<PAGE>

--------------------------------------------------------------------------------
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                                    FORM 10-Q

                       Securities and Exchange Commission
                              Washington, DC 20549

/x/     Quarterly report pursuant to Section 13 or 15(d) of the
        Securities Exchange Act of 1934 for the quarterly period ended 
        September 30, 1998

                                       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 0-10421
                                   -----------
                           CORNERSTONE PROPERTIES INC.
             (Exact name of Registrant as specified in its Charter)

             Nevada                                     74-2170858
(State or other jurisdiction of                (IRS Employer Identification No.)
incorporation and organization)


                              126 East 56th Street
                               New York, New York
                    (Address of principal executive offices)

                                      10022
                                   (Zip Code)

                                 (212) 605-7100
              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>

  Title of each class:              Name of Each Exchange on which Registered:
  --------------------              ------------------------------------------
<S>                                 <C>
  Common Stock, no par value        New York Stock Exchange
                                    Dusseldorf Stock Exchange
                                    Frankfurt Stock Exchange

</TABLE>

     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 
                                             -----     ------

     Aggregate market value of registrant's voting Common Stock held by
non-affiliates as of November 12, 1998: $1,518,230,531.

Number of shares of Common Stock outstanding as of November 12, 1998: 
101,638,864.

<PAGE>

                                    PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

                              CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
                                 CONDENSED CONSOLIDATED BALANCE SHEETS
                         (Dollar amounts in thousands, except per share amounts)

<TABLE>
<CAPTION>


                                                                                September 30,       December 31,
                                                                                    1998               1997
                                                                                -------------       ------------
                                                                                 (Unaudited)
<S>                                                                             <C>               <C>        
ASSETS

Investments, at cost:
       Land                                                                     $   315,498       $   260,542
       Buildings, leasehold interests and improvements                            1,854,308         1,559,085
       Investment in real estate joint venture                                      245,784           240,253
       Deferred lease costs                                                         140,638           127,645
                                                                                -----------       -----------
                                                                                  2,556,228         2,187,525
       Less: Accumulated depreciation and amortization                              271,218           229,652
                                                                                -----------       -----------
          Total investments                                                       2,285,010         1,957,873

Cash and cash equivalents                                                            30,566            24,730
Restricted cash                                                                       5,250             1,903
Other deferred costs, net of accumulated amortization of $3,015 and $1,998          145,726             5,728
Deferred tenant receivables                                                          48,352            38,531
Tenant and other receivables, net                                                    10,026             7,584
Notes receivable                                                                        528             1,652
Other assets                                                                         10,120            13,480
                                                                                -----------       -----------
Total Assets                                                                    $ 2,535,578       $ 2,051,481
                                                                                -----------       -----------
                                                                                -----------       -----------
LIABILITIES

Long-term debt, inclusive of $11,799 and $11,209 of unamortized premium         $   849,554       $   706,178
Credit facility                                                                     148,000           187,000
Accrued interest payable                                                              7,261             4,134
Accrued real estate taxes payable                                                    19,446            13,401
Accounts payable and accrued expenses                                                19,841            18,363
Unearned revenue and other liabilities                                               16,770            10,986
                                                                                -----------       -----------
Total Liabilities                                                                 1,060,872           940,062
                                                                                -----------       -----------

MINORITY INTEREST

Minority Interest in operating partnership                                           55,258              --
Minority Interest in real estate joint ventures                                      14,811            15,420
                                                                                -----------       -----------
Total Minority Interest                                                              70,069            15,420


Commitments and Contingencies

Redeemable Preferred Stock; 344,828 shares authorized;
   0 shares issued and outstanding                                                     --                --

STOCKHOLDERS' INVESTMENT
7% Cumulative Convertible Preferred Stock, $16.50 stated value;
   65,000,000 shares authorized; 3,030,303 shares issued and outstanding             50,000            50,000
Common stock, no par value; 250,000,000 shares authorized;
   (1998-101,636,864; 1997-83,191,819) shares issued and outstanding
Paid-in capital                                                                   1,356,615         1,048,187
Deferred compensation                                                                (1,978)           (2,188)
                                                                                -----------       -----------
Total Stockholders' Investment                                                    1,404,637         1,095,999
                                                                                -----------       -----------
Total Liabilities and Stockholders' Investment                                  $ 2,535,578       $ 2,051,481
                                                                                -----------       -----------
                                                                               -----------       -----------
</TABLE>

                          The accompanying notes are an integral part of these
                              condensed consolidated financial statements.

                                                 2 of 30
<PAGE>

Item 1. Financial Statements (continued)

                          CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
                           CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                 FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
                     (Dollar amounts in thousands, except per share amounts)
                                           (Unaudited)

<TABLE>
<CAPTION>
                                                        Three Months     Three Months     Nine Months      Nine Months
                                                           Ended            Ended            Ended            Ended
                                                        September 30,    September 30,    September 30,    September 30,
                                                           1998             1997             1998             1997
                                                        -------------    -------------    -------------    -------------
<S>                                                     <C>              <C>              <C>              <C>      
Revenues
       Office and parking rentals                       $  83,227        $  34,546        $ 239,767        $ 103,237
       Earnings in real estate joint venture                3,856             --             10,150             --
       Interest and other income                            1,955            3,868            7,167            8,432
                                                        ---------        ---------        ---------        ---------
           Total Revenues                                  89,038           38,414          257,084          111,669
                                                        ---------        ---------        ---------        ---------

Expenses
       Building operating expenses                         18,896            7,660           52,947           22,693
       Real estate taxes                                   12,034            5,933           34,900           17,553
       Interest expense                                    16,057            7,405           47,724           22,395
       Depreciation and amortization                       15,702            7,057           42,561           20,865
       General and administrative                           3,169            1,869            8,713            5,134
                                                        ---------        ---------        ---------        ---------
           Total Expenses                                  65,858           29,924          186,845           88,640
                                                        ---------        ---------        ---------        ---------
                                                           23,180            8,490           70,239           23,029
                                                        ---------        ---------        ---------        ---------
Other income (expenses)
      Loss on sale of real estate assets                     (127)            --             (2,324)            --
      Minority interest                                    (1,826)            (414)          (4,682)          (1,408)
      Net gain on interest rate swaps                        --               --               --                 99
                                                        ---------        ---------        ---------        ---------
Income before extraordinary item                           21,227            8,076           63,233           21,720

Extraordinary loss                                         (2,269)            --             (2,269)             (54)
                                                        ---------        ---------        ---------        ---------

Net income                                              $  18,958        $   8,076        $  60,964        $  21,666
                                                        ---------        ---------        ---------        ---------
                                                        ---------        ---------        ---------        ---------
Income applicable to preferred stock                    $    (875)       $    (875)       $  (2,625)       $  (9,285)
                                                        ---------        ---------        ---------        ---------
                                                        ---------        ---------        ---------        ---------
Income applicable to common stock                       $  18,083        $   7,201        $  58,339        $  12,381
                                                        ---------        ---------        ---------        ---------
                                                        ---------        ---------        ---------        ---------
Income before extraordinary item per common share       $    0.20        $    0.16        $    0.62        $    0.37
                                                        ---------        ---------        ---------        ---------
                                                        ---------        ---------        ---------        ---------
Extraordinary loss per common share                     $   (0.02)       $    --          $   (0.02)       $    --
                                                        ---------        ---------        ---------        ---------
                                                        ---------        ---------        ---------        ---------
Basic income per common share                           $    0.18        $    0.16        $    0.59        $    0.37
                                                        ---------        ---------        ---------        ---------
                                                        ---------        ---------        ---------        ---------
Diluted income per common share                         $    0.18        $    0.16        $    0.59        $    0.37
                                                        ---------        ---------        ---------        ---------
                                                        ---------        ---------        ---------        ---------

</TABLE>
                           The accompanying notes are an integral part of these
                               condensed consolidated financial statements.

                                                 3 of 30
<PAGE>

Item 1. Financial Statements (continued)

                                CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
                              CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                           FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
                                        (Dollar amounts in thousands)
                                                 (Unaudited)
<TABLE>
<CAPTION>
                                                                                         Nine Months       Nine Months
                                                                                            Ended             Ended
                                                                                        September 30,     September 30,
                                                                                            1998              1997
                                                                                          ---------         ---------
<S>                                                                                      <C>               <C>      
Cash flows from operating activities:
        Net income                                                                        $  60,964         $  21,666
        Adjustments to reconcile net income to net cash
           provided by operating activities:
              Depreciation and amortization                                                  42,618            21,282
              Deferred compensation amortization                                                787               661
              Share of net loss in real estate joint venture                                  5,001              --
              Net gain on interest rate swap                                                   --                 (99)
              Extraordinary loss                                                              2,269                54
              Unbilled rental revenue                                                        (9,332)             (978)
              Increase in accrued interest payable                                            3,127               440
              Minority interest share of income                                               4,682             1,408
              Loss on sale of real estate assets                                              2,324              --
              Increase in tenant and other receivables and other assets                      (3,777)           (4,772)
              Increase in accounts payable, accrued expenses and other liabilities            8,123             3,810
                                                                                          ---------         ---------

              Total adjustments                                                              55,822            21,806
                                                                                          ---------         ---------

              Net cash provided by operating activities                                     116,786            43,472
                                                                                          ---------         ---------

Cash flows from investing activities:
        Additions to investment property                                                   (343,160)          (75,064)
        Repayment of notes receivable                                                         1,124               903
        Investments in and advances to real estate joint ventures                            (7,134)             --
        Proceeds from sale of real estate assets                                             45,538              --
                                                                                          ---------         ---------

              Net cash used in investing activities                                        (303,632)          (74,161)
                                                                                          ---------         ---------

Cash flows from financing activities:
        Proceeds from common stock offering                                                 262,344           225,400
        Borrowings under mortgage loans                                                      82,377            35,000
        Borrowings under credit facility                                                    221,500              --
        Repayments under credit facility                                                   (260,500)             --
        Repayment of term loan                                                                 --             (32,500)
        Repayments under mortgage loans                                                      (2,502)             (812)
        Proceeds from dividend reinvestment plan                                              5,247             8,586
        Net payments for swap terminations and debt prepayment costs                         (1,762)             (216)
        Increase in restricted cash                                                          (3,348)          (35,302)
        Stock and debt issuance costs                                                       (15,610)          (18,139)
        Distributions to minority partners                                                   (5,618)           (1,285)
        Distributions to preferred stockholders                                              (3,500)          (10,160)
        Distributions to common stockholders                                                (85,946)          (29,812)
                                                                                          ---------         ---------

              Net cash provided by financing activities                                     192,682           140,760
                                                                                          ---------         ---------

Increase in cash and cash equivalents                                                         5,836           110,071
Cash and cash equivalents, beginning of period                                               24,730           114,803
                                                                                          ---------         ---------
Cash and cash equivalents, end of period                                                  $  30,566         $ 224,874
                                                                                          ---------         ---------
                                                                                          ---------         ---------
</TABLE>
                            The accompanying notes are an integral part of these
                                condensed consolidated financial statements.

                                                  4 of 30
<PAGE>


Item 1.  Financial Statements (continued)

                  CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998


1.   NATURE OF COMPANY'S BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of the Company's Business

     Cornerstone Properties Inc., a Nevada corporation ("Cornerstone" or the 
"Company"), is a self-advised real estate investment trust ("REIT") that owns 
interests in 21 Class A office properties comprising approximately 11.4 
million rentable square feet that are located in 11 metropolitan areas 
throughout the United States. Cornerstone's strategy is to own interests in 
Class A office properties in prime central business district locations and 
major suburban office markets in U.S. metropolitan areas. Class A office 
properties are generally considered to be those that have the most favorable 
locations and physical attributes, command premium rents and experience the 
highest tenant retention rates within their markets.

