<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
              OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
                   For the fiscal year ended December 31, 1996

                          Commission file number 1-8594

                         PRESIDENTIAL REALTY CORPORATION
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

          DELAWARE                                     13-1954619
------------------------------------------         --------------------
(State or other jurisdiction of                    (I.R.S. Employer
   incorporation or organization)                  Identification No.)

180 South Broadway, White Plains, New York                10605
------------------------------------------         ---------------------
  (Address of principal executive offices)              (Zip Code)

Registrant's telephone number, including area code 914-948-1300

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

                                                Name of each exchange on
      Title of each class                       which registered
      -------------------                       ------------------------

Class A Common Stock                         American Stock Exchange
----------------------------                 ---------------------------

Class B Common Stock                         American Stock Exchange
----------------------------                 ---------------------------

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

                                      None
--------------------------------------------------------------------------------
                                (Title of class)

      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 the filing requirements for at least the past 90
days.  Yes   |x|         No |_|

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

      The aggregate market value of voting stock held by nonaffiliates of the
registrant was $21,202,000 at March 7, 1997.

      The number of shares outstanding of each of the registrant's classes of
common stock on March 7, 1997 was 478,940 shares of Class A common and 3,074,661
shares of Class B common.

      Documents Incorporated by Reference: The Company's definitive Proxy
Statement for its Annual Meeting of Shareholders to be held on June 12, 1997,
which Proxy Statement will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A, is incorporated by reference into Part III of this
Form 10-K.
<PAGE>   2

                         PRESIDENTIAL REALTY CORPORATION


                                      INDEX



FACING PAGE......................................................  1

INDEX............................................................  2

PART I

      Item 1.     Business.......................................  3
      Item 2.     Properties..................................... 21
      Item 3.     Legal Proceedings............. ................ 24
      Item 4.     Submission of Matters to a Vote of
                    Security Holders............................. 24

PART II

      Item 5.     Market for the Registrant's Common Equity
                    and Related Stockholder Matters.............. 24
      Item 6.     Selected Financial Data........................ 26
      Item 7.     Management's Discussion and Analysis of
                    Financial Condition and Results of
                    Operations................................... 28
      Item 8.     Financial Statements and Supplementary Data.... 39
      Item 9.     Changes in and Disagreements with Accountants
                    on Accounting and Financial Disclosure ...... 39

PART III

      Item 10.    Directors and Executive Officers of the
                    Registrant................................... 39
      Item 11.    Executive Compensation......................... 39
      Item 12.    Security Ownership of Certain Beneficial
                    Owners and Management........................ 39
      Item 13.    Certain Relationships and Related Transactions. 39


PART IV

      Item 14.    Exhibits, Financial Statement Schedules, and
                    Reports on Form 8-K.......................... 39

Table of Contents to Consolidated Financial Statements........... 44


                                      2
<PAGE>   3

ITEM 1.  BUSINESS

(a)   General

Presidential Realty Corporation is a Delaware corporation organized in 1983 to
succeed to the business of a company of the same name which was organized in
1961 to succeed to the business of a closely held real estate business founded
in 1911. The terms "Presidential" or the "Company" refer to the present
Presidential Realty Corporation or its predecessor company of the same name and
to any subsidiaries. Since 1982 the Company has elected to be treated as a real
estate investment trust ("REIT") for Federal and State income tax purposes. See
Qualification as a REIT.

The Company's principal assets fall into the following three general categories:

      (i) The largest portion of the Company's assets consists of notes
      receivable, which are reflected on the Company's Consolidated Balance
      Sheet at December 31, 1996 as "Mortgage portfolio: sold properties
      (accrual and impaired)". The $61,182,593 aggregate principal amount of
      these notes have been reduced by $14,088,366 of discounts (which reflect
      either the difference between the stated interest rates on the notes and
      the market interest rates at the time the notes were accepted or discounts
      received on the purchase of notes) and $19,535,536 of gains on sales which
      have been deferred. See Note 1-D and 1-E of Notes to Consolidated
      Financial Statements. Accordingly, the net carrying value of the Company's
      "Mortgage portfolio: sold properties" was $27,558,691 at December 31, 1996
      which includes $5,613,041 of wrapped mortgage debt.

      Included in this category is a note having an outstanding principal
      balance of $14,650,867 at December 31, 1996 secured by a first mortgage on
      1,017 condominium units at Fairfield Towers in Brooklyn, New York (the
      "Fairfield Towers First Mortgage"). At December 31, 1996 the net carrying
      value of this note was $11,179,548 after deducting a discount of
      $3,471,319. The Fairfield Towers First Mortgage was acquired by the
      Company in the fourth quarter of 1996 for a purchase price of $11,150,867
      which reflected a $3,500,000 discount. See Loans and Investments below and
      Note 2 of Notes to Consolidated Financial Statements. The Company also
      holds a subordinate note secured by the Fairfield Towers condominium units
      (the "Fairfield Towers Second Mortgage") which the Company received in
      1984 when it sold the Fairfield Towers property to the present owner.


                                      3
<PAGE>   4

      All of the loans included in this category of assets were in good standing
      at December 31, 1996 with the exception of the Fairfield Towers Second
      Mortgage. This loan has been classified as an impaired loan in accordance
      with Statement of Financial Accounting Standards ("SFAS") No. 114,
      "Accounting by Creditors for Impairment of a Loan", which was adopted by
      the Company as of January 1, 1995. Prior to the adoption of SFAS No. 114,
      the Fairfield Towers Second Mortgage was classified as a nonaccrual loan.

      The Fairfield Towers Second Mortgage, which has an outstanding principal
      balance of $14,659,841 at December 31, 1996, has been in nonaccrual status
      since the fourth quarter of 1991. The net carrying value of this note is
      $1,404,764, after discount and deferred gain in the amount of $13,255,077.
      Income with respect to this loan is recognized only to the extent that
      payments are actually received. See Loans and Investments.

      While notes reflected under "Mortgage portfolio: sold properties (accrual
      and impaired)" consist primarily of notes received from sales of real
      properties previously owned by the Company, this category of assets also
      includes the $14,650,867 Fairfield Towers First Mortgage purchased in 1996
      and notes in the aggregate principal amount of $1,464,076 which relate to
      sold cooperative apartments, the majority of which were either acquired by
      the Company in connection with the settlement agreement executed in
      November, 1991 (the "Settlement Agreement") with Ivy Properties, Ltd. and
      its affiliates (collectively "Ivy") or obtained as a result of sales of
      cooperative apartments which the Company received pursuant to the
      Settlement Agreement. See Relationship with Ivy Properties, Ltd. below.

      (ii) A smaller portion of the Company's assets consists of notes
      receivable in the aggregate principal amount of $2,543,541 from loans made
      to Ivy in connection with the conversion of apartment buildings to
      cooperative ownership or the sales in 1981 and 1984 by the Company to Ivy
      of two apartment projects. These loans are reflected on the Company's
      Consolidated Balance Sheet at December 31, 1996 as "Mortgage portfolio:
      related parties (accrual and impaired)". The principal amounts of these
      notes have been reduced by discounts of $145,915 and deferred gains of
      $1,567,400 and, accordingly, these notes have a net carrying value at
      December 31, 1996 of $830,226. Management believes that it holds
      sufficient collateral to protect its interests in all of the outstanding
      loans to Ivy to the extent of the net carrying value of these loans.

                                   4
<PAGE>   5

      At December 31, 1996, all of the loans due from related parties were in
      good standing except for the Overlook loan, a nonrecourse loan made to Ivy
      in connection with the sale of real property previously owned by the
      Company. This loan has been in default since 1990 and is classified as an
      impaired loan. At December 31, 1996, this loan had a carrying value of
      $1,567,400 and a net carrying value of zero after a deferred gain of
      $1,567,400. See Relationship with Ivy Properties, Ltd., and Notes 2 and 19
      of Notes to Consolidated Financial Statements.

      (iii) The Company owns equity interests in eight rental properties and one
      parcel of land. These properties have an historical cost of $25,369,405,
      less accumulated depreciation of $5,680,108, resulting in a net carrying
      value of $19,689,297. See Properties below.

      In addition to the above mentioned general categories, at December 31,
      1996, Presidential also had $588,683 in foreclosed properties. These
      foreclosed properties were acquired by the Company in satisfaction of
      loans due to Presidential and are carried at the lower of cost or
      estimated fair value (net of estimated costs to sell). See Management's
      Discussion and Analysis of Financial Condition and Results of Operations
      and Notes 4 and 19 of Notes to Consolidated Financial Statements.

Under the Internal Revenue Code of 1986, as amended (the "Code"), a REIT which
meets certain requirements is not subject to Federal income tax on that portion
of its taxable income which is distributed to its shareholders, if at least 95%
of its "real estate investment trust taxable income" (exclusive of capital
gains) is so distributed. Since January 1, 1982, the Company has elected to be
taxed as a REIT and has paid regular quarterly cash distributions. Total
dividends paid by the Company in 1996 were $.60 per share. While the Company
intends to operate in such a manner as to enable it to be taxed as a REIT, and
to pay dividends in an amount sufficient to maintain REIT status, no assurance
can be given that the Company will, in fact, continue to be taxed as a REIT, or
that distributions will be maintained at the current rate or that the Company
will have cash available to pay sufficient dividends in order to maintain REIT
status. See Qualification as a REIT and Market for the Registrant's Common
Equity and Related Stockholder Matters.

At December 31, 1996, the Company employed ten persons.

(b)   Investment Strategies

The Company's current overall investment strategy is to make


                                      5
<PAGE>   6

investments in real property which offer attractive current yields with
potential for capital appreciation. The Company's investment policy is not
contained in or subject to restrictions included in the Company's Certificate of
Incorporation or Bylaws, and there are no limits in the Company's Certificate of
Incorporation or Bylaws on the percentage of assets which it may invest in any
one type of asset or the percentage of securities of any one issuer which it may
acquire. The investment policy may, therefore, be changed by the Directors or
Officers of the Company without the concurrence of the holders of its
outstanding stock. However, to continue qualifying as a REIT, the Company must
restrict its activities to those permitted under the Code.
See Qualification as a REIT.

The Company's current primary investment strategies are as follows:

      (i)    Holding of Long Term Notes

      The Company holds and expects to continue to hold long term mortgage notes
      obtained from the sales of real property previously owned by the Company.
      These notes provide for balloon principal payments at varying times. The
      Company may in appropriate circumstances agree to extend and modify these
      notes. See the table set forth below under Loans and Investments.

      The capital gains from sales of real properties previously owned by the
      Company are recognized for income tax purposes on the installment method
      as principal payments are received. To the extent that such payments are
      received by Presidential, it may, as a REIT, either (i) elect to retain
      such payments, in which event it will be required to pay Federal and State
      income tax on the portion of the payments which represent capital gain, or
      (ii) distribute all or a portion of such payments to shareholders, in
      which event Presidential will not be required to pay taxes on the capital
      gain to the extent that it is distributed to shareholders. To the extent
      that Presidential retains such payments, the proceeds, after payment of
      any taxes, will be available for future investment. Presidential has not
      adopted a specific policy with respect to the distribution or retention of
      capital gains, and its decision as to any such gain will be made in
      connection with all of the circumstances existing at the time the gain is
      recognized. It should be noted that there can be no assurance that the
      balloon principal payments due in accordance with the purchase money notes
      will actually be made when due.

      (ii) Equity Properties

      The Company's current investment policy is focused on


                                   6
<PAGE>   7

      acquiring additional equity interests in income producing properties,
      principally moderate income apartment properties in the eastern United
      States. Although the Company's present intention is to acquire additional
      moderate income apartment properties, Presidential has in the past
      invested in other commercial properties, including office buildings,
      shopping centers and light industrial properties, and may do so in the
      future. Geographically, the Company expects to invest primarily in the
      eastern United States, although Presidential has in the past invested in
      other locations and may do so in the future. However, the Company's plans
      to expand its portfolio of real estate equities may be adversely affected
      by limitations on its ability to obtain funds for investment on
      satisfactory terms from external sources.

      Notwithstanding the fact that the Company's current investment policy is
      focused on acquiring additional equity interests in income producing
      properties, in 1996 the Company acquired the Fairfield Towers First
      Mortgage for a purchase price of $11,150,867, which reflected a discount
      of $3,500,000 from the $14,650,867 outstanding principal balance (see
      Loans and Investments). The Company decided to make such acquisition
      because management believed that the Company could obtain a substantial
      current return on the funds utilized for the acquisition of the Fairfield
      Towers First Mortgage and also protect its position as the holder of the
      Fairfield Towers Second Mortgage.

      (iii)   Cooperative/Condominium Conversion Loans

      During the 1980's, the Company's primary investment strategy for new
      investments was to make participating loans on apartment buildings which
      were in the process of being converted to cooperative or condominium
      ownership. All of these buildings were in the New York metropolitan area
      and many of these loans were to Ivy. In 1991, the Company entered into a
      Settlement Agreement with Ivy with respect to a number of loans previously
      made to Ivy, some of which were in default. See Relationship with Ivy
      Properties, Ltd. As part of the settlement arrangements, in 1991 and 1992
      Presidential received 191 cooperative apartments from Ivy in satisfaction
      of certain indebtedness. Most of these apartments were occupied by tenants
      whose right to remain in occupancy is protected by local rent laws. While
      many of these cooperative apartments have since been sold by Presidential
      (many of which were sold at discounted prices subject to the occupancy
      rights of existing tenants) at December 31, 1996, Presidential still owns
      53 cooperative apartments. Many of these remaining cooperative apartments
      generate a positive cash flow from rental operations.


