, to $2,079,000 and $224,000, or 27%,
to $618,000 for the nine and three months ended September 30, 1996,
respectively, down from $2,337,000 and $842,000 for the nine and three months
ended September 30, 1995, respectively. These decreases were attributable to
decreases in depreciation and amortization expenses, as well as interest expense
offset by increases in general and administration expenses.

Depreciation and amortization expense decreased $429,000, or 91%, to $45,000 and
$143,000, or 88% to $20,000 for the nine and three months ended September 30,
1996, respectively, down from $474,000 and $163,000 for the nine and three
months ended September 30, 1995, respectively. These decreases are a direct
result of the cessation of depreciation of the Trust's rental properties held
for sale.


                                       14
<PAGE>   18
Interest expense decreased $238,000, or 37%, to $410,000, and $84,000, or 38%,
to $136,000 for the nine and three months ended September 30, 1996,
respectively, down from $648,000 and $220,000 for the nine and three months
ended September 30, 1995, respectively. These decreases primarily resulted from
the cessation of interest expense on the Casa Grande Motor Inn when it was
foreclosed upon by the lender in February 1996.

General and administrative expenses increased $362,000, or 51%, to $1,073,000
and $10,000, or 4%, to $293,000 for the nine and three months ended September
30, 1996, respectively, up from $711,000 and $283,000 for the nine and three
months ended September 30, 1995, respectively. These increases were due to the
net effect of increases and decreases in various expense categories. The largest
increases were generated by additional Trustee fees and consulting fees related
to expansion transaction activities and the packaging and disposition of the
Trust's mortgage notes.

Valuation Losses. As of the end of the third quarter of 1996, the Trust reported
total valuation losses of $1,743,000, attributable to impairments in the value
of the Fulton Square Shopping Center in Sacramento, California, and the Totem
Square property in Kirkland, Washington, as a reflection of the properties'
current physical conditions and changed market conditions.

Dispositions. During the first quarter of 1996, the Trust sold Redfield Commerce
Center, an office/warehouse property in Scottsdale, Arizona. Its hotel property
in Arroyo Grande, California was allowed to be foreclosed upon after the lender
refused a proposal from the Trust to restructure the debt terms. The net gain
recognized from the sale of the Redfield Commerce Center in Scottsdale, Arizona
was $299,000. There was no gain or loss upon the foreclosure of the Casa Grande
Motor Inn in Arroyo Grande, California as the net book value of the property was
equal to its debt.

During the second quarter of 1996, the Trust sold the Bekins Storage Facility in
Pasadena, California. The Trust incurred a loss of $164,000 from the sale of
Bekins. Also during the second quarter of 1996, the Trust sold two of its seven
mortgage notes. A gain of $430,000 was recognized upon the sale of the Trust's
mortgage note which was collateralized by a first deed of trust on an
office/commercial building in Phoenix, Arizona, and a gain of $30,000 was
recognized upon the sale of the Trust's mortgage note which was collateralized
by a second deed of trust on a commercial building in Pacheco, California.

During the third quarter of 1996, the Trust sold two of its five remaining
mortgage notes. A gain of $130,000 was recognized upon the sale of the Trust's
mortgage note which was collateralized by a first deed of trust on an office
building in Scottsdale, Arizona, and a gain of $387,000 was recognized upon the
sale of the Trust's mortgage note which was collateralized by a second deed of
trust on an office/industrial building in Sunnyvale, California.


                                       15
<PAGE>   19
Liquidity and Capital Resources

At September 30, 1996, the Trust had $3,248,000 in cash. Its two rental
properties had a net book value of $8,562,000 at that date with collateralized
indebtedness against the rental properties totaling $4,298,000 (50%). CalREIT's
$7,716,000 mortgage note portfolio is carried at a net book value of $1,582,000
due primarily to cumulative write downs in valuation. Its investment in
marketable securities had a net book value marked to market at September 30,
1996, of $15,606,000. The primary sources of liquidity for the Trust in the
remainder of 1996, which management believes will adequately meet its future
liquidity and capital resource requirements, will be cash on hand, cash
generated from operations, interest and principal payments on its securities,
and cash generated from asset dispositions. The primary demands on the Trust's
capital resources will be debt service payments and expenses associated with the
search for, analysis of and negotiations with respect to an expansion
transaction.