     In January 1998, Cornerstone converted its corporate structure into an 
umbrella limited partnership REIT ("UPREIT"). Under the UPREIT structure, 
Cornerstone owns all of its properties and conducts all of its property 
business through Cornerstone Properties Limited Partnership, a Delaware 
limited partnership (the "Operating Partnership"), of which Cornerstone is 
the sole general partner. As of November 12, 1998, Cornerstone owned, 
directly or indirectly, approximately 96.1% of the common units of 
partnership interest ("UPREIT Units") in the Operating Partnership.

General

     The condensed consolidated financial statements included herein have 
been prepared by the Company, without audit, pursuant to the rules and 
regulations of the Securities and Exchange Commission. Certain information 
and footnote disclosures normally included in consolidated financial 
statements prepared in accordance with generally accepted accounting 
principles have been omitted pursuant to such rules and regulations, although 
the Company believes that the disclosures are adequate to make the 
information presented not misleading. In the opinion of management of the 
Company, all adjustments, consisting only of normal recurring accruals 
necessary to summarize fairly the unaudited results of operations for the 
three and nine month periods presented, have been included. Results for the 
three and nine months ended September 30, 1998 are not necessarily indicative 
of results which may be expected for any other interim periods or for the 
year as a whole. It is suggested that these condensed consolidated financial 
statements be read in conjunction with the audited financial statements and 
notes thereto included in the Company's latest annual report on Form 10-K.

Principles of Consolidation

     The accompanying financial statements include the accounts of 
Cornerstone, its wholly-owned qualified REIT subsidiary, the Operating 
Partnership and controlled partnerships. The Company has consolidated the 
following partnerships because it has a majority interest in the economic 
benefits and is or has the right to become the managing general partner at 
its sole discretion: NWC Limited Partnership ("NWC"); Third and University 
Limited Partnership ("Third Partnership"); Two Twenty Two Berkeley Venture 
("222 Berkeley"); Five Hundred Boylston West Venture ("500 Boylston") and One 
Ninety One Peachtree Associates ("191 Peachtree"). All significant 
intercompany balances and transactions have been eliminated in consolidation.

Reclassifications

     The Company has reclassified certain prior period amounts in order to 
conform them to the September 30, 1998 financial statement presentation.

                                     5 of 30
<PAGE>

Minority Interest

     Minority interest in the Operating Partnership relates to the interest 
in the Operating Partnership the Company does not own, which as of September 
30, 1998 amounted to 3.9%. The Company allocates income to the minority 
interest in the Operating Partnership based on the weighted-average 
percentage ownership in the Operating Partnership through the year. Persons 
who contributed assets to the Operating Partnership received UPREIT Units, 
shares of Cornerstone's common stock (the "Common Stock"), cash or a 
combination thereof. At the request of a Unitholder, the Company will be 
obligated to redeem each UPREIT Unit held by such Unitholder for one share of 
Common Stock or, at the option of the Company, cash equal to the fair market 
value of one share of Common Stock at the time of redemption. Such 
redemptions will cause the Company's percentage ownership in the Operating 
Partnership to increase. As of September 30, 1998, the number of issued and 
outstanding UPREIT Units held by Unitholders other than the Company was 
4,145,883 (3.9%) and as of such date, no UPREIT Units have been exchanged for 
shares of Common Stock.

     Minority interest in real estate joint ventures represents the Company's 
partner's capital account balances in NWC, Third Partnership, 222 Berkeley, 
500 Boylston and 191 Peachtree. Debit balances in certain of these capital 
accounts originated through special cash distributions in excess of the 
partner's share of income in accordance with certain provisions of the 
respective partnership agreements. Realizability of the debit balances is 
continually monitored by calculating pro forma sales proceeds under the 
respective partnership agreements.

Recently Issued Accounting Standards

     During 1998, the Financial Accounting Standards Board issued Statement 
of Financial Accounting Standard No. 133 "Accounting for Derivative 
Instruments and Hedging Activities" ("SFAS 133"), which is effective for 
fiscal years beginning after June 15, 1999. SFAS 133 establishes a new model 
for accounting for derivatives and hedging activities and supersedes and 
amends a number of existing standards. In addition, the Accounting Standards 
Executive Committee of the American Institute of Certified Public Accountants 
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up 
Activities" ("SOP 98-5") and Statement of Position 98-1, "Accounting for the 
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 
98-1"), which are effective for fiscal years beginning after December 15, 
1998. SOP 98-5 requires that certain costs incurred in conjunction with 
start-up and organizational activities be expensed. SOP 98-1 provides 
guidance on whether the costs of computer software developed or obtained for 
internal use should be capitalized or expensed. Management believes that when 
the Company adopts SFAS 133, SOP 98-5 and SOP 98-1 they will not have a 
significant impact on the Company's financial statements.

     During the first quarter of 1998, the Company adopted the Emerging 
Issues Task Force of the Financial Accounting Standards Board release Issue 
No. 97-11, "Accounting for Internal Costs Relating to Real Estate Property 
Acquisitions" ("EITF 97-11"). EITF 97-11 requires that the internal 
pre-acquisition costs of identifying and acquiring operating property be 
expensed as incurred. The adoption of EITF 97-11 did not have a material 
impact on the Company's financial statements.

     During the first quarter of 1998, the Company also adopted the Financial 
Accounting Standards Board's Statement of Financial Accounting Standard No. 
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 specifies the 
presentation and disclosure requirements for comprehensive income which 
includes those items which have been formerly reported as a component of 
stockholders' equity. The adoption of SFAS 130 did not have a significant 
impact on the Company's financial statements.

Estimates and Risks

     The preparation of financial statements in conformity with generally 
accepted accounting principles requires management to make estimates and 
assumptions that affect the reported amounts of assets and liabilities and to 
make disclosure of contingent assets and liabilities at the date of the 
financial statements and the reported amounts of revenues and expenses during 
the reporting period. The most significant risks, estimates and assumptions 
are related to the recoverability and depreciable lives of investment 
property, the recoverability of deferred tenant receivables and the 
qualification of the Company as a REIT. Actual results could differ from 
those estimates.

                                    6 of 30
<PAGE>

2. PROPERTIES

     The following table summarizes Cornerstone's interest in real estate
investments at September 30, 1998:

<TABLE>
<CAPTION>

                                                                   Completed/   Net Rentable              Ownership
Property                               Location                     Acquired    square feet    % Leased    Interest   Notes
--------                               --------                     --------    ----------     --------    --------   -----
<S>                            <C>                             <C>              <C>           <C>         <C>         <C> 
One Norwest Center..........   Denver, Colorado                        1983      1,188,000          97%       100%
Norwest Center..............   Minneapolis, Minnesota                  1988      1,118,000          99%        50%        A
Washington Mutual Tower.....   Seattle, Washington                     1988      1,155,000          99%        50%        B
125 Summer Street...........   Boston, Massachusetts              1989/1995        464,000          99%       100%
Tower 56....................   New York, New York                 1983/1996        162,000          99%       100%        C
One Lincoln Centre..........   Oakbrook Terrace, Illinois         1986/1996        297,000          91%       100%
527 Madison Avenue..........   New York, New York                 1986/1997        216,000         100%       100%
191 Peachtree Street........   Atlanta, Georgia                   1991/1997      1,221,000          97%        80%        D
Market Square...............   Washington, D.C.                   1990/1997        689,000          95%        59%        E
500 Boylston Street.........   Boston, Massachusetts              1988/1997        715,000         100%      91.5%        F
222 Berkeley Street.........   Boston, Massachusetts              1991/1997        531,000         100%      91.5%        F
Charlotte Plaza.............   Charlotte, North Carolina          1982/1997        613,000          98%       100%
200 Galleria................   Atlanta, Georgia                   1985/1997        433,000          94%       100%
11 Canal Center.............   Alexandria, Virginia               1986/1997         70,000          96%       100%
99 Canal Center.............   Alexandria, Virginia               1986/1997        138,000          99%       100%
TransPotomac Plaza 5........   Alexandria, Virginia               1983/1997         96,000         100%       100%
Sixty State Street..........   Boston, Massachusetts              1979/1997        823,000          99%       100%        G
Corporate 500 Centre........   Deerfield, Illinois             1986-90/1998        679,000          95%       100%        H
One Memorial Drive..........   Cambridge, Massachusetts           1987/1998        353,000         100%       100%        I
201 California Street.......   San Francisco, California          1980/1998        240,000         100%       100%        J
Wilshire Palisades..........   Santa Monica, California           1981/1998        186,000         100%       100%        J


</TABLE>

--------
(A)  While the Company's stated interest in the partnership that owns Norwest
     Center is 50%, its economic interest in the property is significantly
     larger due to priority distributions it receives on its invested capital
     base. For the nine months ended September 30, 1998, the Company's share of
     earnings and cash distributions from the partnership that owns Norwest
     Center was 81%.

(B)  While the Company's stated interest in the partnership that owns Washington
     Mutual Tower is 50%, its economic interest in the property is significantly
     larger due to priority distributions it receives on its invested capital
     base. For the nine months ended September 30, 1998, the Company received
     100% of the cash distributions from the partnership that owns Washington
     Mutual Tower.

(C)  On January 5, 1998, the Company purchased the remaining participation
     rights in the cash flow and residual value of Tower 56 from the former
     participants for 307,692 shares of Common Stock. As a result, all cash flow
     and the residual value of Tower 56 inures to the Company.

                                     7 of 30
<PAGE>

(D)  While the Company's stated interest in the partnership that owns 191
     Peachtree Street is 80%, its economic interest is significantly larger
     because it acquired the first mortgage note on the property in the
     amount of $145 million, which earns interest at 9.375% and will receive a
     priority distribution on its acquired capital base. In 1997, the partner in
     the transaction, CH Associates, Ltd., received an annual incentive
     distribution of $250,000, which the Company expects it will continue to
     receive under the partnership agreement through February 28, 2000, with the
     Company receiving the remainder of the cash flow from the property.

     The partnership that owns 191 Peachtree Street leases a portion of the 
     land upon which the project is located pursuant to a ground lease 
     agreement. The agreement requires the partnership to make annual 
     payments of $5,000 through January 31, 1998, $45,000 through January 31, 
     2002 and $75,000 through January 31, 2008. Thereafter, the annual rent 
     increases $2,500 per year until the expiration date of January 31, 2087. 
     The partnership records ground rental expense relating to this agreement 
     on a straight-line basis. The ground lease is renewable for an 
     additional 99 years.

(E)  In January 1998, the Company acquired partnership interests with a stated
     interest of approximately 59% in the partnerships that own Market Square,
     with the option to purchase an additional 1%. The Company's economic
     interest is significantly larger because it has acquired the first mortgage
     note on the property in the amount of $181.0 million, which earns interest
     at 9.75% and will receive a priority distribution on its acquired capital
     base. In addition, the Company acquired a "buffer loan", with accrued
     principal and interest of $49.0 million, which accrues interest at a rate
     of 11% per annum and is payable from cash flow, refinancing or sales
     proceeds from Market Square in excess of the first mortgage. During the
     nine months ended September 30, 1998, the Company received 100% of the cash
     flow from the property. The Company accounts for the transaction as an
     equity investment in real estate.