                                      7
<PAGE>   8

      Although it may from time to time sell individual or groups of occupied
      apartments, Presidential generally intends to continue to hold these
      apartments until they become vacant and may, in some circumstances, rerent
      apartments free from rent regulations after they have become vacant.

      The Company is not currently making loans in connection with
      cooperative/condominium conversion projects.

      (iv)  Funding of Investments

      In the past, the Company has obtained funds to make loans and investments
      from excess cash from operations or capital transactions, loans from
      financial institutions secured by specific real property or from general
      corporate borrowings. Such loans have in the past been, and may in the
      future be, secured by real property and have recourse to Presidential.
      However, funds may not be readily available from these sources and such
      unavailability may limit the Company's ability to make new investments.
      See Management's Discussion and Analysis of Financial Condition and
      Results of Operations - Liquidity and Capital Resources.

(c)   Loans and Investments

The Company's portfolio of investments consists of the three types of assets
described under General above. At December 31, 1996, all of the loans included
in "Mortgage portfolio: sold properties" were current except for the Fairfield
Towers Second Mortgage. This $14,659,841 loan is classified as an impaired loan
in accordance with SFAS No. 114 and has a net carrying value of $1,404,764 at
December 31, 1996, after a discount of $7,765,964 and a deferred gain of
$5,489,113. The Company has determined that at this time no allowance for credit
losses is required for this loan because the net carrying value of the loan is
less than the fair value of the underlying collateral.

In the fourth quarter of 1996, the Company acquired the Fairfield Towers First
Mortgage, having an outstanding principal balance of $14,650,867, for a purchase
price of $11,150,867. In connection with the acquisition of the Fairfield Towers
First Mortgage, which was to become due in December of 1996, the maturity date
was extended to October 30, 2006. The Fairfield Towers First Mortgage, which is
nonrecourse except for certain limited personal guarantees made by certain of
the principals of the borrower, provides for principal repayments prior to
maturity upon the sale of individual condominium units in an amount equal to
substantially all of the net proceeds of sale (after payment of $2,916 per unit
to the holder of a $422,500 lien on the property, $3,000 per unit to
Presidential as holder of the Fairfield Towers Second Mortgage, $4,050 per unit
on account of past due real estate taxes and $5,917 per unit to fund various


                                      8
<PAGE>   9

obligations to the condominium association), which principal repayments have
averaged approximately $27,000 per unit over the sale of the first 135 units.
All accrued interest on this mortgage has been paid to date. However, there are
approximately $4,800,000 of unpaid real estate taxes (including interest accrued
thereon) outstanding with respect to this property. Approximately $3,000,000 of
this amount arose prior to the condominium conversion of the property and was
covered by a deferred payment agreement with the City of New York which required
payments as condominium units were sold. However, as a result of the slower than
projected pace of sales, the term of the deferred payment agreement expired.
Real estate taxes are now being paid by the owner in an amount equal to the
currently accruing taxes, and the unpaid balance is being reduced at the rate of
$4,050 per unit as condominium units are sold and an additional $200,000 per
year from the cash flow of the property. Subsequent to December 31, 1996, the
Company advanced $600,000 to the owner to repay a portion of the unpaid taxes
and interest. The $600,000 advance was added to the $14,650,867 indebtedness
secured by the Fairfield Towers First Mortgage and the interest rate will be the
same as the interest rate on the Fairfield Towers First Mortgage. The owner is
in the process of negotiating a new deferment agreement with the City of New
York. However, no assurances can be given that the owner will be successful in
negotiating a satisfactory deferment agreement with the City of New York, and if
a satisfactory agreement is not obtained, a continuing default in the payment of
real estate taxes could adversely affect the success of the condominium
conversion at Fairfield Towers and the value of Presidential's First and Second
Mortgages. See Notes 2 and 22 of Notes to Consolidated Financial Statements.

Presidential paid $2,500,867 of its $11,150,867 purchase price for the Fairfield
Towers First Mortgage in cash and executed an $8,650,000 note for the balance
(the "Fairfield Purchase Money Note"). The Fairfield Purchase Money Note is
secured by a collateral assignment of the Fairfield Towers First Mortgage and,
except for a guarantee of $1,000,000, is nonrecourse to Presidential. All
payments of principal received by Presidential under the Fairfield Towers First
Mortgage will be utilized to make principal repayments on the Fairfield Purchase
Money Note. In addition, Presidential is making principal payments on the
Fairfield Purchase Money Note in amounts sufficient to amortize it based on a
9.25% interest rate for a 25 year term, with the entire outstanding principal
balance due on October 30, 2001.

Presidential is also the holder of the Fairfield Towers Second Mortgage on the
condominium units, which it received in 1984 when it sold the Fairfield Towers
property to the present owner. The Fairfield Towers Second Mortgage, which is
nonrecourse, has an outstanding principal balance of $14,659,841 and a net
carrying value of $1,404,764. The cash flow from the rental operations of


                                      9
<PAGE>   10

the condominium units is not sufficient to pay more than a nominal amount of the
interest that is due on the Fairfield Towers Second Mortgage and, accordingly,
pursuant to a modification agreement executed in December, 1992, all unpaid
interest is deferred. While Presidential received $227,001 of interest payments
on the Fairfield Towers Second Mortgage in 1996, it is possible that interest
payments on the Fairfield Towers Second Mortgage will be substantially reduced
in 1997 and subsequent years since cash flow from the rental operations of the
property will be partially utilized to pay down the accrued real estate taxes.
Until the Fairfield Towers First Mortgage is repaid in full, Presidential, as
holder of the Fairfield Towers Second Mortgage, will continue to receive release
payments of only $3,000 per unit upon the sale of each condominium apartment
unit. However, after the Fairfield Towers First Mortgage is repaid, Presidential
will receive substantially all of the net proceeds of sales of condominium units
in repayment of the principal amount of its Second Mortgage and all deferred
interest thereon, including additional interest which is based on percentages of
gross sales prices. By acquiring the Fairfield Towers First Mortgage at a
$3,500,000 discount, Presidential believes that, in addition to obtaining a
significant return on the funds utilized to make the acquisition, it has
protected its position as holder of the Fairfield Towers Second Mortgage since
that position could have been adversely affected upon the maturity of the First
Mortgage in December, 1996. Pursuant to the terms of the Fairfield Towers Second
Mortgage, Presidential has implemented substantial restrictions relating to the
operation and condominium conversion of the property and control of the funds
generated from operations and sales.

The first sales of apartment units pursuant to the conversion of the property to
condominium ownership closed in June, 1994. A total of 50 condominium units were
sold during 1994, with 41 additional units sold in 1995 and 44 additional units
sold in 1996. Although sales during the initial years of the conversion have
been slower than originally anticipated and the Company's return on the
Fairfield Towers Second Mortgage during these initial years has been and will
continue to be limited, if the conversion is successful and the Fairfield Towers
First Mortgage is repaid, the Company expects to ultimately recover the
outstanding principal amount of the Fairfield Towers Second Mortgage and
substantial amounts of the deferred basic and additional interest thereon. While
the ultimate success of the conversion will depend upon a number of factors,
including the owner's ability to attract tenant purchasers as well as purchasers
for vacant apartments, and the ability of purchasers to obtain satisfactory
financing, the Company believes that the initial closings under the conversion
plan are a significant step forward in this process. From the initial closing of
sales under the conversion through December 31, 1996, the Company has received
$340,159 in payments from sales of apartment units,


                                      10
<PAGE>   11

which has reduced the original outstanding principal balance of the Fairfield
Towers Second Mortgage from $15,000,000 to $14,659,841 at December 31, 1996. In
addition, the Fairfield Towers First Mortgage in the original outstanding
principal balance of $18,113,118 has been reduced to $14,650,867 at December 31,
1996. However, the Fairfield Towers Second Mortgage is still classified as an
impaired loan and the Company recognizes interest income on this loan only to
the extent that such interest is actually received. During 1996, the Company
received $230,697 of interest and fees on this note. See Note 2 of Notes to
Consolidated Financial Statements.

Subsequent to December 31, 1996, the Company received prepayment of its
$1,074,200 Cedarbrooke note receivable and modified its Woodland notes
receivable, extending the maturity date from 2000 to 2005, with interest rates
increasing in 2002 from 9% to 9.25%.

At December 31, 1996, all of the loans included in "Mortgage portfolio: related
parties" were in good standing, except for the Overlook loan which was placed in
nonaccrual status in 1990 and, as of January 1, 1995, was classified as an
impaired loan in accordance with SFAS No. 114. At December 31, 1996, the
carrying value of the Overlook loan is $1,567,400 and is reflected on the
Company's Consolidated Balance Sheet at a net carrying value of zero after a
deferred gain of $1,567,400. The note was modified in 1995, extending the
maturity date to December 31, 2003 with an interest rate of 6%. The Overlook
loan, which is a nonrecourse loan, continues to be secured by three second
mortgages (the "Collateral Security") with face amounts totalling $1,617,400.
Pursuant to the Settlement Agreement with Ivy (see Relationship with Ivy
Properties, Ltd.), Ivy agreed to give Presidential a deed in lieu of foreclosure
to the various assets held by Presidential as collateral for the Overlook loan,
but since the Company in its capacity as a secured creditor exercises
significant control over, and receives the economic benefits from, such
collateral, the Company has no current plans to request such deed or to
foreclose on its collateral. See Note 2 of Notes to Consolidated Financial
Statements.

The following tables set forth information as of December 31, 1996 with respect
to the mortgage loan portfolio resulting from the sale of properties and the
loan portfolio due from Ivy.


                                      11
<PAGE>   12

--------------------------------------------------------------------------------
             MORTGAGE PORTFOLIO: NOTES RECEIVABLE - SOLD PROPERTIES
                               DECEMBER 31, 1996
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
---------------------------------              ----------      --------    --------      --------     --------         ---------
                                                                                                                       Effective
                                                                                            Net                        Interest    
                                                  Notes                    Deferred      Carrying     Maturity           Rate      
          Name of Property                     Receivable      Discount      Gain          Value       Dates             1996      
---------------------------------              ----------      --------    --------      --------     --------         ---------
<S>                                <C>        <C>          <C>          <C>           <C>             <C>         <C>
Cedarbrooke                        (1)        $ 1,074,200  $   384,651  $   472,497   $   217,052       2015            8.00%
  Wichita, KS

Crown Tower                        (2)(3)(4)    6,817,747      404,998    3,633,200     2,779,549       1999            9.75%
  New Haven, CT

Fairfield Towers-1st mtg           (5)         14,650,867    3,471,319                 11,179,548       2006            9.25%
  Brooklyn, NY

Fairfield Towers-2nd mtg           (3)(6)(7)   14,659,841    7,765,964    5,489,113     1,404,764       1999            1.47%
  Brooklyn, NY

Grant House                        (2)          3,528,162                 1,023,593     2,504,569       1998            7.33%
  White Plains, NY

Madison Towers                     (2)(3)(4)    7,290,725      485,996    4,358,340     2,446,389       1999            9.75%
  New Haven, CT

Mark Terrace                       (3)(6)       2,244,000      750,768      558,250       934,982       1999            5.16%
  Bronx, NY

Pinewood I & II                                   417,662                   218,534       199,128       2001           12.00%
  Des Moines, IA

Presidential Park                  (8)          6,250,000                 2,991,850     3,258,150       2001            8.50%
  Columbus, OH

Woodgate                           (1)          1,175,500      304,642      684,991       185,867       2015            8.00%
  Wichita, KS

Woodland Village                   (9)          1,027,400      271,853                    755,547       2005            9.00%
  Hartford, CT

Woodland Village                   (9)            582,413      224,965                    357,448       2005            9.00%
  Hartford, CT
                                              -----------  -----------  -----------   -----------
Subtotal                                       59,718,517   14,065,156   19,430,368    26,222,993
                                              -----------  -----------  -----------   -----------
</TABLE>

<TABLE>
<CAPTION>
---------------------------------  --------------------    -------------------------             ----------
                                                             "Wrapped Mortgage"                   Notes
                                                               Senior Debt (2)                   Receivable
                                        Interest           -------------------------                Net of
                                          Rate              Interest        Balance               "Wrapped
          Name of Property               Range                Rate         12/31/96               Mortgage"
---------------------------------  --------------------    ----------      --------              ----------
<S>                                <C>                     <C>             <C>                  <C>
Cedarbrooke                         8.00-9.00%                             $                    $ 1,074,200
  Wichita, KS                                 
                                              
Crown Tower                              9.75%               5.25%         1,817,747              5,000,000
  New Haven, CT                               
                                              
Fairfield Towers-1st mtg         Prime plus 1%                                                   14,650,867
  Brooklyn, NY                                
                                              
Fairfield Towers-2nd mtg                 6.75%                                                   14,659,841
  Brooklyn, NY                                
                                              
Grant House                              7.33%               3.00%         2,504,569              1,023,593
  White Plains, NY                            
                                              