The Trust experienced a net decrease in cash of $1,530,000 for the nine months
ended September 30, 1996, compared to a net increase in cash of $907,000 for the
nine months ended September 30, 1995, a difference of $2,437,000. For the nine
months ended September 30, 1996, cash provided by operating activities was
$370,000, down $293,000 from $663,000 during the same period in 1995. Cash
provided by investing activities during this same period decreased by $2,481,000
to ($1,845,000), down from $636,000, primarily the result of a reduction in
collections on notes receivable and investments in marketable securities funded
with cash generated from operations and asset dispositions; and cash used in
financing activities decreased by $337,000 from $392,000 to $55,000.

The note on Totem Square of $4,265,000 was originally scheduled to mature on
April 1, 1996. The Trust received an extension from the lender to May 1997,
under the same terms and conditions as the original agreement.

Funds From Operations and Funds Available for Distribution. REIT analysts
generally consider Funds From Operations (FFO) an appropriate measure of
performance in comparing the results of operations of REIT's. FFO is defined by
the National Association of Real Estate Investment Trusts as net income computed
in accordance with generally accepted accounting principles before gains and
losses on sales of property and from debt restructuring plus depreciation and
amortization. Funds Available for Distribution (FAD) is defined as FFO less
capital expenditures funded by operations and loan amortization. The Trust
believes that in order to facilitate a clear understanding of the historical
operating results of the Trust, FFO and FAD should be examined in conjunction
with net income as presented in this report. FFO and FAD should not be
considered as an alternative to net income as an indication of the Trust's
performance or to cash flow as a measure of liquidity.


                                       16
<PAGE>   20
      Funds From Operations and Funds Available for Distribution for the three
      months and six months ended June 30, 1996 and 1995 are summarized as
      follows:

            Calculation of Funds From Operations and Funds Available for
Distribution

<TABLE>
<CAPTION>
                                                (In thousands)
                            For the Three Months Ended  For the Nine Months Ended
                                   September 30,               September 30,
                                   1996      1995              1996      1995
                                  -----     -----             -----     -----
<S>                               <C>       <C>               <C>       <C>  
      Net income before                                   
        gain on foreclosure or                            
        sale of investments                               
        and valuation losses      $ 153     $ 100             $ 343     $ 320
                                                          
      Depreciation and                                    
        amortization                 20       163                45       474
                                  -----     -----             -----     -----
        Funds from operations       173       263               388       794
                                                          
      Capital improvements           (5)     (113)             (123)     (204)
                                                          
      Loan principal                                      
        payments                    (17)      (15)              (55)     (392)
                                  -----     -----             -----     -----
        Funds available for                               
          distribution            $ 151     $ 135             $ 210     $ 198
                                  =====     =====             =====     =====
</TABLE>                                          


                                       17
<PAGE>   21
                           PART II. OTHER INFORMATION


            Item 1:     Legal Proceedings

                        The Trust filed a complaint in San Francisco Superior
                        Court on September 27, 1996, seeking a declaratory
                        judgment against Carrillion V, a California limited
                        partnership, and its general partner (collectively, the
                        "Defendant"), with respect to an earnest money deposit
                        given by the Defendant under a May 1996 mortgage loan
                        purchase agreement (the "MLP"). The Trust asserts that
                        the deposit was forfeited by the Defendant, as
                        liquidated damages, upon the default by the Defendant
                        under the MLP. The deposit is presently held by the
                        designated escrow agent under the MLP. The amount in
                        dispute is $142,950. The defendant has moved to change
                        the venue of the dispute to Santa Clara County, but has
                        otherwise not answered the complaint.

            Item 2:     Changes in Securities
                        None

            Item 3:     Defaults Upon Senior Securities
                        None

            Item 4:     Submission of Matters to a Vote of Security Holders
                        None

            Item 5:     Other Information
                        None

            Item 6:     Exhibit 27 Financial Data Schedules
                        Reports on Form 8-K - None


                                       18
<PAGE>   22
                                   SIGNATURES


Pursuant to the requirement 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.


                                       CALIFORNIA REAL ESTATE INVESTMENT TRUST



November 14, 1996                         /s/  Frank A. Morrow
-----------------                         --------------------
     Date                                 Frank A. Morrow,
                                          Chairman of the Board and
                                          Chief Executive Officer


                                       19