(F)  Distributions of cash flow and sales and refinancing proceeds are shared in
     proportion to the Company's 91.5% partnership interest and Hines Interests
     Limited Partnership's and/or its affiliates' ("Hines") 8.5% partnership
     interest.

(G)  On December 31, 1997, Cornerstone purchased the second mortgage on Sixty
     State Street located in the heart of Boston's Central Business District.
     The mortgage is a cash flow mortgage through which all the economic
     benefits/risks (subject to the first mortgage) inure to the Company.
     The Company controls all major decisions regarding management and leasing.
     The total purchase price for the second mortgage was $131.5 million. The
     $78.4 million first mortgage on the property was originally recorded by the
     Company as an $89.6 million liability due to its above-market interest
     rate.

     The second mortgage, which the Company holds, is collateralized only by 
     the improvements on Sixty State Street in Boston. Title to the 
     improvements is owned by Marshall Field, who is the ground lessee under a
     ground lease that expires on December 28, 2067. The lease payments on the
     ground lease are $398,896 per annum throughout the term.

(H)  On January 28, 1998, the Company purchased Corporate 500 Centre in 
     Deerfield, Illinois. Constructed between 1986 and 1990, Corporate 500 
     Centre consists of four Class A office buildings comprising 
     approximately 680,000 rentable square feet. The total purchase price of 
     the property was approximately $150.0 million, approximately $15.0 
     million of which was paid in UPREIT Units priced at $18.50 per unit. The 
     Company financed a portion of the costs to acquire the property with an 
     $80.0 million mortgage loan from Bankers Trust Company at an interest 
     rate of LIBOR plus 1.0%. The Company had entered into an interest rate 
     swap agreement with Bankers Trust Company that effectively fixed the 
     interest rate on the mortgage loan at 6.63%; this agreement was 
     terminated in August 1998 at no cost to the Company. This swap was 
     considered a hedge for federal income tax purposes. This mortgage was 
     subsequently refinanced in October 1998 - see Footnote 5(M).

                                     8 of 30
<PAGE>

(I)  On April 28, 1998, the Company purchased One Memorial Drive in Cambridge,
     Massachusetts. The total purchase price for the property was approximately
     $112.5 million, approximately $29.0 million of which was paid in UPREIT
     Units priced at $17.50 per unit. The Company also issued 3,428,571 shares
     of Common Stock priced at $17.50 per share as part of the acquisition.

(J)  On June 3, 1998, the Company purchased 201 California Street in San
     Francisco, California, and Wilshire Palisades in Santa Monica, California.
     The total purchase price for the properties was approximately $121.5
     million, approximately $29.1 million of which was paid in UPREIT Units
     priced at $17.50 per unit. Also included in the purchase price was $64.6
     million in assumed debt.

On March 31, 1998, the Dearborn Land, an undeveloped parcel of land in Chicago
that was acquired in October 1997 along with nine Class A office properties
(collectively, the "DIHC Properties") from Stichting Pensioenfonds Voor de
Gezondheid Geestelijke en Maatschappelijke Belangen ("PGGM") and Dutch
Institutional Holding Company, Inc. ("DIHC"), was sold for net proceeds of
approximately $18,790,000, resulting in a loss of $212,228.

On April 29, 1998, the Company sold the Frick Building, located in Pittsburgh,
PA, for net proceeds of approximately $26,748,000, resulting in a loss of
$2,111,540.

3.   INVESTMENT IN REAL ESTATE JOINT VENTURE

     During October 1997, the Company acquired the first mortgage note on 
Market Square in the amount of $181.0 million which earns interest at a rate 
of 9.75%. In addition, the Company acquired a "buffer loan", with accrued 
principal and interest of $49.0 million, which accrues interest at a rate of 
11% per annum and is payable from cash flow, refinancing or sales proceeds 
from Market Square in excess of the first mortgage.

     During January 1998, the Company purchased a 99% interest in Market 
Square Development Investors ("MSDI") for approximately $5.1 million. MSDI 
owns an 85.71% interest in Market Square Associates ("MSA"), which owns a 70% 
interest in Avenue Associates Limited Partnership ("AALP"). AALP owns and 
operates Market Square. The Company's investment is accounted for under the 
equity method. The following table provides summary balance sheet information 
as of September 30, 1998 and income and expense information for the nine 
months ended September 30, 1998 for the MSA entity (amounts in thousands):
<TABLE>
<CAPTION>

                                                               1998
                                                           -------------
<S>                                                          <C>
Total Assets, primarily investments in real estate           $ 173,830
Total Liabilities, primarily notes payable to the Company      235,684
Revenues, primarily office and parking rentals                  21,403
Net Loss                                                        (6,995)

</TABLE>

     The amount recorded as earnings in real estate joint venture includes the 
interest income earned on the notes discussed above, which was offset by the 
net loss of MSA from January 30, 1998 through September 30, 1998, plus 
adjustments for straight-line rent and interest expense.

4.   OTHER DEFERRED COSTS

     Included within "other deferred costs" is $138.8 million in loans made 
by the Company between June and September 1998 to affiliates or special 
purpose entities formed by William Wilson & Associates (individually or 
collectively "Wilson"). The loans bear interest at a rate of LIBOR plus 1.50% 
and mature on December 31, 1999 ($89.1 million) and March 20, 2000 ($49.7 
million). The loans are collateralized by seven office projects and one 
parcel of undeveloped land owned by Wilson in the western United States. Upon 
consummation of the Wilson Acquisition, the outstanding loan balance will be 
offset against the purchase price. In the event that the Wilson Acquisition 
is not consummated (see Footnotes 7 and 13), Wilson is obligated to repay the 
loans and any accrued interest. The Company financed these loans in part 
through drawing on its credit facility, which bears interest at a 
weighted-average rate of approximately 6.79%.

                                     9 of 30
<PAGE>

5.   LONG-TERM DEBT

     The following table sets forth certain information regarding the 
consolidated debt obligations of the Company as of September 30, 1998, 
including mortgage obligations relating to the Company's properties. All of 
this debt, with the exception of the Convertible Promissory Note due 2001, is 
nonrecourse to the Company. However, notwithstanding the nonrecourse 
indebtedness, the lender may have the right to recover deficiencies from the 
Company in certain circumstances.

<TABLE>
<CAPTION>

                                                                           Maturity     Prepayment
Property                                 Amortization     Interest Rate    Date         Provisions        9/30/98        12/31/97
--------                                 ------------     -------------    --------     ----------        -------        --------
                                                                                    
<S>                                    <C>               <C>              <C>         <C>                <C>            <C>
Convertible Promissory Note
 due 2001 (A)....................      Interest only     8.11% max (B)    Jan-2001    Not prepayable     $12,926,000    $12,926,000
One Norwest Center (C)............     10 year           6.90             Oct-2008     (D)                98,500,000     96,780,000
Norwest Center....................     Interest only     8.74             Dec-2005    Not prepayable     110,000,000    110,000,000
Washington Mutual Tower...........     Interest only     7.53             Nov-2005     (E)                79,100,000     79,100,000
125 Summer Street.................     Interest only (F) 7.20             Jan-2003     (G)                50,000,000     50,000,000
Tower 56..........................     30 year           7.67             May-2003     (H)                17,608,000     17,742,000
TransPotomac Plaza 5 and Charlotte
  Plaza (I).......................     Interest only     7.28             Oct-2000    Not prepayable      65,000,000     65,000,000
527 Madison Avenue and One Lincoln
  Centre (I)......................     Interest only     7.47             Oct-2004    Not prepayable      65,000,000     65,000,000
Market Square (J) and 200
  Galleria (I)....................     Interest only     7.54             Oct-2007    Not prepayable     120,000,000    120,000,000
Sixty State Street (K)............     30 year           6.84             Jan-2005     (L)                88,140,000     89,630,000
Corporate 500 Centre (M)..........     Interest only     6.63 (N)         Jul-2002    Prepayable          80,000,000       -
201 California Street (O).........     30 year           6.70             Mar-2005     (P)                33,171,000       -
Wilshire Palisades (Q)............     30 year           6.70             Jul-2002     (R)                30,109,000       -
                                                         ---------------------------                  ------------------------------
                                                         7.37%(S)         6.4 yrs. (S)                  $849,554,000   $706,178,000
</TABLE>

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

(A)  The lender, Hines, has the right to convert the note into Common Stock at a
     conversion price of $14.30 per share. At maturity, the Company is entitled
     to repay the principal of the note with Common Stock priced at the lesser
     of $14.30 per share or the then-existing share price.

(B)  Lesser of 30-day LIBOR plus 0.5% or 8.11%.

(C)  On September 25, 1998, the Company completed the refinancing of the $96.1
     million mortgage on One Norwest Center with CIGNA and Mass Mutual. As a
     result of the refinancing, the principal balance was increased to $98.5
     million, the term of the loan was extended from three years to ten years
     and the interest rate was reduced from 7.50% to 6.90%.

(D)  No prepayment until October 1, 2000. From October 1, 2000 through September
     30, 2007, the prepayment fee is the greater of 1% of the outstanding
     principal balance or Treasury Yield Maintenance (as defined). Beginning
     October 1, 2007, the prepayment fee is Treasury Yield Maintenance. The loan
     may be repaid at par during the last three months of the loan.

(E)  No prepayment until September 30, 1998. Prepayable thereafter, with a
     prepayment fee equal to the greater of 1% of the outstanding principal
     balance or Treasury Yield Maintenance (as defined). Prepayment without
     fee during the six months prior to the maturity date.

(F)  Interest only payments through January 1, 2001, with a 25-year amortization
     schedule thereafter.

                                     10 of 30
<PAGE>

(G)  No prepayment until July 1, 1999. Prepayable thereafter with a 
     prepayment fee equal to the greater of 1% of the outstanding 
     principal balance or Treasury Yield Maintenance (as defined). 
     Prepayment without fee on or after three months prior to maturity date.

(H)  No prepayment until December 31, 1999. Prepayable thereafter with a 
     prepayment fee equal to the greater of 1% of the principal balance or 
     Treasury Yield Maintenance (as defined). Prepayment without fee during 
     the three months prior to the maturity date.

(I)  The three loans arising from the acquisition of several properties from
     DIHC are cross-collateralized, having the effect of forming a "collateral
     pool" for the underlying notes.

(J)  The collateral for this loan is a pledge of the $181.0 million first
     mortgage loan on Market Square which the Company purchased from PGGM.

(K)  While the face amount of the loan is $77,938,000, and the interest rate is
     9.5%, the Company is carrying the debt at $88,140,000, which is the market
     value of the loan at the time of the closing, less the amortization of
     principal and premium since closing, based upon a market interest rate for
     similar quality loans of 6.84%.

(L)  No prepayment until February 1, 2000. Prepayable thereafter with a 
     prepayment fee equal to the greater of 2% of the outstanding principal 
     balance or Treasury Yield Maintenance (as defined). The 2% maximum is 
     reduced by 0.25% per annum thereafter until it reaches 1%. Prepayment 
     without fee during the 90 days prior to the maturity date.

(M)  On October 9, 1998, the Company completed the refinancing of the $80.0
     million mortgage on Corporate 500 Centre with Teachers Insurance and
     Annuity Association. As a result of the refinancing, the principal balance
     was increased to $90.0 million, the term of the loan was extended from 4.5
     years to 10 years and the interest rate was increased by three basis points
     to 6.66%.

(N)  The interest rate on the loan is LIBOR plus 100 basis points.