Madison Towers                           9.75%               5.25%         1,290,725              6,000,000
  New Haven, CT                               
                                              
Mark Terrace                             5.16%                                                    2,244,000
  Bronx, NY                                   
                                              
Pinewood I & II                         12.00%                                                      417,662
  Des Moines, IA                              
                                              
Presidential Park                   7.50-8.50%                                                    6,250,000
  Columbus, OH                                
                                              
Woodgate                            8.00-9.00%                                                    1,175,500
  Wichita, KS                                 
                                              
Woodland Village                    9.00-9.25%                                                    1,027,400
  Hartford, CT                                
                                              
Woodland Village                    9.00-9.25%                                                      582,413
  Hartford, CT                                
                                                                          ----------            -----------
Subtotal                                                                   5,613,041             54,105,476
                                                                          ----------            -----------
</TABLE>



                                      12
<PAGE>   13

             MORTGAGE PORTFOLIO: NOTES RECEIVABLE - SOLD PROPERTIES
                          DECEMBER 31, 1996 (CONTINUED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
------------------------------                  ----------    --------       --------      --------      ---------        ---------
                                                                                                                          Effective
                                                                                              Net                         Interest 
                                                   Notes                     Deferred      Carrying       Maturity          Rate   
Sold Co-op Apartments                           Receivable    Discount         Gain          Value         Dates            1996   
------------------------------                  ----------    --------       --------      --------      ---------        ---------
<S>                              <C>            <C>           <C>            <C>           <C>           <C>             <C>

Emily Towers                     (10)(11)       $225,410       $1,115         $5,687       $218,608      2002-2008       7.00-9.50%
  Flushing, NY

330 W.72nd St.                   (12)(13)         62,765       10,543                        52,222           2016       8.25-9.25%
  New York, NY

330 W.72nd St. Purchasers        (10)            133,816                      49,089         84,727           2003            8.75%
  New York, NY

Towne House                      (10)(11)        769,350        7,756         42,638        718,956      1998-2014       7.50-9.50%
  New Rochelle, NY

6300 Riverdale Ave.              (10)(11)         31,352          176                        31,176           2003       7.50-8.25%
  Riverdale, NY

Mark Terrace                                      38,660                                     38,660           2003            9.00%
  Bronx, NY

Sherwood House                   (12)(14)         44,246        3,620                        40,626      2002-2010       9.00-9.50%
  Long Beach, NY

Rye Colony                                       132,847                                    132,847      2009-2010      8.00-10.00%
 Rye, NY

Hastings Gardens                 (10)             25,630                       7,754         17,876      2005-2011       6.00-9.00%
  Hastings, NY
                                             -----------  -----------    -----------    -----------
Subtotal                                       1,464,076       23,210        105,168      1,335,698
                                             -----------  -----------    -----------    -----------
Total Notes Receivable-
  Sold Properties                            $61,182,593  $14,088,366    $19,535,536    $27,558,691
                                             ===========  ===========    ===========    ===========
</TABLE>

<TABLE>
<CAPTION>
--------------------------
                                                             "Wrapped Mortgage"                  Notes
                                                               Senior Debt (2)                  Receivable
                                  Interest               ---------------------------             Net of
                                    Rate                 Interest         Balance               "Wrapped
Sold Co-op Apartments               Range                  Rate           12/31/96              Mortgage"
--------------------------        ---------              --------         --------              ----------
<S>                              <C>                      <C>             <C>                   <C>
                                           
Emily Towers                     7.00-9.50%                               $                       $225,410
  Flushing, NY                             
                                           
330 W.72nd St.                   8.25-9.25%                                                         62,765
  New York, NY                             
                                           
330 W.72nd St. Purchasers             8.75%                                                        133,816
  New York, NY                             
                                           
Towne House                      7.50-9.50%                                                        769,350
  New Rochelle, NY                         
                                           
6300 Riverdale Ave.              7.50-8.25%                                                         31,352
  Riverdale, NY                            
                                           
Mark Terrace                          9.00%                                                         38,660
  Bronx, NY                                
                                           
Sherwood House                   9.00-9.50%                                                         44,246
  Long Beach, NY                           
                                           
Rye Colony                      8.00-10.00%                                                        132,847
 Rye, NY                                   
                                           
Hastings Gardens                 6.00-9.00%                                                         25,630
  Hastings, NY                  
                                                                          -----------          -----------
Subtotal                                                                                         1,464,076
                                                                          -----------          -----------
Total Notes Receivable-
  Sold Properties                                                         $ 5,613,041          $55,569,552
                                                                          ===========          ===========
</TABLE>


                                      13
<PAGE>   14

             MORTGAGE PORTFOLIO: NOTES RECEIVABLE - SOLD PROPERTIES
                          DECEMBER 31, 1996                         (CONCLUDED)
--------------------------------------------------------------------------------
(1)  The discounts on the Cedarbrooke and Woodgate notes were computed at a
     yield of 12%. Subsequent to December 31, 1996, the $1,074,200 Cedarbrooke
     note receivable was paid in full.
(2)  This note is a wraparound mortgage note, whereby the Company holds a junior
     mortgage which secures a liability which includes the amount of the
     outstanding senior or underlying mortgage. The purchaser services the
     entire debt secured by the wraparound mortgage and Presidential services
     the senior debt from the proceeds of the wrap mortgage.
(3)  The discount on this note was computed at a yield of 14%.
(4)  The maturity dates of these notes may be extended at the option of the
     buyer from April 30, 1999 to April 30, 2009.
(5)  This note was purchased by the Company in the fourth quarter of 1996 at a
     discount of $3,500,000. The interest rate, currently 9.25%, is a variable
     rate equal to 1% above the prime rate.
(6)  The maturity dates of the Fairfield Towers Second Mortgage and the Mark
     Terrace note may be extended at the option of the buyers from November 29,
     1999 to November 29, 2005.
(7)  This note is classified as an impaired loan and interest income is recorded
     on a cash basis.
(8)  Interest is paid on this note at the rate of 6% per annum through July 31,
     1999 and a rate of not less than 7.5% per annum through maturity. In
     connection with the modification of the note in 1994, the borrower paid a
     fee of $628,863 in order to increase the effective interest rate on the
     note to 8.5% per annum through July 31, 1999.
(9)  The discounts on the Woodland Village notes were computed at a yield of
     25%. In December, 1995, the borrower excercised its option to extend the
     maturity date of the notes from 1995 to 2000. Subsequent to December 31,
     1996, the maturity dates of these loans were further extended to 2005. The
     interest rate is 9% per annum through December 31, 2002 and 9.25% per annum
     thereafter. The notes are amortizing monthly, based on a 20 year term at
     the above rates, and have balloon payments due at maturity.
(10) These notes were either assigned by Ivy to reduce Ivy loans in process of
     foreclosure or were received from purchasers of apartments which
     Presidential held as foreclosed property.
(11) The amount under discount represents unamortized mortgage points received
     from purchasers.
(12) These notes were assigned by Ivy as a result of the Settlement Agreement
     with Ivy.
(13) The discount on this note was computed at 16% of face value.
(14) The discount on this note was computed at 15% of face value.


                                      14
<PAGE>   15

             MORTGAGE PORTFOLIO: NOTES RECEIVABLE - RELATED PARTIES
                                DECEMBER 31, 1996
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                         Net          Final
                                                Notes                     Deferred    Carrying       Maturity         Interest
      Name of Property                       Receivable    Discount         Gain        Value         Dates            Rate
      ----------------                       ----------    --------       --------    --------       --------         --------
<S>                             <C>         <C>           <C>           <C>           <C>            <C>             <C>
UTB End Loans                   (1)           $241,935    $117,226      $             $124,709        Various        Various

Consolidated Loans              (2)            116,787                                 116,787           2016        Chase Prime

Overlook                        (3)          1,567,400                   1,567,400                       2003        6.0%
Alexandria, VA

University Towers               (4)            617,419      28,689                     588,730        Various        11.80 to 25.33%
New Haven, CT
                                            ----------    --------      ----------    --------
                                            $2,543,541    $145,915      $1,567,400    $830,226
                                            ==========    ========      ==========    ========
</TABLE>


(1)  Ivy's equity in these purchase money notes (which are secured by co-op
     apartment units at University Towers, New Haven, CT) was transferred to
     Presidential as part of the Settlement Agreement.
(2)  As part of the Settlement Agreement with Ivy, certain of Presidential's
     outstanding nonrecourse loans (most of which had previously been written
     down to zero) were consolidated into two notes which currently have an
     aggregate outstanding principal balance of $4,886,837. The $116,787
     represents Presidential's net carrying value of the notes. Presidential
     does not expect to recover any material amounts on these notes in excess of
     their net carrying value.
(3)  This loan has been in default since 1990 and is classified as an impaired
     loan.
(4)  These notes represent a 100% interest in notes receivable held by UTB
     Associates, a partnership in which Presidential has a 66-2/3% interest.
     These notes are amortized over a period of approximately 28 years from the
     date of a co-op apartment sale.


                                       15
<PAGE>   16

(d)   Qualification as a REIT

Since 1982, the Company has operated in a manner intended to permit it to
qualify as a REIT under Sections 856 to 860 of the Code. The Company intends to
continue to operate in a manner to permit it to qualify as a REIT. However, no
assurance can be given that it will be able to continue to operate in such a
manner or to remain qualified.

In any year that the Company qualifies as a REIT and meets other conditions,
including the distribution to stockholders of at least 95% of its "real estate
investment trust taxable income" (excluding long-term capital gains but before a
deduction for dividends paid), the Company will be entitled to deduct the
distributions that it pays to its stockholders in determining its ordinary
income and capital gains that are subject to federal income taxation (see Note
10 of Notes to Consolidated Financial Statements). Income not distributed is
subject to tax at rates applicable to a domestic corporation. In addition, the
Company is subject to an excise tax (at a rate of 4%) if the amounts actually or
deemed distributed during the year do not meet certain distribution
requirements. In order to receive this favorable tax treatment, the Company must
restrict its operations to those activities which are permitted under the
Internal Revenue Code and to restrict itself to the holding of assets that a
REIT is permitted to hold.

It should be noted that no assurance can be given that the Company will, in
fact, continue to be taxed as a REIT, that distributions will be maintained at
the current rate, that the Company will have sufficient cash to pay dividends in
order to maintain REIT status or that it will be able to make cash distributions
in the future. In addition, even if the Company continues to qualify as a REIT,
the Board of Directors has the discretion to determine whether or not to
distribute long-term capital gains and other types of income not required to be
distributed in order to maintain REIT tax treatment.

(e)  Relationship with Ivy Properties, Ltd.

From 1979 to 1989, Presidential made loans to Ivy Properties, Ltd. and its
affiliates ("Ivy") in connection with Ivy's cooperative conversions of apartment
properties in the New York metropolitan area. In 1981, UTB Associates, a
partnership controlled by Presidential, sold an apartment property to Ivy in
return for purchase money notes. In addition, in 1984, Presidential sold to Ivy
its 50% partnership interest in the partnership which owned Overlook Gardens, a
308 unit apartment complex in Alexandria, Virginia for a purchase money note.

Ivy is owned by Thomas Viertel, Steven Baruch and Jeffrey Joseph (the "Ivy
Principals"), who are the sole partners of Pdl


                                      16
<PAGE>   17

Partnership, which since 1991 has owned 198,735 shares of the Company's Class A
common stock. From 1985 through 1991, these 198,735 shares of Class A common
stock were owned by BJV Partnership, another partnership wholly owned by the Ivy
Principals. As a result of the ownership of the 198,735 shares of Class A common
stock described above and 24,601 additional shares of Class A common stock owned
in the aggregate individually by the Ivy Principals, Pdl Partnership and the Ivy
Principals have, and BJV Partnership and the Ivy Principals had, beneficial
ownership of an aggregate of approximately 47% of the outstanding shares of
Class A common stock of the Company, which class of stock is entitled to elect
two-thirds of the Board of Directors of the Company. By reason of such
beneficial ownership, the Ivy Principals are in a position substantially to
control elections of the Board of Directors of the Company.

Thomas Viertel is the son of Joseph Viertel, a Director and a former President
of Presidential, and the nephew of Robert E. Shapiro, Chairman of the Board of
Directors and a former President of Presidential. Steven Baruch is the cousin of
Robert E. Shapiro and Joseph Viertel.

As a result of the deterioration of the sales market for cooperative apartments
in the New York metropolitan area in 1989 and 1990, Ivy defaulted on certain of
its outstanding loans from Presidential in 1990 and 1991. In early 1990, Ivy
began negotiations with Presidential with respect to a workout of the loans then
in default. Because of the relationships described above between the Ivy
Principals and Presidential, the negotiations with Ivy were conducted on behalf
of Presidential by a committee of three members of the Board of Directors with
no affiliations with the Ivy Principals (the "Independent Committee") and an
officer of Presidential who was not affiliated with the Ivy Principals. On
November 14, 1991, Presidential and Ivy consummated a Settlement Agreement with
respect to various outstanding loans to Ivy, which was approved unanimously by
the Board of Directors of Presidential.

In connection with the Settlement Agreement, Presidential received, among other
things, a number of vacant and occupied cooperative apartment units in the New
York metropolitan area and certain third party promissory notes held by Ivy.
Presidential received these assets in exchange for (i) the satisfaction of all
of Ivy's recourse debt to Presidential and certain of its nonrecourse debt to
Presidential with respect to which Presidential held first priority security
interests and (ii) the release by Presidential of certain subordinate security
interests in collateral securing some of the defaulted loans.