(O)  While the face amount of the loan is $32,842,000, and the interest rate is
     6.9%, the Company has recorded the debt at $33,171,000, which is the market
     value of the loan at the time of the closing, less the amortization of
     principal and premium since closing, based upon a market interest rate for
     similar quality loans of 6.70%.

(P)  No prepayment until March 15, 2001. Prepayable thereafter with a
     prepayment fee, if paid in full, equal to the greater of 1% of the
     amount being prepaid or Modified Yield Maintenance (as defined). If a
     partial prepayment is made, the prepayment fee is equal to Modified Yield
     Maintenance. Prepayment without fee during the 120 days prior to the
     maturity date.

(Q)  While the face amount of the loan is $28,841,000, and the interest rate is
     8.04%, the Company has recorded the debt at $30,109,000, which is the
     market value of the loan at the time of the closing, less the amortization
     of principal and premium since closing, based upon a market interest rate
     for similar quality loans of 6.70%.

(R)  No prepayment until July 1, 1998. Prepayable thereafter with 60 days notice
     to Lender, with a prepayment fee equal to the greater of 1% of the
     outstanding principal balance or Yield Maintenance (as defined).

(S)  Weighted-average interest rate and term of the Company's long-term
     debt.

Since most of the long-term debt is collateralized by property, there are
restrictive covenants that limit the total amount of indebtedness that can be
placed on individual properties.

                                    11 of 30
<PAGE>

6.   CREDIT FACILITY

     The Company has a $350 million Revolving Credit Facility with Bankers 
Trust Company and The Chase Manhattan Bank for acquisitions and general 
working capital purposes as well as the issuance of letters of credit. The 
interest rate on the line of credit depends on the Company's leverage ratio 
at the time of borrowing and will be at a spread of 1.10% to 1.40% over LIBOR 
or the Prime Rate at the borrower's option. The letters of credit will be 
priced at the applicable Eurodollar credit spread. The line of credit expires 
on October 27, 2000. As of September 30, 1998, $148.0 million of the credit 
line was outstanding at a weighted-average interest rate of approximately 
6.79% as well as a $0.9 million letter of credit at a spread of 1.40%. The 
letter of credit  expired on November 2, 1998. The line of credit contains 
certain restrictive covenants including; (i) a limitation on the Company's 
dividend to 90% of funds from operations and 110% of cash available for 
distribution; (ii) the percentage of total liabilities to total property 
asset value (as defined) cannot exceed 55%; (iii) the ratio of adjusted 
EBITDA to interest expense may not be less than 2.25 to 1.00; (iv) the fixed 
charge coverage ratio may not be less than 1.75 to 1.00; and (v) the ratio of 
total property asset value to secured indebtedness may not be less than 2.50 
to 1.00.

7.   COMMITMENTS AND CONTIGENCIES

     The Company has entered into an agreement to purchase a 912,000 square foot
Class A office building, currently under development, in downtown Minneapolis,
Minnesota, for an estimated cost of approximately $160.0 million, of which
approximately $33.0 million has been spent to date. The project is scheduled to
be completed in the year 2000 and is approximately 50% pre-leased. The
development is to be financed through a construction loan by U.S. Bank. Upon
completion, the Company will retire the construction loan and acquire the
property from the developer for an amount to be determined by applying a
negotiated formula to in-place net operating income.

     On June 22, 1998, the Company entered into an agreement to merge with 
and acquire certain assets from Wilson, a private real estate developer, 
property manager and owner based in San Mateo, California. The Company will 
acquire the Wilson operating company and approximately 9.1 million square 
feet of Wilson's Class A office buildings in the San Francisco Bay Area, 
Southern California, Phoenix, Salt Lake City and Seattle (the "Wilson 
Acquisition"). The total purchase price for the Wilson Acquisition is 
estimated to be approximately $1.81 billion and is expected to close during 
the fourth quarter of 1998. See Footnote 13.

8.   STOCKHOLDERS' INVESTMENT

     The 7% Cumulative Convertible Preferred Stock is convertible into Common
Stock at $16.50 per share at any time after August 4, 2000.

     On April 21, 1997, Cornerstone completed its initial public offering
("IPO") in the United States of 16.1 million shares of Common Stock at a price
of $14 per share. The Company received net proceeds of approximately $207.8
million ($225.4 million gross proceeds less an underwriting discount of
approximately $14.1 million and expenses of approximately $3.5 million).

     On February 6, 1998, Cornerstone completed a secondary public offering 
of 14,375,000 shares of Common Stock at $18.25 per share. The shares were 
placed in the U.S. through a syndicate of seven investment banks led by 
Merrill Lynch & Co. Net proceeds to the Company were approximately $247.9 
million (approximately $262.3 million gross proceeds less an underwriting 
discount of approximately $13.7 million and expenses of approximately $0.7
million). The net proceeds were used to repay outstanding borrowings under 
the Revolving Credit Facility and for working capital purposes.


                                    12 of 30
<PAGE>

     The following tables summarize the stock options and restricted stock
grants for certain officers of the Company as of September 30, 1998:

<TABLE>
<CAPTION>

Stock Options

                    Options Granted   Exercise Price                               Options         Options
  Date of Grant     (No. of shares)   (per share)           Vesting(A)           Exercisable      Exercised
  -------------     ---------------   -----------           ----------           -----------      ---------
<S>                 <C>               <C>               <C>                      <C>              <C>
August, 1995 ....        637,500       $   14.30        33.3%/yr, 10yr term        637,500                 0
October, 1995 ...        150,000       $   14.30        33.3%/yr, 10yr term        100,000            10,500
March, 1997 .....        880,000       $   14.50        33.3%/yr, 10yr term        293,333                 0
November, 1997 ..         70,000       $   18.44        33.3%/yr, 10yr term              0                 0
February, 1998 ..         70,000       $   18.13        33.3%/yr, 10yr term              0                 0
February, 1998 ..        595,000       $   18.25        33.3%/yr, 10yr term              0                 0
March, 1998 .....        200,000       $   18.25        33.3%/yr, 10yr term              0                 0
                                                                                              
</TABLE>



Restricted Stock Grants

<TABLE>
<CAPTION>

                           Shares Granted           Value at Grant  
      Date of Grant        (No. of shares)          Date (per share)                        Vesting (B)
      -------------        ---------------          ----------------                        -----------
<S>                        <C>                      <C>                   <C>
August, 1995                     167,622                 $14.30           The grant will fully vest with respect to 13.333% on June
                                                                          30, 1996, 1997, 1998, 1999 and with respect to 46.668% on
                                                                          June 30, 2000.
March, 1997                      100,000                 $16.38           The grant will fully vest with respect to 13.333% on June
                                                                          30, 1998, 1999, 2000, 2001 and with respect to 46.668% on
                                                                          June 30, 2002.
November, 1997                    12,500                 $18.44           The grant will fully vest with respect to 13.333% on June
                                                                          30, 1998, 1999, 2000, 2001 and with respect to 46.668% on
                                                                          June 30, 2002.
March, 1998                       12,500                 $18.13           The grant will fully vest with respect to 13.333% on
                                                                          March 15, 1999, 2000, 2001, 2002 and with respect to
                                                                          46.668% on March 15, 2003.
March, 1998                       19,178                 $18.25           The grant will fully vest with respect to 13.333% on
                                                                          March 15, 1999, 2000, 2001, 2002 and with respect to
                                                                          46.668% on March 15, 2003.
</TABLE>
--------

(A)  The vesting schedule for the options were amended from 20%/yr, 10yr term to
     33.3%/yr, 10yr term on February 4, 1998.

(B)  Deferred compensation of approximately $4,842,000 is being amortized
     according to the respective amortization schedule for each vesting period
     noted above, with the unamortized balance of approximately $1,978,000 shown
     as a deduction from stockholders' investment. Regular dividends are paid
     on restricted stock.

9.   STOCKHOLDERS' AND UNITHOLDERS' DISTRIBUTIONS

     A cash dividend and Unitholder distribution of $0.30 per share/unit was 
declared for the first quarter of 1998 and paid on February 27, 1998, to 
Common Stockholders and Unitholders of record as of January 30, 1998. A cash 
dividend and Unitholder distribution of $0.30 per share/unit was declared for 
the second quarter of 1998 and paid on May 29, 1998, to Common Stockholders 
and Unitholders of record as of April 30, 1998. A cash dividend and 
Unitholder distribution of $0.30 per share/unit was declared for the third 
quarter of 1998 and paid on August 31, 1998, to Common Stockholders and 
Unitholders of record as of July 31, 1998.

                                    13 of 30
<PAGE>

10.  INCOME PER COMMON SHARE

     The tables below set forth the calculation of income per common share for
the three and nine months ended September 30, 1998 and 1997 (dollar amounts in
thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                            Three Months Ended
                                                          -------------------------------------------------------
                                                              September 30, 1998            September 30, 1997
                                                          ----------------------------    -----------------------
                                                              Basic        Diluted          Basic      Diluted
                                                          -------------- -------------    ----------- -----------
<S>                                                         <C>             <C>             <C>       <C>      
               Proceeds upon exercise of options            $    --         $  40,940       $    --   $  24,021
               Market price of shares
                    average for the respective period       $    --         $   15.91       $    --   $   17.31
               Treasury shares that could be 
                    repurchased (options)                        --             2,573            --       1,388
               Option shares outstanding                         --             2,592            --       1,668
               Weighted common stock equivalent
                    shares (Excess shares under option
                    over Treasury shares that could
                    be repurchased)                              --               157            --         280
               Weighted average common shares
                    outstanding                               101,574         101,574          45,804    45,804
                                                            ---------       ---------       --------- ---------
               Adjusted weighted average common
                    shares outstanding                        101,574         101,731          45,804    46,084


               Net income for the period                    $  18,958       $  18,958       $   8,076 $   8,076
               Income applicable to
                    preferred stock                         $   (875)       $   (875)       $   (875) $   (875)
                                                            ---------       ---------       --------- ---------
               Income available to 
                    common shares                           $  18,083       $  18,083       $   7,201 $   7,201
               Income per common share                      $    0.18       $    0.18       $    0.16 $    0.16

</TABLE>

<TABLE>
<CAPTION>
                                                                            Nine Months Ended
                                                          -------------------------------------------------------
                                                              September 30, 1998            September 30, 1997
                                                          ----------------------------    -----------------------
                                                              Basic        Diluted          Basic      Diluted
                                                          -------------- -------------    ----------- -----------
<S>                                                       <C>            <C>              <C>         <C>     
               Proceeds upon exercise of options          $   --         $ 40,940         $   --      $ 24,021
               Market price of shares                                                   
                   average for the respective period      $   --         $  17.29         $   --      $  16.14
               Treasury shares that could be                                            
                   repurchased (options)                      --            2,368             --         1,488
               Option shares outstanding                      --            2,592             --         1,668
               Weighted common stock equivalent                                         
                   shares (Excess shares under option                                   
                   over Treasury shares that could be                                   
                   repurchased)                               --              276             --           179
               Weighted average common shares                                           
                   outstanding                              98,312         98,312           33,494      33,494
                                                          --------       --------         --------    --------
               Adjusted weighted average common                                         
                   shares outstanding                       98,312         98,588           33,494      33,673
                                                                                        
               Net income for the period                  $ 60,964       $ 60,964         $ 21,666    $ 21,666
               Income applicable to                                                     
                   preferred stock                        $ (2,625)      $ (2,625)        $ (9,285)   $ (9,285)
                                                          --------       --------         --------    --------
               Income available to                                                      
                   common shares                          $ 58,339       $ 58,339         $ 12,381    $ 12,381
               Income per common share                    $   0.59       $   0.59         $   0.37    $   0.37
                                                                                        
</TABLE>

                                    14 of 30
<PAGE>

11.  SUPPLEMENTAL CASH FLOW INFORMATION

     Cash paid for interest was approximately $46,981,000 and $21,955,000 for
the nine months ended September 30, 1998 and 1997, respectively.

Non-Cash Investing and Financing Activities

     On January 5, 1998, the Company purchased the participation rights in the
cash flow and residual value of Tower 56 from the former participants for
307,692 shares of Common Stock.

     On January 28, 1998, the Company purchased Corporate 500 Centre, a complex
of four office buildings in Deerfield, Illinois. As part of the total purchase
price of approximately $150.0 million, the Company issued 822,794 UPREIT Units
priced at $18.50 per unit.

     On April 28, 1998, the Company purchased One Memorial Drive, an office
tower in Cambridge, Massachusetts. As part of the total purchase price of
approximately $112.5 million, the Company issued 3,428,571 shares of Common
Stock and 1,657,426 UPREIT Units, both priced at $17.50.

     On June 3, 1998, the Company purchased 201 California Street in San
Francisco, California, and Wilshire Palisades in Santa Monica, California. As
part of the total purchase price for the Properties of approximately $121.5
million, the Company assumed $64.6 million in debt and issued 1,665,663 UPREIT
Units priced at $17.50 per unit.

     On September 25, 1998, in conjunction with the refinancing of the One
Norwest Center mortgage, the Company incurred an extraordinary loss of $507,022,
which represented the unamortized deferred financing costs on the previous One
Norwest Center mortgage at the time of the refinancing.

12.  PRO FORMA FINANCIAL INFORMATION

     The pro forma financial information shown below is based on the 
consolidated historical statements of Cornerstone after giving effect to the 
acquisitions of 527 Madison Avenue, the DIHC Properties, Corporate 500 
Centre, One Memorial Drive, 201 California Street and Wilshire Palisades as 
if such acquisitions took place on January 1, 1998 and 1997, respectively. 
The pro forma financial information is presented for informational purposes 
only and may not be indicative of results that would have actually occurred 
had the acquisitions taken place at the date indicated. Also, they may not be 
indicative of the results that may be achieved in the future.

<TABLE>
<CAPTION>

            September 30,                              1998                 1997
            -------------                              ----                 ----
<S>                                               <C>                  <C>          
Pro forma total revenues                          $ 269,769,000        $ 246,576,000
Pro forma income before extraordinary items          63,165,000           68,080,000
Pro forma net income                                 60,896,000           68,026,000
Pro forma extraordinary loss per share                    (0.02)                0.00
Pro forma income per share                                 0.58                 0.83
</TABLE>

                                    15 of 30
<PAGE>

13.  OTHER MATTERS

     On June 22, 1998, the Company entered into an agreement to merge with 
and acquire certain assets from Wilson, a private real estate developer, 
property manager and owner based in San Mateo, California. The Company will 
acquire the Wilson operating company and approximately 9.1 million square 
feet of Wilson's Class A office buildings in the San Francisco Bay Area, 
Southern California, Phoenix, Salt Lake City and Seattle. The total purchase 
price for Wilson and its portfolio is expected to be approximately $1.81 
billion. At this price, it is anticipated that the Company will issue to 
Wilson and its investors approximately $635 million in Common Stock and 
UPREIT Units, at a stated price of $17.25 per share/unit, and pay cash for 
the remaining equity. In addition, the Company will assume or repay 
approximately $780 million of existing indebtedness currently held by Wilson. 
The cash needed for the transaction will be financed under the Revolving 
Credit Facility and from an expected sale of $200 million of Common Stock to 
PGGM, a 31% equity holder in the Company at September 30, 1998, at an agreed 
price of $17.25 per share. The consummation of the Wilson Acquisition is 
subject to the approval of the stockholders of the Company and the investors 
of Wilson, as well as other outstanding closing conditions. The Wilson 
investors consented to the transaction in September 1998. The Company's proxy 
statement has been filed and distributed to its stockholders. Upon approval 
of the transaction by the Company's stockholders, the transaction will close 
in the fourth quarter of 1998.

14.  SUBSEQUENT EVENTS

     A cash dividend and Unitholder distribution of $0.30 per share/unit was 
declared for the fourth quarter of 1998 to Common Stockholders and 
Unitholders of record as of October 30, 1998, to be paid on November 30, 1998.

     On November 4, 1998, a syndicate of banks led by BT Alex. Brown, Chase 
Securities, and NationsBank Montgomery Securities provided the Company with a 
$550 million line of credit for acquisitions and general working capital 
purposes. The interest rate on the line of credit depends on the Company's 
leverage ratio at the time of borrowing and will be at a spread of 1.10% to 
1.40% over LIBOR. These are the same terms as the Company's previous $350 
million line of credit, which was retired at the closing of the new line of 
credit. The $550 million line of credit expires on November 4, 2001. On 
November 4, 1998, the amount outstanding on the previous line of credit was 
transferred to the banks taking part in the syndicate providing the new line 
of credit.

     On November 6, 1998, the Company purchased an additional 14.29% partnership
interest in MSA for $4.0 million. Upon completion of the transaction, the
Company effectively owns 99.14% of the MSA entity, which has a 70% interest in
AALP. AALP owns and operates Market Square (see Footnote 3). The Company will 
consolidate Market Square in the fourth quarter.

                                    16 of 30
<PAGE>

Item 2

     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998


RESULTS OF OPERATIONS

Consolidation

     Cornerstone's principal source of income is rental revenues received 
through its investment in fourteen fee simple properties, six real estate 
partnerships and one mortgage. NWC, Third Partnership, 191 Peachtree, 222 
Berkeley and 500 Boylston have been consolidated because Cornerstone has a 
majority interest in the economic benefits and is or has the right to become 
managing general partner at its sole discretion. The Company has accounted 
for its investment in MSA using the equity method because it does not have 
sufficient control of the day to day operations of the partnership.

Property Results

     For the three and nine months ended September 30, 1998 and 1997, 
Property results can be summarized as follows (amounts in thousands):

<TABLE>
<CAPTION>

                                           For the three           For the three         For the nine        For the nine
                                            months ended            months ended         months ended        months ended
                                          September 30, 1998     September 30, 1997   September 30, 1998  September 30, 1997
                                         --------------------    ------------------   ------------------  ------------------

<S>                                             <C>                    <C>                  <C>                 <C>     
Office and Parking Rentals                      $83,227                $34,546              $239,767            $103,237
Less:
  Building Operating Expenses                    18,896                  7,660                52,947              22,693
  Real Estate Taxes                              12,034                  5,933                34,900              17,553
  Depreciation and Amortization                  15,702                  7,057                42,561              20,865
                                                -------                -------              --------             -------
Total Operating Expenses                         46,632                 20,650               130,408              61,111
                                                -------                -------              --------             -------
Total Property Income                           $36,595                $13,896              $109,359             $42,126
                                                -------                -------              --------             -------
                                                -------                -------              --------             -------

</TABLE>

     The increase in property income of $22.7 million for the three months 
ended September 30, 1998 as compared to the same period in 1997 was due to 
additional revenue of $22.6 million derived from 13 properties acquired since 
September 30, 1997. At the properties held during both periods (the "Existing 
Propoerties"), property income at One Norwest Center increased $0.4 million 
due to increased rental rates. The remaining increase of $0.1 million was 
caused by slight variances in property income at the existing properties. 
These increases were offset by a reduction in property income of $0.4 million 
at the Frick Building which was due to the sale of this building in April 
1998. 

     The increase in property income of $67.2 million for the nine months 
ended September 30, 1998 as compared to the same period in 1997 was due to 
the additional revenue of $65.9 million derived from 13 properties acquired 
since September 30, 1997 and an increase of $0.7 million in revenues from 527 
Madison Avenue because it was purchased in February 1997. At the Existing 
Properties, property income at One Norwest Center increased $0.2 million due 
to increased rental rates. Washington Mutual Tower increased $0.6 million due 
to increased rental rates and parking revenue. 125 Summer Street increased 
$0.6 million due to increased rental rates and the lease up of the former 
Gadsby and Hannah space which was vacant during the same period in 1997. 
These increases were offset by a reduction in property income of $0.6 million 
at the Frick Building which was due to the sale of this building in April 
1998. The remaining decrease of $0.2 million was caused by slight variances 
in property income at the other properties.

                                    17 of 30

<PAGE>

Earnings in Real Estate Joint Venture

    The earnings in real estate joint venture of approximately $10.1 million 
for the nine months ended September 30, 1998 was due to the acquisition of 
the mortgage loan and "buffer loan" on Market Square in October 1997 and the 
partnership interest in Market Square in January 1998. The amount is 
comprised of approximately $15.1 million of interest earned on the loans 
which is offset by an equity in loss pickup of approximately $5.0 million.

Interest and Other Income

     Interest and other income decreased to approximately $2.0 million for 
the three months ended September 30, 1998 from approximately $3.9 million for 
the three months ended September 30, 1997. These amounts primarily consist of 
interest earned from short-term investments, management fee income, lease 
cancellation payments and income from advisory contracts in 1997. The 
decrease was due to a reduction in interest income of $2.7 million on 
short-term investments due to the Company having excess cash in 1997 from its 
preferred stock placement that occurred in late 1996 as well as its IPO in 
April 1997, a reduction of $0.6 million due to the expiration of certain 
advisory contracts in 1997 and a reduction in lease cancellation income of 
$0.3 million. These amounts were offset by an increase of $0.8 million in 
tenant alteration income, a $0.4 million increase in management fee income 
and an increase of $0.5 million in other income.

     Interest and other income decreased to approximately $7.2 million for 
the nine months ended September 30, 1998 from approximately $8.4 for the nine 
months ended September 30, 1997. These amounts primarily consist of interest 
earned from a mortgage note receivable, short-term investments, a note 
receivable from a partner, management fee income and income from advisory 
contracts in 1997. The decrease was due to a reduction in interest income of 
$4.7 million on short-term investments due to the Company having excess cash 
in 1997 from its preferred stock placement that occurred in late 1996 as well 
as its IPO in April 1997, a reduction of $0.9 million due to the expiration 
of certain advisory contracts in 1997 and a reduction of $0.1 million in 
interest received from the note receivable from a partner due to the 
reduction in principal. These amounts were offset by an increase of $2.0 
million in tenant alteration income, an increase of $1.8 million due to the 
purchase of the mortgage note on Market Square in late 1997 and an increase 
of $0.7 million in management fee income.

Interest Expense

     Interest expense incurred by Cornerstone relating to its financing 
activities increased to approximately $16.1 million for the three months 
ended September 30, 1998 from approximately $7.4 million for the three months 
ended September 30, 1997. The increase in interest expense was due to $4.7 
million of interest expense on the purchase money loans from the DIHC 
transaction, an increase in interest expense of $0.2 million on the Revolving 
Credit Facility, an increase of $0.2 million in amortization of deferred 
financing costs, interest of $1.5 million on the Sixty State Street loan, 
interest of $1.3 million on the Corporate 500 Centre loan, interest of $0.5 
million on the 201 California Street loan and interest of $0.5 million on the 
Wilshire Palisades loan. These increases were offset by the decrease of $0.2 
million due to the refinancing of the One Norwest Center loan, as discussed 
below.