                                      17
<PAGE>   18

Most of Ivy's remaining nonrecourse debt to Presidential was consolidated, on
modified terms, into two nonrecourse loans (collectively, the "Consolidated
Loans") which were collateralized by substantially all of Ivy's remaining
business assets with respect to which Presidential either did not previously
have any security interest or had a junior security interest (collectively, the
"Consolidated Collateral"). The terms of the Settlement Agreement permit Ivy to
use the proceeds of each sale of Consolidated Collateral to (1) pay existing
indebtedness of Ivy to its bank and trade creditors and certain operating
expenses and (2) create and fund specified reserves to provide for payment of
future obligations and potential liabilities. At December 31, 1996, the
Consolidated Loans had an outstanding principal balance of $4,886,837 and a net
carrying value of $116,787. Since, as permitted by the terms of the Consolidated
Loans, most of Ivy's assets have been sold with the sales proceeds used to pay
other recourse obligations of Ivy, Presidential does not expect to recover any
material amount on the Consolidated Loans in excess of their net carrying value.

In 1996 Presidential and the Ivy Principals agreed to a modification of the
Settlement Agreement to provide that the Ivy Principals will make payments on
the Consolidated Loans in an amount equal to 25% of the operating cash flow
(after provision for certain reserves) of Scorpio Entertainment, Inc.
("Scorpio"), a company owned by the Ivy Principals which acts as a producer of
theatrical productions. This agreement, and Presidential's decision not to
exercise an option (which it had received as part of the original Settlement
Agreement) to acquire the capital stock of Scorpio, was made pursuant to the
unanimous determination of the Independent Committee that such actions were in
the best interests of Presidential. Presidential does not expect to receive any
material payments on the Consolidated Loans in 1997.

The table entitled "Mortgage portfolio: notes receivable related parties" set
forth under Loans and Investments above reflects all loans to Ivy outstanding at
December 31, 1996 All of such loans are in good standing except for the Overlook
loan. See Loans and Investments. Management believes that it holds sufficient
collateral to protect its interests in the loans that remain outstanding to Ivy
to the extent of the net carrying value of these loans.

Jeffrey Joseph is the President and a Director of Presidential, Thomas Viertel
is an Executive Vice President and the Chief Financial Officer of Presidential
and Steven Baruch is an Executive Vice President of Presidential.

Any transactions relating to the implementation of the terms of the Settlement
Agreement, or otherwise involving the Ivy Principals, are subject to the
approval of the Independent Committee.


                                      18
<PAGE>   19

(f)  Competition

The real estate business is highly competitive in all respects. In attempting to
expand its portfolio of owned properties, the Company will be in competition
with other potential purchasers for properties and sources of financing, many of
whom will be larger and have greater financial resources than the Company. As a
result of such competition, there can be no assurance that the Company will be
able to obtain opportunities for new investments at attractive rates of return.

(g)   Lines of Business

Revenues for 1996 were derived approximately 65% from rental property
operations, 30% from mortgage loan operations - sold properties, 2% from
mortgage loan operations - related parties, and 3% from investment income and
other income. (See Management's Discussion and Analysis of Financial Condition
and Results of Operations).

The following table reflects the contributions for the years ended December 31,
1996, 1995 and 1994 of Presidential's lines of business to (I) revenues and (II)
operating income before general and administrative expenses:


                                      19
<PAGE>   20

                PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                           ----------------------------------------
REVENUES                                        1996          1995         1994
--------                                        ----          ----         ----
<S>                                         <C>           <C>           <C>

Rental property operations                  $ 8,450,821   $7,998,825   $ 6,388,155
Mortgage loan operations-sold properties      3,868,034    3,533,452     3,444,067
Mortgage loan operations-related parties        248,851      232,472       278,140
Investment income and other income              370,833      406,676       343,044
                                            -----------   -----------   ----------

 Total                                      $12,938,539   $12,171,425  $10,453,406
                                            ===========   ===========  ===========
</TABLE>

<TABLE>
<CAPTION>
OPERATING INCOME BEFORE GENERAL AND ADMINISTRATIVE EXPENSES(1)
--------------------------------------------------------------
<S>                                         <C>           <C>           <C>
Rental property operations                   $   63,165    $   48,360   $  525,015
Mortgage loan operations-sold properties (2)  3,330,725     3,149,782    3,062,182
Mortgage loan operations-related parties (2)    248,851       232,472      234,364
Investment income and other income (3)          366,188       406,671      343,044
                                             ----------    ----------   ----------

  Total                                      $4,008,929    $3,837,285   $4,164,605
                                             ==========    ==========   ==========
</TABLE>

(1)   Does not include depreciation from non-rental property (home office
      furniture and equipment), net gain from the sale of properties and
      securities, and the cumulative effect of change in accounting for
      securities.

(2)   Net of interest expense for wrap mortgage debt, interest expense on
      borrowings to fund loan agreements and amortization of loan acquisition
      costs.

(3)   Net of miscellaneous interest expense.


                                   20
<PAGE>   21

ITEM 2. PROPERTIES

As of December 31, 1996, the Company had an ownership or leasehold interest in
629 apartment units, 641,300 square feet of commercial, industrial and
professional space and one parcel of land, all of which are carried on the
balance sheet at $19,689,297 (net of accumulated depreciation of $5,680,108).
The Company has mortgage debt on the majority of these properties in the
aggregate amount of $26,513,465, all of which is nonrecourse to Presidential
with the exception of $294,824 pertaining to the mortgage on the Mapletree
Industrial Center property.

In February, 1996, the Company foreclosed on its mortgage receivable on the Kent
Terrace Apartments and became the owner of this 112 unit apartment property in
Martinsburg, West Virginia. The Company intends to hold this property as a
rental property and, accordingly, has reclassified the $329,212 net carrying
value of the loan and deferred interest of $338,190 to real estate on its
consolidated balance sheet.

The chart below indicates the operating results of each of the properties owned
by the Company at December 31, 1996 in accordance with generally accepted
accounting principles ("GAAP") and, following that, in terms of cash flow from
operations.


                                      21
<PAGE>   22

                PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
                -------------------------------------------------
                                   REAL ESTATE
                                DECEMBER 31, 1996


<TABLE>
<CAPTION>
                                                                                                                                   
                                                                        Vacancy                                          Income    
                                                   Rentable               Rate           Mortgage      Interest        (Loss) from 
        Property                                Space (approx.)         Percent          Balance         Rate         Operations(1)
------------------------------------            ---------------         -------          --------      --------       -------------
<S>                                             <C>                     <C>              <C>           <C>            <C>
Residential
-----------------------------------
Broad Park Lodge                                3 Apt. Units              0.00%        $                                ($5,943)   
  White Plains, NY

Crown Court   (3)                               105 Apt. Units
  New Haven, CT                                  & 2,000 sq.ft.     (Net Lease)          2,884,821          7.00%         6,936    
                                                 of comml. space

Cambridge Green
  Council Bluffs, IA                            201 Apt. Units            9.29%          3,160,489          8.50%        (6,945)   


Continental Gardens
  Miami, FL                                     208 Apt. Units            6.67%          7,800,000          9.10%       112,687    


Kent Terrace  (4)
 Martinsburg, WV                                112 Apt. Units           55.83%                                        (161,584)   

Commercial Buildings
-----------------------------------
Building Industries Center
  White Plains, NY                              23,500 sq.ft.             0.85%            949,208         10.00%       (84,291)   


Metmor Plaza ("Home Mortgage Plaza")  (5)
  Hato Rey, PR                                  206,400 sq.ft.            7.88%         11,399,359        Various       254,429    

Mapletree Industrial Center
  Palmer, MA                                    385,000 sq.ft.            8.14%            294,824          8.25%       103,776    

University Towers Professional Space  (5)
  New Haven, CT                                 24,400 sq.ft.             9.02%                                          79,985    


Other - Land
-----------------------------------
Hartford, CT  (6)                                                                                                      (23,176)    

Towers Shoppers Parcade,
  New Haven, CT                                     1/4 acre        (Net Lease)             24,764          9.75%       11,570     
                                                                                       -----------                    --------     
                                                                                       $26,513,465                    $287,444     
                                                                                       ===========                    ========     
</TABLE>

<TABLE>
<CAPTION>
                                                 Cash Flow
                                                (Deficiency)
                                                    from
        Property                                Operations(2)
------------------------------------            -------------
<S>                                             <C>
Residential
-----------------------------------
Broad Park Lodge                                   ($5,943)
  White Plains, NY

Crown Court   (3)                               
  New Haven, CT                                      5,383
                                                

Cambridge Green
  Council Bluffs, IA                                40,257


Continental Gardens
  Miami, FL                                        323,564


Kent Terrace  (4)
 Martinsburg, WV                                  (119,530)

Commercial Buildings
-----------------------------------
Building Industries Center
  White Plains, NY                                 (60,816)


Metmor Plaza ("Home Mortgage Plaza")  (5)
  Hato Rey, PR                                     248,937

Mapletree Industrial Center
  Palmer, MA                                        71,342

University Towers Professional Space  (5)
  New Haven, CT                                     83,002


Other - Land
-----------------------------------
Hartford, CT  (6)                                  (1,140)

Towers Shoppers Parcade,
  New Haven, CT                                     7,663
                                                 --------
                                                 $592,719
                                                 ========
</TABLE>


See notes on following page.


                                       22
<PAGE>   23

(1)   The results are calculated in accordance with GAAP and therefore reflect
      the deduction of noncash charges such as depreciation and amortization of
      mortgage costs.

(2)   Cash flow or deficiencies from operations as reflected in the above chart
      are calculated before deduction of depreciation, valuation adjustments,
      amortization of mortgage costs and property replacements and additions,
      but after deduction of mortgage amortization. These results should not be
      considered as an alternative to income or loss from operations on the GAAP
      basis as an indicator of the properties' performance or to cash flows
      presented in accordance with GAAP. These results do not reflect the cash
      available to fund cash requirements.

(3)   The Crown Court property is subject to a long-term net lease containing an
      option to purchase commencing in 1999 and a right to extend the net lease
      for an additional ten years.

(4)   The Company received the Kent Terrace property in February, 1996 and is in
      the process of an extensive rehabilitation program at the property. The
      rehabilitation program has resulted in vacancies and upgrading expenses
      that have adversely affected the operations of the property. The Company
      expects to substantially complete the rehabilitation program in early
      1997. The results presented are for approximately eleven months of
      operations.

(5)   These results are net of minority interest share of partnership income.

(6)   The Company owns 4 acres of vacant land located in Hartford, Connecticut.
      During 1996, the Company wrote off to expense the $22,036 carrying value
      of this land.

In addition, at December 31, 1996, the Company owned four properties which it
obtained in foreclosure of loans. These properties are shown on the Company's
Consolidated Balance Sheets under "Foreclosed properties". (See Note 4 of Notes
to Consolidated Financial Statements).

In the opinion of management, all of the Company's properties are adequately
covered by insurance in accordance with normal insurance practices. All real
estate owned by the Company is owned in fee simple (except for the University
Towers professional space, which is held under a valid and existing long-term
lease), with title generally insured for the benefit of the Company by
respectable title insurance companies.

The majority of the mortgages on the Company's properties are self-liquidating
at fixed rates of interest with the exception of the mortgages on Metmor Plaza
("Home Mortgage Plaza"), Building

                                      23
<PAGE>   24

Industries Center and Continental Gardens. The Metmor Plaza mortgage amortizes
monthly with a balloon payment due at maturity in February, 1999. The Building
Industries Center mortgage amortizes monthly with a balloon payment due at
maturity in May, 2000. The Continental Gardens mortgage requires monthly
payments of interest only through January 1, 1997 and monthly payments of
principal and interest from February 1, 1997 through maturity in January, 2005,
when a balloon payment will be due.


ITEM 3. LEGAL PROCEEDINGS

      None.


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

      None.


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

(a)   The principal market for the Company's Class A and Class B Common Stock is
      the American Stock Exchange (ticker symbols PDL A and PDL B). The high and
      low prices for the stock on such principal exchange for each quarterly
      period during the past two years, and the per share dividends declared per
      quarter, are as follows:


                                                                    
                                   Stock Prices                    Dividends
                        ---------------------------------         Declared Per
                        Class A                   Class B          Share on
                     ----------------       ----------------      Class A and
                      High       Low          High      Low         Class B
                      ----       ---          ----      ---       ------------

Calendar 1996

First Quarter        $6 7/8     $6 1/4       $6 3/8   $5 7/8        $.15
Second Quarter        6 3/8      6            6 3/8    5 15/16       .15
Third Quarter         6 1/4      6            6 3/8    5 3/8         .15
Fourth Quarter        6 1/2      6 1/16       6 3/8    5 3/4         .15

Calendar 1995

First Quarter        $8 5/8     $7 5/8       $8 1/2   $6 1/2        $.15
Second Quarter        7 1/2      7 1/16       7        6 9/16        .15
Third Quarter         7 3/8      6 7/8        7        6 7/16        .15
Fourth Quarter        7 3/8      6 3/4        7        5 7/8         .15



                                          24
<PAGE>   25

(b)   The number of record holders for the Company's Common Stock at December
      31, 1996 was 188 for Class A and 885 for Class B.