     Interest expense incurred by Cornerstone relating to its financing 
activities increased to approximately $47.7 million for the nine months ended 
September 30, 1998 from approximately $22.4 million for the nine months ended 
September 30, 1997. The increase in interest expense was due to $13.7 million 
of interest expense on the purchase money loans from the DIHC transaction, an 
increase in interest expense of $2.0 million on the Revolving Credit 
Facility, an increase of $0.6 million in amortization of deferred financing 
costs, interest of $4.6 million on the Sixty State Street loan, interest of 
$3.6 million on the Corporate 500 Centre loan, interest of $0.7 million on 
the 201 California Street loan and interest of $0.7 million on the Wilshire 
Palisades loan. These increases were offset by a decrease of $0.4 million due 
to the Term Loan interest and a decrease of $0.2 million due to the 
refinancing of the One Norwest Center loan, both as discussed below.

                                    18 of 30

<PAGE>

General and Administrative Expenses

     The aggregate amount of Cornerstone's general and administrative 
expenses have increased to approximately $3.2 million for the three months 
ended September 30, 1998 from approximately $1.9 million for the three months 
ended September 30, 1997. The increase in 1998 from 1997 of $1.3 million is 
due to the additional employees, space, systems and other support necessary 
to manage the substantial growth in assets of the Company during the most 
recent twelve-month period. Included in the increase is approximately $1.1 
million of accrued bonus expense which is expected to be paid upon 
consummation of the Wilson Acquisition.

     The aggregate amount of Cornerstone's general and administrative 
expenses have increased to approximately $8.7 million for the nine months 
ended September 30, 1998 from approximately $5.1 million for the nine months 
ended September 30, 1997. The increase in 1998 from 1997 of $3.6 million is 
due to the additional employees, space, systems and other support necessary 
to manage the substantial growth in assets of the Company during the most 
recent twelve-month period. Included in the increase is approximately $1.1 
million of accrued bonus expense which is expected to be paid upon 
consummation of the Wilson Acquisition.

Loss on Sale of Real Estate Assets

     On March 31, 1998, the Dearborn Land, an undeveloped parcel of land in 
Chicago that was acquired in October 1997 along with nine Class A office 
properties from PGGM and DIHC was sold for net proceeds of approximately 
$18.8 million, resulting in a loss of approximately $0.2 million.

     On April 29, 1998, the Company sold the Frick Building, located in 
Pittsburgh, PA, for net proceeds of approximately $26.7 million, resulting in 
a loss of approximately $2.1 million.

Minority Interest

     Minority interest increased to approximately $1.8 million for the three 
months ended September 30, 1998 from approximately $0.4 million for the three 
months ended September 30, 1997 due to the allocation of income to the 
Unitholders and the purchase of the partnership interests in 500 Boylston, 
222 Berkeley and 191 Peachtree.

     Minority interest increased to approximately $4.7 million for the nine 
months ended September 30, 1998 from approximately $1.4 million for the nine 
months ended September 30, 1997 due to the allocation of income to the 
Unitholders and the purchase of the partnership interests in 500 Boylston, 
222 Berkeley and 191 Peachtree.

Interest Rate Swaps

     During 1998, the Company had entered into a $80.0 million interest rate 
swap to protect it from interest rate fluctuations that could have affected 
its floating rate debt on Corporate 500 Centre. The swap effectively fixed 
the interest rate on the $80.0 million loan at 6.63%. This agreement was 
terminated in August 1998 at no cost to the Company. The swap was considered 
a hedge for federal income tax purposes.

                                    19 of 30

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow (dollar amounts in thousands)

<TABLE>
<CAPTION>

                                           For the nine months ended       For the nine months ended
Cash flow provided by (used in):               September 30, 1998              September 30, 1997
--------------------------------           -------------------------       ------------------------- 
<S>                                               <C>                              <C>       
Operating activities                              $   116,786                      $   43,472
Investing activities                                 (303,632)                        (74,161)
Financing activities                                  192,682                         140,760
Earnings to fixed charges ratio                          2.16                            1.39

</TABLE>

     Cash provided by operating activities increased to approximately $116.8 
million for the nine months ended September 30, 1998 from approximately $43.5 
million for the nine months ended September 30, 1997. The increase is 
primarily due to the cash flows from the interests in 13 properties acquired 
since the end of the third quarter of 1997.

     Cash used in investing activities increased to approximately $303.6 
million for the nine months ended September 30, 1998 from approximately $74.2 
million for the nine months ended September 30, 1997 due to the acquisition 
of Corporate 500 Centre for approximately $135.0 million (net of UPREIT 
Units), One Memorial Drive for approximately $23.5 million (net of Common 
Stock and UPREIT Units) and 201 California Street and Wilshire Palisades for 
approximately $28.1 million (net of assumed debt and UPREIT Units). Further 
adding to the increase was the net change in the investment in Market Square 
of approximately $7.1 million, an increase in deferred costs of approximately 
$141.0 million and other property additions of approximately $15.5 million. 
These investments were partially offset by the approximately $18.8 million 
and approximately $26.7 million in proceeds from the sale of the Dearborn 
Land and the Frick Building, respectively. In addition, these investments 
were partially offset by the receipt of approximately $1.1 million from the 
repayment of notes receivable. During 1997, the Company invested 
approximately $67.0 million in 527 Madison Avenue and approximately $8.1 
million in other property investments. These investments were slightly offset 
by the receipt of approximately $0.9 million from the repayment of notes 
receivable.

     Cash provided by financing activities increased to approximately $192.7 
million for the nine months ended September 30, 1998 from approximately 
$140.8 million for the nine months ended September 30, 1997. The increase was 
mainly due to the secondary offering proceeds of approximately $262.3 million 
compared to approximately $225.4 million received from the Company's IPO in 
1997, an increase in mortgage borrowings of approximately $47.4 million, a 
decrease in restricted cash of approximately $32.0 million and a decrease in 
stock and debt issuance costs of approximately $2.5 million. Further adding 
to the increase was a decrease in loan repayments of approximately $30.8 
million and a decrease in preferred distributions of approximately $6.7 
million. These amounts were offset by an increase in credit facility 
repayments versus credit facility borrowings of approximately $39.0 million, 
a decrease in proceeds from the dividend reinvestment plan of approximately 
$3.4 million, an increase in distributions to minority partners of 
approximately $4.3 million, an increase in net swap termination and debt 
prepayment costs of approximately $1.6 million and an increase in dividends 
paid of approximately $56.1 million.

     The ratio of earnings to fixed charges and dividends on preferred stock 
increased to 2.16 times at September 30, 1998 from 1.39 times at September 
30, 1997 due to the substantial reduction of the Company's leverage ratio and 
the conversion of the 8% preferred shares into Common Stock.

Funds From Operations

     The Company calculates Funds from Operations ("FFO") based upon guidance 
from the National Association of Real Estate Investment Trusts ("NAREIT"). 
FFO is defined as net income, excluding gains or losses from debt 
restructuring and sales of property, plus depreciation and amortization, 
after adjustments for unconsolidated joint ventures. The Company has adjusted 
1997 FFO by the net gain on interest rate swap due to the non-cash nature of 
this item.

     Industry analysts generally consider FFO to be an appropriate measure of 
performance of a REIT such as Cornerstone. FFO does not represent cash 
generated from operating activities in accordance with generally accepted 
accounting principles and, therefore, should not be considered a substitute 
for net income as a measure of performance or a substitute for cash flow from 
operations as a measure of liquidity calculated in accordance with generally 
accepted accounting principles.

                                    20 of 30

<PAGE>

The Company believes that FFO is helpful to investors as a measure of the
performance of an equity REIT because, along with cash flows from operating
activities, financing activities and investing activities, it provides investors
an understanding of the ability of the Company to generate earnings from its 
recurring operations, after the payment of all administrative costs and 
interest expense. For cash flows from operating, financing and
investing activities, see the Condensed Consolidated Statements of Cash Flows
included in the Condensed Consolidated Financial Statements which are part of
this report.

     The Company no longer reports free and deferred rental income as an 
adjustment to FFO because this is not part of the industry standard. 
Therefore, included in FFO for the three months ended September 30, 1998 is 
an increase of approximately $3,483,000 and a decrease of approximately 
$38,000 for the three months ended September 30, 1997, for free and deferred 
rental income (after adjustment for minority interest). Included in FFO for 
the nine months ended September 30, 1998 and 1997 is an increase of 
approximately $10,392,000 and $746,000, respectively, for free and deferred 
rental income (after adjustment for minority interest).

     The table below sets forth the adjustments which were made to the net 
income of the Company in the calculation of FFO for the three and nine month 
periods ended September 30, 1998 and 1997, respectively (amounts in 
thousands):

                            Funds From Operations (1)
<TABLE>
<CAPTION>

                                           Three Months            Three Months           Nine Months           Nine Months
                                              Ended                   Ended                  Ended                 Ended
                                        September 30, 1998      September 30, 1997     September 30, 1998    September 30, 1997
                                        ------------------      ------------------     ------------------    ------------------
<S>                                            <C>                    <C>                    <C>                   <C>     
Net income                                     $ 18,958               $  8,076               $ 60,964              $ 21,666

NAREIT adjustments:
   Depreciation and amortization (2)             15,702                  7,057                 42,561                20,865
   Realized/unrealized gain on swaps                  0                      0                      0                   (99)
   Minority adjustments                            (407)                  (307)                (1,415)               (1,044)
   Unconsolidated depreciation                    1,380                      0                  3,554                     0
   Loss on sale of real estate assets               127                      0                  2,324                     0
   Extraordinary losses/swap losses               2,269                      0                  2,269                    54

Other adjustments:
   Amortization on rent notes                       387                    346                  1,133                   903
   Minority interest allocated to             
    unitholders                                     780                      0                  1,426                     0  
                                               --------               --------               --------              --------

Funds from operations                            39,196                 15,172                112,816                42,345

Interest expense on convertible note                200                    199                    604                   592
                                               --------               --------               --------              --------

Funds from operations available for            
   diluted shares                              $ 39,396               $ 15,371              $ 113,420              $ 42,937
                                               --------               --------               --------              --------
                                               --------               --------               --------              --------
</TABLE>

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

(1) Although the Company believes that this table is a full and fair
    presentation of the Company's FFO, similarly captioned items may be defined
    differently by other REITs, in which case direct comparisons may not be
    possible.

(2) The depreciation and amortization adjustment does not include amortization
    of deferred financing costs and depreciation of non-real estate assets in
    accordance with guidance from NAREIT.


                                    21 of 30

<PAGE>

     The increase in FFO for the three and nine month periods ended September 
30, 1998 as compared to the same periods in 1997 is primarily due to the 
acquisition of interests in 14 properties since the end of the February of 
1997.

     The Company will seek to continue increasing FFO and the value of its 
property portfolio by acquiring additional properties that the Company 
believes will produce favorable returns. As part of its ongoing business, the 
Company periodically engages in discussions with public and private real 
estate entities regarding possible portfolio or asset acquisitions or 
business combinations.

Capital Stock Transactions

     On January 31, 1997, through a dividend reinvestment plan available to 
its German stockholders, Cornerstone received proceeds of approximately $3.7 
million and issued an additional 243,907 shares of Common Stock to such 
stockholders.

     On April 21, 1997, the Company received approximately $225.4 million 
gross proceeds from the public placement of 16,100,000 new shares of Common 
Stock at a price of $14.00 per share and listed on the New York Stock 
Exchange through underwriters led by Merrill Lynch & Co. The net proceeds 
were used as partial consideration for the purchase of the DIHC Properties.