(c)   Under the Internal Revenue Code of 1986, as amended, a REIT which meets
      certain requirements is not subject to Federal income tax on that portion
      of its taxable income which is distributed to its shareholders, if at 
      least 95% of its "real estate investment trust taxable income" (exclusive 
      of capital gains) is so distributed. Since January 1, 1982, the Company 
      has elected to be taxed as a REIT and has paid regular quarterly cash
      distributions. No assurance can be given that the Company will, in fact,
      continue to be taxed as a REIT, or that the Company will have sufficient
      cash to pay dividends in order to maintain REIT status. See Qualification
      as a REIT above.


                                      25
<PAGE>   26

ITEM 6.  SELECTED FINANCIAL DATA
--------------------------------

<TABLE>
<CAPTION>
                                                                                              YEAR ENDED DECEMBER 31,
                                                                              ---------------------------------------------------
                                                                               1996       1995       1994        1993       1992
                                                                              ------     ------     ------      ------     ------
                                                                               (Amounts in thousands, except per common share data)
<S>                                                                          <C>        <C>        <C>          <C>        <C>
Selected Data from Consolidated Statements of Operations:

  Revenues:
    Rental                                                                    $8,451     $7,999     $6,388      $6,388      $6,162
    Interest on mortgages                                                      4,117      3,766      3,722       3,802       3,795
    Investment and other                                                         371        406        343         157          92
                                                                             -------    -------    -------     -------     -------
  Total                                                                      $12,939    $12,171    $10,453     $10,347     $10,049
                                                                             =======    =======    =======     =======     =======
  Income before net gain from sales of properties and securities
    and cumulative effect of change in accounting principles                  $1,723     $1,874     $1,824      $1,366      $1,370
  Net gain from sales of properties and securities (1)                           845         71      2,669         236         606
  Cumulative effect of change in accounting for securities                                              38
  Cumulative effect of change in accounting for postretirement benefits                                           (699)
                                                                             -------    -------    -------     -------     -------
  Net Income                                                                  $2,568     $1,945     $4,531        $903      $1,976
                                                                             =======    =======    =======     =======     =======

  Earnings per common share:
    Income before net gain from sales of properties and securities
      and cumulative effect of change in accounting principles                 $0.49      $0.53      $0.52       $0.39       $0.40
    Net gain from sales of properties and securities                            0.24       0.02       0.76        0.07        0.17
    Cumulative effect of change in accounting for securities                                          0.01
    Cumulative effect of change in accounting for postretirement benefits                                        (0.20)
                                                                             -------    -------    -------     -------     -------
    Net Income                                                                 $0.73      $0.55      $1.29       $0.26       $0.57
                                                                             =======    =======    =======     =======     =======



  Cash distributions per common share                                          $0.60      $0.60      $0.60       $0.41       $0.40
                                                                             =======    =======    =======     =======     =======
</TABLE>
(1)  The net gain from sales of properties and securities for 1994 includes a
     net gain from fire insurance settlement of $1,817,000.


                                       26
<PAGE>   27

ITEM 6.  SELECTED FINANCIAL DATA (CONCLUDED)
--------------------------------------------

<TABLE>
<CAPTION>
                                                                                                 AT DECEMBER 31,
                                                                              ---------------------------------------------------
                                                                               1996       1995       1994        1993       1992
                                                                              ------     ------     ------      ------     ------
                                                                               (Amounts in thousands, except per common share data)
<S>                                                                          <C>        <C>        <C>          <C>        <C>

Selected Data from Consolidated Balance Sheets:

  Total mortgage portfolio (1)                                               $63,726    $53,416    $54,735      $55,169    $56,389
                                                                             =======    =======    =======      =======    =======

  Mortgage portfolio - net of discounts and
    deferred gains (1)                                                       $28,389    $18,882    $18,781      $17,463    $17,661
                                                                             =======    =======    =======      =======    =======

  Real estate  (2)                                                           $25,369    $23,872    $23,479      $14,547    $14,235
  Less: accumulated depreciation                                               5,680      5,074      4,475        4,468      4,039
                                                                             -------    -------    -------      -------     -------

  Net real estate                                                            $19,689    $18,798    $19,004      $10,079    $10,196
                                                                             =======    =======    =======      =======    =======

  Foreclosed properties                                                         $589       $601       $727       $2,228     $3,677
                                                                             =======    =======    =======      =======    =======

  Loans in process of foreclosure                                                                                $1,569     $1,569
                                                                             =======    =======    =======      =======    =======

  Securities                                                                    $975     $2,390     $1,767       $2,090        $82
                                                                             =======    =======    =======      =======    =======

  Total assets                                                               $57,800    $49,513    $50,999      $40,707    $41,549
                                                                             =======    =======    =======      =======    =======

  Mortgage debt - includes amounts due in one year:
    Properties owned  (2)                                                    $26,514    $26,978    $27,490      $18,586    $18,804
    Properties in process of foreclosure                                                                          1,317      1,317
    Wrap mortgage debt on sold properties                                      5,613      6,061      6,492        6,909      7,311
                                                                             -------    -------    -------      -------     -------

  Total                                                                      $32,127    $33,039    $33,982      $26,812    $27,432
                                                                             =======    =======    =======      =======    =======

  Notes payable - includes amounts due in one year (1)                        $8,643                               $837     $1,111
                                                                             =======    =======    =======      =======    =======

  Stockholders' equity                                                       $11,438    $10,801    $10,574       $8,300     $8,672
                                                                             =======    =======    =======      =======    =======

</TABLE>
(1)  In October, 1996, the Company purchased the $14,651,000 Fairfield Towers
     First Mortgage at a $3,500,000 discount for a net purchase price of
     $11,151,000. The Company paid $2,501,000 in cash and obtained an $8,650,000
     bank loan for the balance of the purchase price.

(2)  In December, 1994, the Company acquired Continental Gardens in Miami,
     Florida, for a purchase price of $9,765,000 and obtained a $7,800,000 first
     mortgage loan on the property.

See Notes to Consolidated Financial Statements.


                                       27
<PAGE>   28

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

Results of Operations

      1996 vs 1995

Income for 1996 increased by $767,114 from $12,171,425 in 1995 to $12,938,539 in
1996 primarily as a result of increases in rental income and interest
income-sold properties, partially offset by a decrease in investment and other
income.

Rental income increased by $451,996 from $7,998,825 in 1995 to $8,450,821 in
1996. The Kent Terrace property, which the Company became the owner of in
February, 1996, as a result of the foreclosure of its mortgage on that property,
resulted in increased rental income of $239,098. In addition, the Metmor Plaza
property received income of $127,094 as a result of lease cancellation
penalties. Rental income at the Cambridge Green and Continental Gardens
properties also increased by an aggregate amount of $181,578. These increases
were offset by decreases in rental income of $59,650 at the Mapletree Industrial
Center, Building Industries Center and the Metmor Plaza properties.

Interest on mortgages-sold properties increased by $354,721 from $2,118,275 in
1995 to $2,472,996 in 1996 primarily as a result of the purchase of the
Fairfield Towers First Mortgage in the fourth quarter of 1996, which resulted in
additional interest income of $237,159. There also was an increase of $155,643
of interest received on the Fairfield Towers Second Mortgage. In addition, there
was an increase of $156,108 in the amortization of discounts on notes, of which
$76,473 pertains to the Town House note, which was prepaid in June, 1996, and
$39,937 pertains to the Fairfield mortgages. These increases were partially
offset by decreases from 1995 to 1996 of $138,901 of interest on the Kent
Terrace note and $44,220 of interest on the Town House note.

Costs and expenses increased by $917,314 from $10,298,209 in 1995 to $11,215,523
in 1996 primarily due to increased general and administrative expenses, interest
on notes payable, rental property operating expenses and an increase in minority
interest share of partnership income.

General and administrative expenses increased by $319,935 from $1,940,992 in
1995 to $2,260,927 in 1996. This increase was primarily due to increases in
professional fees of $89,948, of which approximately $51,446 was incurred in
connection with proposed acquisitions of properties which were not completed;
franchise tax expense of $66,345; salary expense of $71,636, of which $46,514
pertains to executive bonuses; general office expense of $36,535 and a reduction
in reimbursed overhead from foreclosed properties of $34,736 resulting from
sales of


                                      28
<PAGE>   29

foreclosed properties in 1995 and 1996.

Rental property operating expenses increased by $364,376 from $3,411,014 in 1995
to $3,775,390 in 1996. The addition of the Kent Terrace property resulted in an
increase of $362,394. In addition, the Metmor Plaza property had increased
expenses of $79,572 for utilities and repairs and maintenance; environmental
expenses at the Mapletree Industrial Center property increased $45,593, and the
Company wrote off the $22,036 carrying value of vacant land in Hartford,
Connecticut. These increases were offset by decreases of $46,252 in bad debts
and $96,805 in insurance expense at the Mapletree Industrial Center property.

Rental property depreciation expense increased by $44,653 from $606,999 in 1995
to $651,652 in 1996 primarily as a result of the addition of the Kent Terrace
property in 1996 and increases in rental property depreciation expense at the
Cambridge Green and Continental Gardens properties as a result of improvements
and additions to those properties.

Minority interest share of partnership income increased by $93,061 from $752,812
in 1995 to $845,873 in 1996, as a result of an increase in partnership income on
the Metmor Plaza property.

Loss from operations of foreclosed properties decreased by $43,775 from $82,849
in 1995 to $39,074 in 1996. This decrease is primarily a result of the sales of
foreclosed properties in 1995 and 1996.

Net gain from sales of foreclosed properties decreased by $54,469 from $88,151
in 1995 to $33,682 in 1996. During 1996, the Company sold the remaining five
cooperative apartments at Hastings Gardens in Hastings, New York and, in
addition, recognized a deferred gain from the previous sale of a cooperative
apartment. During 1995, the Company sold twenty cooperative apartments at three
locations.

Net gain from sales of properties and securities are sporadic (as they depend on
the timing of sales or the receipt of installments or prepayments on purchase
money notes). In 1996, the net gain from sales of properties and investments was
$845,051 compared with a net gain of $71,367 in 1995. The 1996 gain is primarily
a result of a $1,000,000 principal prepayment received on the Town House loan,
which resulted in the recognition of $773,258 of deferred gain. In addition, the
Company recognized deferred gains of $71,996 and $56,573, respectively, from
principal payments received on the Overlook loan and the Fairfield Towers Second
Mortgage. These amounts were offset by a loss of $56,776 from the sale of
securities. The 1995 gain is primarily a result of principal payments received
on the Fairfield Towers Second Mortgage which resulted in the recognition of
$46,582 of deferred gain.


                                      29
<PAGE>   30

Balance Sheet

Net mortgage portfolio increased by $9,507,326 from $18,881,591 at December 31,
1995, to $28,388,917 at December 31, 1996. This increase was primarily the
result of the purchase of the $14,650,867 Fairfield Towers First Mortgage in the
fourth quarter of 1996. This mortgage was acquired by the Company at a discount
of $3,500,000 for a net purchase price of $11,150,867. At December 31, 1996, the
net carrying value of this loan was $11,179,548 after deducting the unamortized
discount of $3,471,319. This $11,150,867 increase was offset by prepayments of
$2,188,787 received on the purchase money notes secured by the Town House,
Memphis, Tennessee property ($1,000,000) and the Hoboken, New Jersey property
($1,188,787). This decrease of $2,188,787 was offset by the $773,258 recognition
of deferred gain, for a net decrease of $1,415,529. In addition, the $329,212
net carrying value of the Kent Terrace loan was reclassified from net mortgage
portfolio to real estate in February, 1996 when the Company foreclosed on its
mortgage and became the owner of the property.

Real estate increased by $1,497,787 from $23,871,618 at December 31, 1995 to
$25,369,405 at December 31, 1996. This increase was primarily the result of the
reclassification of the Kent Terrace note to real estate in February, 1996. Upon
receipt of the property, the Company reclassified to real estate the $329,212
net carrying value of the loan from net mortgage portfolio and the $338,190
related deferred interest receivable from other receivables. The Company also
recorded $653,681 in acquisition and improvement costs for the Kent Terrace
property and $198,740 for additions and improvements to other properties. In
June, 1996, the Company wrote off to expense the $22,036 carrying value on 4
acres of vacant land located in Hartford, Connecticut.

Prepaid expenses and deposits in escrow decreased by $203,303 from $1,327,000 at
December 31, 1995 to $1,123,697 at December 31, 1996. This decrease is primarily
the result of the reduction in mortgage escrow deposits for the Cambridge Green,
Continental Gardens and Crown Court properties.

Other receivables decreased by $393,204 from $1,029,052 at December 31, 1995 to
$635,848 at December 31, 1996 primarily as a result of the reclassification of
the $338,190 deferred interest receivable on Kent Terrace to real estate and the
receipt of $75,000 of accrued interest on notes receivable - sold properties.

Securities available for sale decreased by $1,415,138 from $2,390,346 at
December 31, 1995 to $975,208 at December 31, 1996. This decrease was the result
of the sale of $2,706,835 of securities, offset by the purchase of $1,231,478 of
securities and the $60,219 increase in the fair value of securities held at


                                      30
<PAGE>   31

December 31, 1996.

Note payable to bank was $8,642,600 at December 31, 1996. There were no bank
loans at December 31, 1995. In connection with its acquisition of the Fairfield
Towers First Mortgage, the Company obtained an $8,650,000 bank loan in the
fourth quarter of 1996 from Fleet Bank National Association ("Fleet"). The note
is secured by a collateral assignment of the Fairfield Towers First Mortgage
and, except for a guarantee of $1,000,000 of the indebtedness, is nonrecourse to
Presidential. The note matures on October 30, 2001. See Financing Activities.

Accrued liabilities increased by $316,759 from $1,776,117 at December 31, 1995
to $2,092,876 at December 31, 1996 primarily as a result of increases in
accruals for environmental expenses of $82,500 and bank loan and other interest
expense of $202,314.

Deferred income decreased by $164,487 from $560,164 at December 31, 1995 to
$395,677 at December 31, 1996. This decrease was primarily the result of the
recognition of deferred interest income of $119,358 received in connection with
the 1994 modification of the Presidential Park note and the recognition of
deferred fees of $40,000 from the modification of the Presidential Park note.

Net unrealized loss on securities available for sale decreased by $60,219 from
$11,205 at December 31, 1995 to a net unrealized gain of $49,014 at December 31,
1996. This decrease in unrealized loss is a result of the increase in the fair
value of the securities available for sale for the year.

Results of Operations

     1995 vs 1994

Income for 1995 increased by $1,718,019 from $10,453,406 in 1994 to $12,171,425
in 1995 primarily as a result of increases in rental income and investment
income, partially offset by a decrease in other income.

Rental income increased by $1,610,670 from $6,388,155 in 1994 to $7,998,825 in
1995. The Continental Gardens apartment property, which was purchased in
December, 1994, resulted in an increase of rental income of $1,543,900.
Additionally, rental income increased by $170,427 at the Metmor Plaza property,
offset by a decrease of $84,914 at the Mapletree Industrial Center property.

Investment income increased by $112,551 from $226,170 in 1994 to $338,721 in
1995. This increase was primarily due to increased interest income on cash and
cash equivalent accounts and interest income received on mortgage deposits in
escrow.


                                      31
<PAGE>   32

Other income decreased by $48,919 from $116,874 in 1994 to $67,955 in 1995. This
decrease was primarily the result of the receipt in 1994 of $42,200 in
modification and late fees on the Fairfield Towers Second Mortgage.

Costs and expenses increased by $1,669,346 from $8,628,863 in 1994 to
$10,298,209 in 1995 primarily due to increases in all areas of rental property
operations resulting from the ownership of the Continental Gardens apartment
property which was purchased in December, 1994, as well as increases in
operating expenses and mortgage interest on other rental properties. These
increases were offset by a decrease in general and administrative expenses.

General and administrative expenses decreased by $369,135 from $2,310,127 in
1994 to $1,940,992 in 1995. This decrease was primarily due to decreases in
franchise tax expense of $55,781, decreases in professional fees, directors fees
and expenses, executive pension plan expense, and annual report printing expense
of $98,848 in the aggregate and decreases in salary expense of $136,581,
primarily as a result of a decrease of $111,473 in accruals for contractual
bonuses. Additionally, in 1994 there was a bad debt write-off of $67,200
relating to the Brookline Manor loan.

Rental property operating expenses increased by $917,217 from $2,493,797 in 1994
to $3,411,014 in 1995. The purchase of Continental Gardens referred to above
resulted in increased operating expenses of $419,549. In addition, at the
Mapletree Industrial Center property there were increases in bad debts of
$48,397, repairs and maintenance of $76,372 and insurance costs of $66,444.
Also, the 1994 period reflected the receipt of net insurance proceeds of
$294,350 pertaining to a flood in 1993 at the Cambridge Green Apartments.

Rental property mortgage interest increased by $808,648 from $1,464,939 in 1994
to $2,273,587 in 1995. This increase is primarily due to an increase of $660,914
of mortgage interest for Continental Gardens and an increase of $162,289 for the
Metmor Plaza property. The Metmor Plaza mortgage has a variable rate of interest
based on the LIBOR rate and the "Section 936" rate (which is established by the
lender), but cannot exceed 8% per annum.

Real estate tax expense increased by $178,011 from $598,185 in 1994 to $776,196
in 1995 primarily as a result of the purchase of Continental Gardens.

Rental property depreciation expense increased by $126,876 from $480,123 in 1994
to $606,999 in 1995 primarily as a result of the purchase of Continental
Gardens. The increase in depreciation for Continental Gardens was $170,505,
partially offset by a decrease of $49,001 pertaining to the Mapletree Industrial
Center.


                                      32
<PAGE>   33

Minority interest share of partnership income increased by $88,546 from $664,266
in 1994 to $752,812 in 1995, as a result of an increase in partnership income on
the Metmor Plaza property.

Net gain from sales of properties and securities are sporadic (as they depend on
the timing of sales or the receipt of installments or prepayments on purchase
money notes). In 1995, the net gain from sales of properties and investments was
$71,367 compared with a net gain of $2,668,919 in 1994. The 1995 gain is
primarily a result of principal payments received on the Fairfield Towers Second
Mortgage which resulted in the recognition of $46,582 of deferred gain.
Additionally, a $15,293 net gain was recognized on the sale of the Rye Colony
cooperative apartments in Rye, New York, and a net gain of $9,492 was recognized
from the sale of securities. The 1994 gain is a result of the recognition of a
net gain of $1,816,873 resulting from the settlement of a fire insurance claim
relating to the Mapletree Industrial Center property, as well as the receipt of
principal payments on the Overlook loan, the Fairfield Towers Second Mortgage
and the Presidential Park loan, all of which resulted in the recognition of
$1,023,639 of deferred gains. These gains were partially offset by a loss of
$172,443 which was recorded as a result of the write-off of the loan in process
of foreclosure on the Brookline Manor property.

Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". As a result of the adoption of SFAS No. 115, the cumulative
effect of change in accounting for securities of $37,617 of income was
recognized in 1994.

Liquidity and Capital Resources

Management believes that the Company has sufficient liquidity and capital
resources to carry on its existing business and, barring any unforeseen
circumstances, to pay the dividends required to maintain REIT status in the
foreseeable future. The Company is seeking to expand its portfolio of real
estate equities and plans to utilize for this purpose a portion of its available
funds and additional funds that the Company may receive from balloon payments
due on the Company's notes receivable as they mature, as well as funds that may
be available from external sources. However, the Company's plans to expand its
portfolio of real estate equities may be adversely affected by limitations on
its ability to obtain funds for investment on satisfactory terms from external
sources.

At December 31, 1996, Presidential did not maintain any line of credit or short
term financing arrangement. Presidential obtains funds for working capital and
investment from its available cash and cash equivalents, from operating
activities and from


                                      33
<PAGE>   34

repayments of its mortgage portfolio. Subsequent to December 31, 1996, the
Company obtained a $250,000 line of credit from Citibank, N. A.

At December 31, 1996, Presidential had $1,392,135 in available cash and cash
equivalents and $975,208 in securities available for sale. The December 31, 1996
total of $2,367,343 represents a decrease of $1,329,508 from the $3,696,851
total at December 31, 1995. This $1,329,508 decrease is primarily the result of
the purchase of the Fairfield Towers First Mortgage in the fourth quarter of
1996. The Company purchased the $14,650,867 mortgage at a discount of $3,500,000
for a net purchase price of $11,150,867. The Company obtained an $8,650,000
purchase money loan and paid $2,673,662 in cash for the balance of the purchase
price and costs relating to the acquisition of the Fairfield Towers First
Mortgage. In addition, the Company incurred costs of $760,218 for the
improvements and operations of the Kent Terrace property. These decreases were
offset by the receipt of $2,188,787 in prepayments on the Town House and Hoboken
purchase money notes. Subsequent to December 31, 1996, the Company received a
$1,074,200 principal prepayment on its Cedarbrooke note receivable.


     Operating Activities

Presidential's principal source of cash from operating activities is from
interest on its mortgage portfolio, which was $3,178,511 in 1996, net of
interest payments on wrap mortgage debt. In 1996, net cash received from rental
property operations was $1,158,374 which is net of distributions to minority
partners but before additions and improvements and mortgage amortization.


     Investing Activities

Presidential holds a portfolio of mortgage notes receivable which consist
primarily of notes arising from sales of real properties previously owned by the
Company. Some of these notes wrap around underlying mortgage debt (the
"Underlying Debt") which is paid by Presidential only out of funds received on
its mortgage portfolio relating to the Underlying Debt. During 1996, the Company
received principal payments of $2,608,404 on its mortgage portfolio (net of any
principal payments attributable to the Underlying Debt), of which approximately
$2,500,461 represented prepayments, which are sporadic and cannot be relied upon
as a regular source of liquidity. In 1996, the Company also received $69,530
from sales of foreclosed properties, which are also sporadic.

During 1996, the Company invested $11,150,867 in the purchase from Fleet Bank
National Association of the $14,650,867 Fairfield


                                      34
<PAGE>   35

Towers First Mortgage, which mortgage was purchased at a $3,500,000 discount.
The Company paid $2,500,867 in cash and executed an $8,650,000 note to Fleet for
the purchase of this mortgage. The Fairfield Towers First Mortgage matures in
2006, the interest rate is 1% above Fleet's prime interest rate and principal
repayments on the mortgage are required upon the sale of each condominium unit.

During 1996, the Company invested $956,584 in additions and improvements to its
properties.

     Financing Activities

The Company's indebtedness at December 31, 1996, consisted of $32,126,506 of
mortgages (including $5,613,041 of underlying indebtedness on properties not
owned by the Company but on which the Company holds wraparound mortgages). The
mortgage debt, which is secured by individual properties, is nonrecourse to the
Company with the exception of the Mapletree Industrial Center mortgage which was
refinanced in June of 1996, and which is secured by the property and a guarantee
of repayment by Presidential. Generally mortgage debt repayment is serviced with
cash flow from the operations of the individual properties. During 1996, the
Company made $526,351 of principal payments on mortgage debt on properties which
it owns. In addition, the Company refinanced the mortgage on its Mapletree
Industrial Center property in Palmer, Massachusetts in June, 1996 and the
existing mortgage of $238,181 was paid from the proceeds of the new $300,000
mortgage. The interest rate is 8.25% for the first year and will be adjusted
annually to equal the Lender's prime rate. The mortgage matures in June, 2011
and requires monthly payments of principal and interest in the initial amount of
$2,910.

The mortgages on the Company's properties are self-liquidating at fixed rates of
interest with the exception of the mortgages on Metmor Plaza, Building
Industries Center and Continental Gardens. The Metmor Plaza mortgage in the
outstanding amount of $11,399,359 amortizes monthly with a $10,415,779 balloon
payment due at maturity in February, 1999 and has a variable interest rate which
is capped at 8%. The Building Industries Center mortgage in the outstanding
amount of $949,208 amortizes monthly with a $909,833 balloon payment due at
maturity in May, 2000 and has an interest rate of 10%. The Continental Gardens
mortgage in the amount of $7,800,000, bears interest at 9.1% through January,
2000 and a rate to be based on Treasury bill rates thereafter. This mortgage
begins to amortize in 1997 and there will be a balloon payment of approximately
$7,214,000 due at maturity in January, 2005.

During the fourth quarter of 1996, the Company obtained an $8,650,000 bank loan
from Fleet in connection with the


                                      35
<PAGE>   36

acquisition of the Fairfield Towers First Mortgage. The note is nonrecourse to
Presidential except for a guarantee limited to $1,000,000 of the principal
amount and matures on October 30, 2001. The interest rate is variable and is
based at the Company's election on either the bank's prime rate plus 1%, a cost
of funds rate plus 3%, or various LIBOR rates plus 3%. The note amortizes
monthly based on a 9.25% interest rate for a 25 year term with additional
principal payments due upon the sale of condominium units.

During 1996, Presidential declared and paid cash distributions of $2,123,045 to
its shareholders and received proceeds from dividend reinvestments of $131,677.


     Fairfield Towers

The Company's financial performance and liquidity in 1997 and subsequent years
will be affected by the results of the condominium conversion of Fairfield
Towers Apartments in Brooklyn, New York by the owner of that property and the
rental operations of the unsold condominium units. In October of 1996, the
Company acquired the $14,650,867 Fairfield Towers First Mortgage on 1,017
condominium units at Fairfield Towers for a purchase price of $11,150,867 and in
connection with the acquisition extended the maturity date of the Fairfield
Towers First Mortgage to October 30, 2006. The Fairfield Towers First Mortgage
provides for principal repayments prior to maturity upon the sale of individual
condominium units. The Company also holds the Fairfield Towers Second Mortgage
having an outstanding principal balance of $14,659,841 on the 1,017 condominium
units. Until the Fairfield Towers First Mortgage is repaid, Presidential will
receive basic interest on the Fairfield Towers Second Mortgage only out of net
cash flow from operations of the property and release payments upon the sale of
each condominium unit in the amount of $3,000 per unit. All unpaid basic
interest and additional interest (which is based on percentages of gross sales
proceeds) will be deferred until after repayment of the Fairfield Towers First
Mortgage.