     On April 30, 1997, through a dividend reinvestment plan available to its 
German stockholders, Cornerstone received proceeds of approximately $2.2 
million and issued an additional 141,733 shares of Common Stock to such 
stockholders.

     On July 25, 1997, the 1,148,276 shares of Redeemable Preferred stock 
outstanding at the time were converted into 11,482,760 shares of Common 
Stock. The contractual conversion was based upon meeting a $16.00 twenty-day 
average price per share of Common Stock.

     On July 31, 1997, through a dividend reinvestment plan available to its 
German stockholders, Cornerstone received proceeds of approximately $2.6 
million and issued an additional 175,796 shares of Common Stock to such 
stockholders.

     On October 27, 1997, the Company increased the authorized shares from 
115,000,000 shares of capital stock, without par value, to 265,000,000 shares 
of capital stock, without par value, of which 15,000,000 shares were 
preferred stock and 250,000,000 shares were Common Stock.

     On October 28, 1997, as consideration for the acquisition of the DIHC 
Properties, Cornerstone issued 34,185,500 shares of Common Stock to DIHC and 
PGGM as compensation for the acquisition of interests in nine Class A office 
buildings and an undeveloped parcel of land.

     On October 31, 1997, through a dividend reinvestment plan available to 
its German stockholders, Cornerstone received proceeds of approximately $2.5 
million and issued an additional 134,577 shares of Common Stock to such 
stockholders.

     On January 5, 1998, the Company purchased the participation rights in 
the cash flow and residual value of Tower 56 from the former participants for 
307,692 shares of Common Stock.

     On February 6, 1998, Cornerstone completed a secondary public offering of
14,375,000 shares of Common Stock at $18.25 per share. The shares were placed
in the U.S. through a syndicate of seven investment banks led by Merrill
Lynch & Co. Net proceeds to the Company were approximately $247.9 million
(approximately $262.3 million gross proceeds less an underwriting discount of 
approximately $13.7 million and expenses of approximately $0.7 million). 
The net proceeds were used to repay the Company's acquisition line of credit
and for working capital purposes.

                                    22 of 30

<PAGE>

     On February 27, 1998, through a dividend reinvestment plan available to 
its German stockholders, Cornerstone received proceeds of approximately $2.0 
million and issued an additional 109,007 shares of Common Stock to such 
stockholders.

     On April 28, 1998, the Company issued 3,428,571 shares of Common Stock 
to Prudential Securities as partial consideration for the acquisition of One 
Memorial Drive.

     On May 20, 1998, the Company increased the number of authorized 
Preferred Stock from 15,000,000 shares to 65,000,000 shares.

     On May 29, 1998, through a dividend reinvestment plan available to its 
German stockholders, Cornerstone received proceeds of approximately $1.8 
million and issued an additional 98,487 shares of Common Stock to such 
stockholders.

     On August 31, 1998, through a dividend reinvestment plan available to 
its German stockholders, Cornerstone received proceeds of approximately $1.5 
million and issued an additional 94,610 shares of Common Stock to such 
stockholders.

Mortgage Indebtedness

     On October 27, 1997, the Company entered into three mortgage loans with 
PGGM and its wholly-owned subsidiary DIHC as purchase money financing for the 
DIHC Properties. The mortgages, which are cross-collateralized, encumber 
TransPotomac Plaza 5, Charlotte Plaza, 527 Madison Avenue, One Lincoln 
Centre, 200 Galleria and the first mortgage note on Market Square. These 
mortgages total $250.0 million and are interest only with no prepayment 
rights. The first loan has a $65.0 million principal balance, bears interest 
at a rate of 7.28% and matures in October 2000. Upon repayment of this loan, 
PGGM will release the liens on TransPotomac Plaza 5 and Charlotte Plaza. The 
second loan has a $65.0 million principal balance, bears interest at a rate 
of 7.47% and matures in October 2004. Upon repayment of this loan, PGGM will 
release the liens on 527 Madison Avenue and One Lincoln Centre. The third 
loan has a $120.0 million principal balance, bears interest at 7.54% and 
matures in October 2007. Upon repayment of this loan, PGGM will release the 
liens on Market Square and 200 Galleria.

     On December 31, 1997, the Company purchased the second mortgage on Sixty 
State Street in Boston, MA.  The property has a first mortgage in the amount 
of approximately $78.4 million, which matures in January 2005. The loan 
requires amortization based on a 30-year schedule and bears interest at a 
rate of 9.5%. While the face amount of the first mortgage is $77.9 million, 
and the interest rate is 9.5%, the Company is carrying the debt at $88.1 
million, which is the market value of the loan at the time of the closing, 
less the amortization of principal and premium since closing, based upon a 
market interest rate for similar quality loans of 6.84%.

     On January 28, 1998, the Company entered into an $80.0 million first 
mortgage on Corporate 500 Centre with Bankers Trust Company. The loan bears 
interest at a rate of LIBOR plus 1.0% and matures in July 2002.

     On June 3, 1998, the Company assumed the mortgage on 201 California Street 
in San Francisco, CA. The loan requires amortization based on a 30-year 
schedule and bears interest at a rate of 6.9%. While the face amount of the 
loan is $32.8 million, and the interest rate is 6.9%, the Company is carrying 
the debt at $33.2 million, which is the market value of the loan at the time 
of the closing, less the amortization of principal and premium since closing, 
based upon a market interest rate for similar quality loans of 6.7%.


                                    23 of 30

<PAGE>

     On June 3, 1998, the Company assumed the mortgage on Wilshire Palisades 
in Santa Monica, CA. The loan requires amortization based on a 30-year 
schedule and bears interest at a rate of 8.04%. While the face amount of the 
loan is $28.8 million, and the interest rate is 8.04%, the Company is 
carrying the debt at $30.1 million, which is the market value of the loan at 
the time of the closing, less the amortization of principal and premium since 
closing, based upon a market interest rate for similar quality loans of 6.7%.

     On September 25, 1998, the Company completed the refinancing of the 
$96.1 million mortgage on One Norwest Center with CIGNA and Mass Mutual. As a 
result of the refinancing, the principal balance was increased to $98.5 
million, the term of the loan was extended from three years to ten years and 
the interest rate was reduced from 7.50% to 6.90%.

     On October 9, 1998, the Company completed the refinancing of the $80.0 
million mortgage on Corporate 500 Centre with Teachers Insurance and Annuity 
Association. As a result of the refinancing, the principal balance was 
increased to $90.0 million, the term of the loan was extended from 4.5 years 
to 10 years and the interest rate was increased by three basis points to 
6.66%.

Other Indebtedness

     On August 8, 1995, the existing $32.5 million loan (the "Term Loan") was 
extended through December 31, 2003 and assigned to Deutsche Bank AG London at 
an interest rate of 5%. The Term Loan had a $32.5 million balance at December 
31, 1996. The loan was prepaid on March 18, 1997, since, under its terms, it 
was required to be prepaid upon Cornerstone's IPO in the United States. The 
Company has no long-term debt maturing until 2000.

     On October 27, 1997, the Company entered into a three-year, $350.0 
million acquisition line of credit syndicated by Bankers Trust Company and 
The Chase Manhattan Bank. The line bears interest at a rate of LIBOR plus 
1.10% to 1.40% depending on the Company's then current leverage ratio. As of 
September 30, 1998, $148.0 million of the credit line was outstanding at a 
weighted-average interest rate of approximately 6.79%. The line is also 
available for the issuance of standby letters of credit.

Stockholders' and Unitholders' Distributions

     Cornerstone intends to distribute at least 95% of its taxable income to 
maintain its qualification as a REIT. The Company anticipates that FFO will 
exceed taxable income for the foreseeable future. Cornerstone's distribution 
policy is to pay distributions based upon FFO, less prudent reserves. The 
Company paid distributions of $0.30 per share/unit to all stockholders and 
Unitholders on February 27, 1998 (to stockholders and Unitholders of record 
as of January 30, 1998). The Company paid distributions of $0.30 per share/unit
to all stockholders and Unitholders on May 29, 1998 (to stockholders and 
Unitholders of record as of April 30, 1998). The Company paid distributions of 
$0.30 per share/unit to all stockholders and Unitholders on August 31, 1998 (to
stockholders and Unitholders of record as of July 31, 1998).

     At the present time, the Company is current in the payment of all 
preferred dividends.

Liquidity

     At September 30, 1998, the Company had approximately $30.6 million in 
cash and cash equivalents and approximately $5.3 million in restricted cash. 
Restricted cash is being held by the mortgage servicer for the One Norwest 
Center, Washington Mutual Tower and Wilshire Palisades mortgage loans. 
Cornerstone also had available $202.0 million under its working capital line 
of credit for general corporate purposes. In addition, Cornerstone 
anticipates it will receive distributions from its real estate partnerships, 
rental income from its fee owned properties and interest income from its 
mortgages on a monthly basis which will be used to cover normal operating 
expenses and pay distributions to its stockholders and Unitholders. Based 
upon its cash reserves and other sources of funds including its $350.0 
million line of credit, Cornerstone has sufficient liquidity to meet its cash 
requirements for the foreseeable future.

                                    24 of 30

<PAGE>

Other Matters

General
-------
     The Company is not aware of any environmental issues at any of its 
properties. The Company believes it has sufficient insurance coverage at each 
of its properties. A majority of the Company's leases with the majority of its 
tenants require the tenants to pay most operating expenses and increases in 
common area maintenance expenses, which reduces the Company's exposure to 
increases in costs and operating expenses resulting from inflation.

Recently Issued Accounting Standards 
------------------------------------
     During 1998, the Financial Accounting Standards Board issued Statement of 
Financial Accounting Standard No. 133 "Accounting for Derivative Instruments 
and Hedging Activities" ("SFAS 133"), which is effective for fiscal years 
beginning after June 15, 1999. SFAS 133 establishes a new model for 
accounting for derivatives and hedging activities and supersedes and amends a 
number of existing standards. In addition, the Accounting Standards Executive 
Committee of the American Institute of Certified Public Accountants issued 
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" 
("SOP 98-5") and Statement of Position 98-1, "Accounting for the Costs of 
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which 
are effective for fiscal years beginning after December 15, 1998. SOP 98-5 
requires that certain costs incurred in conjunction with start-up activities 
be expensed. SOP 98-1 provides guidance on whether the costs of computer 
software developed or obtained for internal use should be capitalized or 
expensed. Management believes that when the Company adopts SFAS 133, SOP 98-5 
and SOP 98-1 they will not have a significant impact on the Company's 
financial statements.

     During the first quarter of 1998, the Company adopted the Emerging 
Issues Task Force of the Financial Accounting Standards Board release Issue 
No. 97-11, "Accounting for Internal Costs Relating to Real Estate Property 
Acquisitions" ("EITF 97-11"). EITF 97-11 requires that the internal 
pre-acquisition costs of identifying and acquiring operating property be 
expensed as incurred. The adoption of EITF 97-11 did not have a material 
impact on the Company's financial statements.

     During the first quarter of 1998, the Company also adopted the Financial 
Accounting Standards Board's Statement of Financial Accounting Standard No. 
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 specifies the 
presentation and disclosure requirements for comprehensive income which 
includes those items which have been formerly reported as a component of 
stockholders' equity. The adoption of SFAS 130 did not have a significant 
impact on the Company's financial statements.