Presidential paid $2,500,867 of its $11,150,867 purchase price for the Fairfield
Towers First Mortgage in cash and executed an $8,650,000 note for the balance
(the "Fairfield Purchase Money Note"). The Fairfield Purchase Money Note is
secured by a collateral assignment of the Fairfield Towers First Mortgage and
all payments of principal received by Presidential under the Fairfield Towers
First Mortgage are utilized to make principal repayments on the Fairfield
Purchase Money Note. In addition, Presidential is making principal payments on
the Fairfield Purchase Money Note in amounts sufficient to amortize it based on
a 9.25% interest rate over a 25 year term, with the entire outstanding principal
balance due on October 30, 2001. The


                                      36
<PAGE>   37

spread between the interest receivable on the Fairfield Towers First Mortgage
and the interest payable by Presidential on the Fairfield Purchase Money Note
will result in a substantial return for Presidential on its $2,500,867 cash
investment in the Fairfield Towers First Mortgage and, if and when the principal
amount of the Fairfield Towers First Mortgage is repaid in full, Presidential
will recover the $3,500,000 purchase discount that it obtained in acquiring the
Fairfield Towers First Mortgage. While the Company's return on the Fairfield
Towers Second Mortgage during the initial years of the conversion has been and
will continue to be limited, if the conversion is successful and the Fairfield
Towers First Mortgage is repaid, the Company expects to ultimately recover the
outstanding principal balance of the Fairfield Towers Second Mortgage and
substantial amounts of basic and additional interest. In June of 1994, the
owners of the Fairfield Towers property closed the first sales of the
condominium units pursuant to the conversion of the property to condominium
status. At December 31, 1996, a total of 135 units were sold.

The success of the condominium conversion could be adversely affected by the
existence of approximately $4,800,000 of unpaid real estate taxes and interest
accrued on such taxes owed by the owners of the property, as of December 31,
1996. Approximately $3,000,000 of this amount arose prior to the condominium
conversion of the property and was covered by a deferred payment agreement with
the City of New York which required payments as condominium units were sold.
However, as a result of the slower than projected pace of sales, the term of the
deferred payment agreement expired. Subsequent to December 31, 1996, the Company
advanced $600,000 to the owner to be used to pay a portion of the unpaid real
estate taxes and interest, which amount was added to the indebtedness secured by
the Fairfield Towers First Mortgage, and the holder of the $8,650,000 Fairfield
Purchase Money Note has agreed to advance $600,000 to Presidential to reimburse
it for its $600,000 advance. The owner is in the process of negotiating a new
deferment agreement with the City of New York. However, no assurances can be
given that the owner will be successful in negotiating a satisfactory deferment
agreement with the City of New York, and if a satisfactory agreement is not
obtained, a continuing default in the payment of real estate taxes could
adversely affect the success of the condominium conversion at Fairfield Towers
and the value of Presidential's First and Second Mortgages.

      Environmental Matters

The Company is involved in various stages of environmental projects for the
investigation and removal of potentially hazardous drums found at three sites on
its Mapletree Industrial Center property in Palmer, Massachusetts. Accrued
liabilities for environmental matters have been recorded in operating


                                      37
<PAGE>   38

expenses when it is probable that a liability has been incurred and the amount
of the liability can be reasonably estimated. These estimates are exclusive of
claims against third parties and have not been discounted. Actual costs incurred
may vary from these estimates due to the inherent uncertainties involved. The
Company believes that any additional liability in excess of amounts provided
which may result from the resolution of this matter will not have a material
adverse effect on the financial condition, liquidity or the cash flow of the
Company. As of December 31, 1996, the response action outcome and cleanup at the
first and second disposal sites have been completed. The site investigation at
the third disposal site has been completed and, as a result, the Company accrued
an additional $120,500 of environmental costs in order to complete further site
investigations and cleanup costs at this site. This work is scheduled to be
accomplished over the next four years. For 1996, 1995 and 1994, the amounts
charged to operations for environmental expenses were $129,129, $83,536 and
$17,758, respectively.


                                      38
<PAGE>   39

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      See Table of Contents to Consolidated Financial Statements.

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

      None.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      Reference is made to the Company's definitive Proxy Statement for its
      Annual Meeting of Shareholders to be held June 12, 1997, which Proxy
      Statement will be filed with the Securities and Exchange Commission
      pursuant to Regulation 14A and which is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

      Reference is made to the Company's definitive Proxy Statement for its
      Annual Meeting of Shareholders to be held June 12, 1997, which Proxy
      Statement will be filed with the Securities and Exchange Commission
      pursuant to Regulation 14A and which is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      Reference is made to the Company's definitive Proxy Statement for its
      Annual Meeting of Shareholders to be held June 12, 1997, which Proxy
      Statement will be filed with the Securities and Exchange Commission
      pursuant to Regulation 14A and which is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Reference is made to the Company's definitive Proxy Statement for its
      Annual Meeting of Shareholders to be held June 12, 1997, which Proxy
      Statement will be filed with the Securities and Exchange Commission
      pursuant to Regulation 14A and which is incorporated herein by reference.

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

     (a) and (d) A Table of Contents to Consolidated Financial Statements and
     Schedules is included in this report.

     (b) No report on Form 8-K was filed during the calendar quarter ended
     December 31, 1996.


                                      39
<PAGE>   40

      (c) Exhibits:

3.1 Certificate of Incorporation of the Company (incorporated herein by
reference to Exhibit 3.5 to Post-effective Amendment No. 1 to the Company's
Registration Statement on Form S-14, Registration No. 2-83073).

3.2 Certificate of Amendment to Certificate of Incorporation of the Company
(incorporated herein by reference to Exhibit 3 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1987, Commission File No. 1-8594).

3.3 Certificate of Amendment to Certificate of Incorporation of the Company,
filed July 21, 1988 with the Secretary of State of the State of Delaware
(incorporated herein by reference to Exhibit 3.3 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1988, Commission File No. 1-8594).

3.4 Certificate of Amendment to Certificate of Incorporation of the Company,
filed on September 12, 1989 with the Secretary of State of the State of Delaware
(incorporated herein by reference to Exhibit 3.4 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1989, Commission File No. 1-8594).

3.5 By-laws of the Company (incorporated herein by reference to Exhibit 3.7 to
Post-effective Amendment No. 1 to the Company's Registration Statement on Form
S-14, Registration No. 2-83073).

10.1 Stock Option Plan effective July 1, 1987 for a maximum of 320,000 shares of
Class B Common Stock (incorporated herein by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1988,
Commission File No. 1-8594).

10.2 1993 Stock Option Plan for 250,000 shares of Class B common stock
(incorporated herein by reference to Exhibit 10.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1993, Commission File No. 1-8594).

10.3 Employment Agreement dated as of November 1, 1982 between the Company and
Robert E. Shapiro, as amended by Amendments dated March 1, 1983, November 25,
1985, February 23, 1987 and January 4, 1988, (incorporated herein by reference
to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1988, Commission File No. 1-8594).

10.4 Employment Agreement dated as of November 1, 1982 between the Company and
Joseph Viertel as amended by Amendments dated March 1, 1983, November 22, 1985
and February 23, 1987, (incorporated herein by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1992,
Commission File No. 1-8594).


                                      40
<PAGE>   41

10.5 Employment Agreement dated November 14, 1993 between the Company and
Jeffrey F. Joseph, (incorporated herein by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1993,
Commission File No. 1-8594).

10.6 Employment Agreement dated November 14, 1993 between the Company and Steven
Baruch, (incorporated herein by reference to Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1993, Commission File
No. 1-8594).

10.7 Employment Agreement dated November 14, 1993 between the Company and Thomas
Viertel, (incorporated herein by reference to Exhibit 10.12 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1993, Commission File
No. 1-8594).

10.8 Settlement Agreement dated November 14, 1991 between the Company and Steven
Baruch, Jeffrey F. Joseph and Thomas Viertel, (incorporated herein by reference
to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1991, Commission File No. 1-8594).

10.9 Presidential Realty Corporation Defined Benefit Plan dated December 16,
1994, (incorporated herein by reference to Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994, Commission File No.
1-8594).

21. List of Subsidiaries of Registrant dated December 31, 1994, (incorporated
herein by reference to Exhibit 21 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994, Commission File No. 1-8594).

27. Financial Data Schedule for the year ended December 31, 1996 (see page 90).


                                      41
<PAGE>   42

                                   SIGNATURES

Pursuant to the requirements of Section 13 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.

                    PRESIDENTIAL REALTY CORPORATION

                    By:      THOMAS VIERTEL
                       --------------------------
                             Thomas Viertel
                             Chief Financial Officer
                             March 20, 1997

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

      Signature and Title                                   Date


By:   ROBERT E. SHAPIRO                                     March 20, 1997
   ----------------------------
      Robert E. Shapiro
      Chairman of the Board of
      Directors and Director

By:   JEFFREY F. JOSEPH                                     March 20, 1997
   ----------------------------
      Jeffrey F. Joseph
      President and Director

By:   THOMAS VIERTEL                                        March 20, 1997
   ----------------------------
      Thomas Viertel
      Executive Vice President
      (Chief Financial Officer)

By:   ELIZABETH DELGADO                                     March 20, 1997
   ----------------------------
      Elizabeth Delgado
      Treasurer
      (Principal Accounting Officer)

By:   RICHARD BRANDT                                        March 20, 1997
   ----------------------------
      Richard Brandt
      Director

By:   MORTIMER M. CAPLIN                                    March 20, 1997
   ----------------------------
      Mortimer M. Caplin
      Director

By:   ROBERT FEDER                                          March 20, 1997
   ----------------------------
      Robert Feder
      Director


                                      42
<PAGE>   43

SIGNATURES (Continued)


      Signature and Title                                   Date



By:    JOSEPH VIERTEL                                       March 20, 1997
   ----------------------------
       Joseph Viertel
       Director


                                      43
<PAGE>   44

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                       Page
                                                                       ----

Independent Auditors' Report                                            45

CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated Balance Sheets - December 31, 1996
  and 1995                                                              46

Consolidated Statements of Operations for the
  Years Ended December 31, 1996, 1995 and 1994                          48

Consolidated Statements of Stockholders' Equity for
  the Years Ended December 31, 1996, 1995 and 1994                      49

Consolidated Statements of Cash Flows for the
  Years Ended December 31, 1996, 1995 and 1994                          50

Notes to Consolidated Financial Statements                              52

CONSOLIDATED SCHEDULES:

II.    Valuation and Qualifying Accounts for the Years
         Ended December 31, 1996, 1995 and 1994                         85

III.   Real Estate and Accumulated Depreciation at
         December 31, 1996                                              86

IV.    Mortgage Loans on Real Estate at December 31, 1996               88



NOTE:  All schedules, other than those indicated above, are omitted because of
       the absence of the conditions under which they are required or because
       the required information is included in the consolidated financial
       statements or the notes to the consolidated financial statements.


                                      44
<PAGE>   45

INDEPENDENT AUDITORS' REPORT


Board of Directors and Stockholders
Presidential Realty Corporation
White Plains, New York

We have audited the accompanying consolidated balance sheets of Presidential
Realty Corporation and subsidiaries (the "Company") as of December 31, 1996 and
1995 and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. Our audits also included the financial statement schedules listed in the
foregoing Table of Contents. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits.

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

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

As described in Note 7, the Company changed its method of accounting for
securities in 1994.


Deloitte & Touche LLP




Stamford, Connecticut
March 10, 1997
<PAGE>   46

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                    December 31,       December 31,
                                                                       1996               1995
                                                                    ------------       ------------
<S>                                                                 <C>                <C>
Assets

  Mortgage portfolio (Note 2):
    Sold properties, accrual                                       $46,522,752         $34,605,410
    Related parties, accrual                                           976,141           1,090,746
    Sold properties, impaired                                       14,659,841          16,080,144
    Related parties, impaired                                        1,567,400           1,639,396
                                                                   -----------         -----------
    Total mortgage portfolio                                        63,726,134          53,415,696
                                                                   -----------         -----------
  Less discounts:
    Sold properties, accrual                                         6,322,402           3,554,902
    Related parties, accrual                                           145,915             162,766
    Sold properties, impaired                                        7,765,964           7,829,694
                                                                   -----------         -----------
    Total discounts                                                 14,234,281          11,547,362
                                                                   -----------         -----------
  Less deferred gains:
    Sold properties, accrual                                        14,046,423          14,830,873
    Sold properties, impaired                                        5,489,113           6,516,474
    Related parties, impaired                                        1,567,400           1,639,396
                                                                   -----------         -----------
    Total deferred gains                                            21,102,936          22,986,743
                                                                   -----------         -----------
  Net mortgage portfolio (of which $587,839 in 1996
    and $1,878,646 in 1995 are due within one year)                 28,388,917          18,881,591
                                                                   -----------         -----------

  Real estate (Note 3)                                              25,369,405          23,871,618
    Less: accumulated depreciation                                   5,680,108           5,073,887
                                                                   -----------         -----------
  Net real estate                                                   19,689,297          18,797,731
                                                                   -----------         -----------

  Foreclosed properties (Note 4)                                       588,683             601,434
  Minority partners' interest (Note 6)                               3,830,024           3,971,048
  Prepaid expenses and deposits in escrow                            1,123,697           1,327,000
  Other receivables (net of valuation allowance of
    $184,790 in 1996 and $143,739 in 1995)                             635,848           1,029,052
  Other receivables (related party)                                     10,109              10,664
  Securities available for sale (Note 7)                               975,208           2,390,346
  Cash and cash equivalents                                          1,392,135           1,306,505
  Other assets                                                       1,166,115           1,197,743
                                                                   -----------         -----------
  Total Assets                                                     $57,800,033         $49,513,114
                                                                   ===========         ===========
</TABLE>


  See notes to consolidated financial statements.