Year 2000 Issue
---------------

     General      

     The Year 2000 Issue is the result of computer programs being written 
using two digits rather than four to define a specific year. Absent 
corrective actions, a computer program that has date sensitive software may 
recognize a date using "00" as the year 1900 rather than the year 2000. This 
could result in a system failure or miscalculations causing disruptions of 
operations, including, among other things, a temporary inability to process 
transactions, prepare financial statements, send tenant invoices, or engage 
in similar normal business activities.

     Readiness

     The Company's corporate business and technical information systems have 
been assessed as to Year 2000 compliance and functionality. Presently these 
systems are nearly complete with respect to required software or hardware 
changes. The Company anticipates that internal business and technical 
information Year 2000 compliance issues will be substantially remediated by 
the end of the second quarter of 1999.

     The Company has completed the identification and review of computer 
hardware and software suppliers and is in the process of verifying the Year 
2000 preparedness of third party property managers, suppliers, tenants, 
vendors and/or service providers that the Company has identified as critical.

                                    25 of 30

<PAGE>

     Cost

     The total historical and anticipated remaining costs for the Year 2000 
remediation are estimated to be immaterial to the Company's financial 
condition. The costs to date have been expensed as incurred and consist of 
immaterial internal staff costs and other expenses such as telephone and 
mailing costs. In addition, where the appropriate course of action includes 
replacement or upgrade of certain systems or equipment, the Company's review 
at this time indicates a minor cost to the Company. The "non-information 
technology building systems" that have thus far been identified as 
non-compliant are at or approaching the end of their useful lives and have 
been or will be replaced or upgraded in 1999 as a part of the normal 
operations and maintenance at the Company's properties.

     The Company does not anticipate delays in finalizing Year 2000 
remediation within remaining time schedules. However, third parties having a 
material relationship with the Company (e.g., property managers, utilities, 
financial institutions, governmental agencies, municipalities and major 
tenants) may be a potential risk based on their individual Year 2000 
preparedness which may not be within the Company's reasonable control. The 
Company is in the process of identifying, reviewing and logging the Year 2000 
preparedness of critical third parties.

     Anticipated completion of this review is December 31, 1998. Pending the 
results of that review, the Company will determine what course of action and 
contingencies will need to be made. There can be no assurance that the 
external Year 2000 issues will be resolved in 1999. If not resolved, such 
issues could have a material adverse impact on the Company's business, 
operating results and financial condition.

     Year 2000 Compliance Detail

     The Company's program addresses the Year 2000 issue with respect to the 
following: (i) the Company's information technology and operating systems, 
including its accounting and financial reporting systems; (ii) the Company's 
"non-information technology building systems", including building access, 
energy management, elevator systems, equipment and other infrastructure 
systems that may contain or use computer systems or embedded micro-controller 
technology; and (iii) certain systems of the Company's third party property 
managers, major suppliers and material service providers (insofar as such 
systems relate to the Company's business activities such as billing, 
financial reporting, payroll, health services, stock transfer services and 
alarm systems). As described below, the Company's Year 2000 program involves 
(a) an assessment of the Year 2000 problems that may affect the Company, (b) 
the development of remedies to address the problems discovered in the 
assessment phase, (c) the testing of such remedies and (d) the preparation of 
contingency plans to deal with worst case scenarios.

         Assessment Phase. As part of the internal assessment phase, the Company
has attempted to substantially identify all the major components of the systems
described above. In determining the extent to which such systems are vulnerable
to the Year 2000 issue, the Company is evaluating either directly or through its
third party managers purchased software applications and property operational
control systems, e.g., heating ventilation and air conditioning (HVAC), lighting
timers, alarms, fire, sewage and access. In addition, in the second quarter of
1998, the Company's third party managers began sending letters to the major
suppliers and service providers of the Company's buildings, requesting them to
provide assurance of existing or anticipated Year 2000 compliance by their
systems insofar as the systems relate to their activities with the Company. The
Company is requesting that all responses to the inquiries be returned to it no
later than December 31, 1998.

         Remediation and Testing Phase. Based upon the assessment and
remediation efforts to date, the Company has completed, tested and put on line
the Year 2000 compliance modification in all the software for all corporate
applications including accounting and financial reporting. All of the Company's
personal computers and associated applications and networking infrastructure are
Year 2000 compliant.


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<PAGE>

         The Company purchases primarily "off-the-shelf" versions of the
software used for spreadsheet analysis, database applications, word processing
systems and accounting, all of which are Year 2000 compliant. The Company's
corporate office phone, communication and data processing networks are Year 2000
compliant.

         Seven third-party property managers manage the Company's portfolio of
21 office properties. The Company is working closely with these managers to
assess the Year 2000 impact on the operations of the buildings. For the most
part, the systems reviewed by the Company have been found to be Year 2000
compliant. The reviewed systems include but are not limited to HVAC equipment,
building management systems, elevators, security and life safety systems. Those
systems that have been found not to be compliant are nearing the end of their
useful lives and are being replaced or upgraded in the normal course of
business.

         Contingency Plans. The Company intends to develop contingency plans to
handle its most reasonably likely worst case Year 2000 scenarios. These have not
yet been identified fully. The Company intends to complete its determination of
worst case scenarios after it has received and analyzed responses to
substantially all of the inquiries it has made of third parties. Following its
analysis, the Company intends to develop a timetable for completing its
contingency plans.

         Costs Related to the Year 2000 Issue. To date, the Company has 
incurred no material costs. Labor, mailing and phone costs attributed to the 
Year 2000 program are minimal. The Company currently estimates that to have 
all systems compliant it will incur some additional costs which are not 
quantifiable but believed to be not material to the Company's business. The 
"non-information technology building systems" that have thus far been 
identified as non-compliant and at or approaching the end of their useful 
lives will be replaced or upgraded as a part of the normal operations and 
maintenance at the Company's properties.

         Risks Related to the Year 2000 Issue. Although the Company's Year 2000
efforts are intended to minimize the adverse effects of the Year 2000 issue on
the Company's business and operations, the actual effects of the issue and the
success or failure of the Company's efforts described above cannot be known
until the year 2000. Failure by the Company's third party managers, major
suppliers, and other service providers to address adequately their respective
Year 2000 issues in a timely manner (insofar as such issues relate to the
Company's business) could have a material adverse effect on the Company's
business, results of operations and financial condition.

Wilson Acquisition
------------------
     On June 22, 1998, the Company entered into an agreement to merge 
with and acquire certain assets from Wilson, a private real estate developer, 
property manager and owner based in San Mateo, California. The Company will 
acquire the Wilson operating company and approximately 9.1 million square 
feet of Wilson's Class A office buildings in the San Francisco Bay Area, 
Southern California, Phoenix, Salt Lake City and Seattle. The total purchase 
price for Wilson and its portfolio is expected to be approximately $1.81 
billion. At this price, it is anticipated that the Company will issue to 
Wilson and its investors approximately $635 million in Common Stock and 
UPREIT Units, at a stated price of $17.25 per share/unit, and pay cash for 
the remaining equity. In addition, the Company will assume or repay 
approximately $780 million of existing indebtedness currently held by Wilson. 
The cash needed for the transaction will be financed under the Revolving 
Credit Facility and from an expected sale of $200 million of Common Stock to 
PGGM, a 31% equity holder in the Company at September 30, 1998, at an agreed 
price of $17.25 per share. The consummation of the Wilson Acquisition is 
subject to the approval of the stockholders of the Company and the investors 
of Wilson, as well as other outstanding closing conditions. The Wilson 
investors consented to the transaction in September 1998. The Company's proxy 
statement has been filed and distributed to its stockholders. Upon approval 
of the transaction by the Company's stockholders, the transaction will close 
in the fourth quarter of 1998.

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<PAGE>

Minneapolis Office Building Development
---------------------------------------
     The Company has entered into an agreement to purchase a 912,000 square 
foot Class A office building, currently under development, in downtown 
Minneapolis, Minnesota, for an estimated cost of approximately $160.0 
million, of which approximately $33.0 million has been spent to date. The 
project is scheduled to be completed in the year 2000 and is approximately 
50% pre-leased. The development is to be financed through a construction loan 
by U.S. Bank. Upon completion, the Company will retire the construction loan 
and acquire the property from the developer for an amount to be determined by 
applying a negotiated formula to in-place net operating income.

Subsequent Events

     1. A cash dividend and Unitholder distribution of $0.30 per share was 
declared for the fourth quarter of 1998 to Common Stockholders and 
Unitholders of record as of October 30, 1998, to be paid on November 30, 1998.

     2. On November 4, 1998, a syndicate of banks led by BT Alex. Brown, 
Chase Securities, and NationsBank Montgomery Securities provided the Company 
with a $550 million line of credit for acquisitions and general working 
capital purposes. The interest rate on the line of credit depends on the 
Company's leverage ratio at the time of borrowing and will be at a spread of 
1.10% to 1.40 % over LIBOR. These are the same terms as the Company's 
previous $350 million line of credit, which was retired at the closing of the 
new line of credit. The $550 million line of credit expires on November 4, 
2001. On November 4, 1998, the amount outstanding on the previous line of 
credit was transferred to the banks taking part in the syndicate providing 
the new line of credit.

     3. On November 6, 1998, the Company purchased an additional 14.29% 
partnership interest in MSA for $4.0 million. Upon completion of the 
transaction, the Company effectively owns 99.14% of the MSA entity, which has 
a 70% interest in AALP. AALP owns and operates Market Square. The Company 
will consolidate Market Square in the fourth quarter.


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<PAGE>

                           PART II - OTHER INFORMATION

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On August 31, 1998, through a dividend reinvestment plan available to all German
shareholders, the Company issued 94,610 shares of Common Stock to such
shareholders in lieu of paying cash dividends in the aggregate amount of
$1,476,000. Such shares were issued and sold to persons outside the United
States and were not registered under the Securities Act.



Item 6.   EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits: 


     1)   Exhibit 2.1: Contribution Agreement and Agreement and Plan of Merger
          dated as of June 22, 1998 (incorporated by reference to Annex A to 
          the Company's Proxy Statement filed with the Commission on 
          November 13, 1998)

     2)   Exhibit 12.1: Statement of Computation of Earnings to Fixed Charges

     3)   For EDGAR filing purposes only, this report contains Exhibit 27,
          Financial Data Schedule

     4)   Exhibit 99.1: Supplemental Information to Quarterly Earnings Release

(b)  Reports on Form 8-K:

     1.   Form 8-K dated August 26, 1998

          Item 2 - Acquisition or Disposition of Assets. Press releases
                              announcing Cornerstone's acquisition of One 
                              Memorial Drive, 201 California and Wilshire 
                              Palisades.

          Item 7 - Financial Statements and Exhibits. Income statements for One
                              Memorial Drive, 201 California and Wilshire 
                              Palisades, and financial statements reflecting 
                              the acquisition of same.

     2.   Form 8-K/A dated September 4, 1998

          Item 7 - Financial Statements and Exhibits. Consents of Independent
                              Auditors to include their opinions in various 
                              previously filed Cornerstone registration 
                              statements and reports.





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<PAGE>

                                   SIGNATURES

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


                              CORNERSTONE PROPERTIES INC.
                              (Registrant)


                              By: /s/ John S. Moody                          .
                                  --------------------------------------------
                                  John S. Moody, Chairman and CEO

                              Date:  November 16, 1998

                              By: /s/ Kevin P. Mahoney                       .
                                  --------------------------------------------
                                  Kevin P. Mahoney, Senior Vice President 
                                        and Chief Financial Officer
                                        (Principal Financial Officer)

                              Date:  November 16, 1998



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