                                       46
<PAGE>   47

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

Liabilities and Stockholders' Equity

<TABLE>
<CAPTION>
                                                                             December 31,       December 31,
                                                                                 1996               1995
                                                                             ------------       ------------
<S>                                                                         <C>                 <C>
Liabilities:
  Mortgage debt (Note 8):
    Properties owned                                                        $26,513,465         $26,977,997
    Wrap mortgage debt on sold properties                                     5,613,041           6,060,537
                                                                            -----------         -----------
  Total (of which $1,053,553 in 1996 and $1,002,048
    in 1995 are due within one year)                                         32,126,506          33,038,534

  Note payable to bank (of which $93,377 is due
    within one year) (Note 9)                                                 8,642,600
  Executive pension plan liability (Note 16)                                  1,716,112           1,841,859
  Accrued liabilities                                                         2,092,876           1,776,117
  Accrued postretirement costs (Note 17)                                        592,453             617,316
  Deferred income                                                               395,677             560,164
  Accounts payable                                                              271,126             346,522
  Other liabilities                                                             524,526             531,363
                                                                            -----------         -----------
Total Liabilities                                                            46,361,876          38,711,875
                                                                            -----------         -----------

Stockholders' Equity:
  Common stock; par value $.10 a share (Notes 1-H and 13)
    Class A, authorized 700,000 shares, issued and
      outstanding 478,940 shares                                                 47,894              47,894
    Class B               December 31, 1996          December 31, 1995          308,675             306,406
    -----------           -----------------          -----------------
    Authorized:                  10,000,000                 10,000,000
    Issued:                       3,086,750                  3,064,056
    Treasury:                        14,221                     14,221

  Additional paid-in capital                                                  1,874,341           1,744,933
  Retained earnings                                                           9,350,801           8,905,779
  Net unrealized gain (loss) on securities available for sale (Note 7)           49,014             (11,205)
  Class B, treasury stock (at cost)                                            (192,568)           (192,568)
                                                                            -----------         -----------
Total Stockholders' Equity                                                   11,438,157          10,801,239
                                                                            -----------         -----------
Total Liabilities and Stockholders' Equity                                  $57,800,033         $49,513,114
                                                                            ===========         ===========
</TABLE>


See notes to consolidated financial statements.


                                       47
<PAGE>   48

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31,
                                                                                -----------------------------------------
                                                                                 1996              1995             1994
                                                                                ------            ------           ------
<S>                                                                           <C>              <C>             <C>
Income:
  Rental                                                                      $8,450,821       $7,998,825      $6,388,155
  Interest on mortgages - sold properties                                      2,472,996        2,118,275       2,009,476
  Interest on wrap mortgages                                                   1,395,038        1,415,177       1,434,591
  Interest on mortgages - related parties                                        248,851          232,472         278,140
  Investment income                                                              312,298          338,721         226,170
  Other                                                                           58,535           67,955         116,874
                                                                              ----------       ----------      ----------
Total                                                                         12,938,539       12,171,425      10,453,406
                                                                              ----------       ----------      ----------
Costs and Expenses:
  General and administrative                                                   2,260,927        1,940,992       2,310,127
  Interest on notes payable and other                                            271,873          115,756         138,328
  Interest on wrap mortgage debt                                                 247,780          267,919         287,333
  Amortization of loan acquisition costs                                          22,301
  Depreciation on non-rental property                                             24,986           23,077          29,935
  Rental property:
    Operating expenses                                                         3,775,390        3,411,014       2,493,797
    Interest on mortgages                                                      2,201,104        2,273,587       1,464,939
    Real estate taxes                                                            777,353          776,196         598,185
    Depreciation on real estate                                                  651,652          606,999         480,123
    Amortization of mortgage and organization costs                              130,892          135,159         164,509
    Minority interest share of partnership income                                845,873          752,812         664,266
    Loss from operations of foreclosed properties (Note 4)                        39,074           82,849          71,356
    Net gain from sales of foreclosed properties (Note 4)                        (33,682)         (88,151)        (74,035)
                                                                              ----------       ----------      ----------
Total                                                                         11,215,523       10,298,209       8,628,863
                                                                              ----------       ----------      ----------
Income before net gain from sales of properties and securities
  and cumulative effect of change in accounting principle                      1,723,016        1,873,216       1,824,543

Net gain from sales of properties and securities (includes a net gain
  from fire insurance settlement of $1,816,873 in 1994 (Note 3))                 845,051           71,367       2,668,919
                                                                              ----------       ----------      ----------
Income before cumulative effect of change in accounting principle              2,568,067        1,944,583       4,493,462

Cumulative effect of change in accounting for securities (Note 7)                                                  37,617
                                                                              ----------       ----------      ----------
Net Income                                                                    $2,568,067       $1,944,583      $4,531,079
                                                                              ==========       ==========      ==========

Earnings per Common Share (Note 1-H):
  Income before net gain from sales of properties and securities
    and cumulative effect of change in accounting principle                        $0.49            $0.53           $0.52

  Net gain from sales of properties and securities                                  0.24             0.02            0.76
                                                                              ----------       ----------      ----------
  Income before cumulative effect of change in accounting principle                 0.73             0.55            1.28

  Cumulative effect of change in accounting for securities (Note 7)                                                  0.01
                                                                              ----------       ----------      ----------
Net Income per Common Share                                                        $0.73            $0.55           $1.29
                                                                              ==========       ==========      ==========
Cash Distributions per Common Share (Note 14)                                      $0.60            $0.60           $0.60
                                                                              ==========       ==========      ==========
Weighted Average Number of Shares Outstanding                                  3,538,667        3,517,306       3,499,620
                                                                              ==========       ==========      ==========
</TABLE>


See notes to consolidated financial statements.


                                       48
<PAGE>   49

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                     Net Unrealized
                                                          Additional                  Gain (Loss) on                     Total
                                               Common      Paid-in      Retained       Securities        Treasury    Stockholders'
                                               Stock       Capital      Earnings    Available for Sale    Stock         Equity
                                               ------     ----------    --------    ------------------   --------    -------------
<S>                                          <C>         <C>           <C>            <C>                 <C>         <C>
Balance at January 1, 1994                   $350,609    $1,502,107    $6,639,550     $                   ($192,568)   $8,299,698

Net proceeds from dividend reinvestment
  and share purchase plan                       1,789       126,385                                                       128,174
Net income                                                              4,531,079                                       4,531,079
Cash distributions ($.60 per share)                                    (2,099,441)                                     (2,099,441)
Cumulative effect of change in accounting
  for securities                                                                         (37,617)                         (37,617)
Net unrealized loss on securities
  available for sale                                                                    (247,440)                        (247,440)
                                             --------    ----------    ----------     ----------          ---------   -----------
Balance at December 31, 1994                  352,398     1,628,492     9,071,188       (285,057)          (192,568)   10,574,453

Net proceeds from dividend reinvestment
  and share purchase plan                       1,902       116,441                                                       118,343
Net income                                                              1,944,583                                       1,944,583
Cash distributions ($.60 per share)                                    (2,109,992)                                     (2,109,992)
Change in net unrealized gain (loss) on
  securities available for sale                                                          273,852                          273,852
                                             --------    ----------    ----------     ----------          ---------   -----------
Balance at December 31, 1995                  354,300     1,744,933     8,905,779        (11,205)          (192,568)   10,801,239

Net proceeds from dividend reinvestment
  and share purchase plan                       2,269       129,408                                                       131,677
Net income                                                              2,568,067                                       2,568,067
Cash distributions ($.60 per share)                                    (2,123,045)                                     (2,123,045)
Change in net unrealized gain (loss) on
  securities available for sale                                                           60,219                           60,219
                                             --------    ----------    ----------     ----------          ---------   -----------
Balance at December 31, 1996                 $356,569    $1,874,341    $9,350,801        $49,014          ($192,568)  $11,438,157
                                             ========    ==========    ==========     ==========          =========   ===========
</TABLE>


See notes to consolidated financial statements.


                                       49
<PAGE>   50

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                                   ---------------------------------------------------
                                                                       1996              1995                  1994
                                                                      ------            ------                ------
<S>                                                                 <C>               <C>                  <C>
Cash Flows from Operating Activities:
  Cash received from rental properties                              $8,389,399        $7,964,015           $6,420,896
  Interest received                                                  3,426,291         3,247,312            3,654,340
  Miscellaneous income (disbursements)                                 218,998           (61,353)             152,238
  Interest paid on rental property mortgages                        (2,221,872)       (2,267,543)          (1,380,830)
  Interest paid on wrap mortgage debt                                 (247,780)         (267,919)            (287,333)
  Interest paid on loans                                               (69,558)                               (43,776)
  Cash disbursed for rental and foreclosed property operations      (4,308,676)       (4,087,044)          (3,160,242)
  Cash disbursed for general and administrative costs               (2,368,704)       (2,541,953)          (1,999,976)
                                                                    ----------        ----------           ----------
Net cash provided by operating activities                            2,818,098         1,985,515            3,355,317
                                                                    ----------        ----------           ----------

Cash Flows from Investing Activities:
  Payments received on notes receivable                              3,055,900           953,054            1,798,704
  Payments disbursed for investments in notes receivable           (11,176,563)          (23,944)             (34,747)
  Net payments received on sales of foreclosed properties               69,530           172,098              339,280
  Net proceeds received from fire insurance settlement                                                      2,727,156
  Payments disbursed for purchase of property                                                              (9,837,786)
  Payments disbursed for additions and improvements                   (956,584)         (465,519)            (587,662)
  Proceeds from sales of securities                                  2,650,059           146,908              162,533
  Purchases of securities                                           (1,231,478)         (487,060)            (100,000)
  Net cash receipts from operations of foreclosed properties             4,372             2,564               18,381
                                                                    ----------        ----------           ----------
Net cash provided by (used in) investing activities                 (7,584,764)          298,101           (5,514,141)
                                                                    ----------        ----------           ----------
Cash Flows from Financing Activities:
  Principal payments on mortgage debt:
    Properties owned                                                  (526,351)         (511,827)            (409,759)
    Wrap mortgage debt on sold properties                             (447,496)         (431,748)            (416,562)
  Mortgage debt payment from proceeds of mortgage refinancing         (238,181)                            (2,008,577)
  Mortgage proceeds                                                    300,000                             11,322,037
  Mortgage refinancing repairs and replacement escrows                                                       (846,773)
  Mortgage costs                                                      (182,059)           (1,500)            (967,743)
  Note proceeds                                                      8,650,000
  Principal payments on notes payable                                   (7,400)                              (836,726)
  Cash distributions on common stock                                (2,123,045)       (2,109,992)          (2,099,441)
  Proceeds from dividend reinvestment and share purchase plan          131,677           118,343              128,174
  Distributions to minority partners                                  (704,849)         (442,598)            (653,350)
                                                                    ----------        ----------           ----------
Net cash provided by (used in) financing activities                  4,852,296        (3,379,322)           3,211,280
                                                                    ----------        ----------           ----------

Net Increase (Decrease) in Cash and Cash Equivalents                    85,630        (1,095,706)           1,052,456

Cash and Cash Equivalents, Beginning of Year                         1,306,505         2,402,211            1,349,755
                                                                    ----------        ----------           ----------
Cash and Cash Equivalents, End of Year                              $1,392,135        $1,306,505           $2,402,211
                                                                    ==========        ==========           ==========
</TABLE>


See notes to consolidated financial statements.


                                       50
<PAGE>   51

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                                      ----------------------------------------------
                                                                       1996              1995                  1994
                                                                      ------            ------                ------
<S>                                                                 <C>               <C>                  <C>
Reconciliation of Net Income to Net Cash
  Provided by Operating Activities

Net Income                                                          $2,568,067        $1,944,583           $4,531,079
                                                                    ----------        ----------           ----------

Adjustments to reconcile net income to net
  cash provided by operating activities:
    Cumulative effect of accounting change for
      securities                                                                                              (37,617)
    Depreciation and amortization                                      829,831           765,235              674,567
    Net gain from fire insurance settlement                                                                (1,816,873)
    Gain from sales of properties and securities                      (845,051)          (71,367)            (852,046)
    Net gain from sales of foreclosed properties                       (33,682)          (88,151)             (74,035)
    Amortization of discounts on notes and fees                       (802,857)         (662,247)            (640,622)
    Decrease (increase) in accounts receivable                          55,569          (156,977)             (23,946)
    Increase (decrease) in accounts payable
      and accrued liabilities                                           90,753          (545,426)             748,171
    Increase (decrease) in deferred income                            (164,487)         (175,388)             375,657
    Decrease (increase) in prepaid expenses,
      deposits in escrow and deferred charges                          244,121           264,769             (271,102)
    Increase (decrease) in security deposit liabilities                 10,419           (24,344)             (14,519)
    Miscellaneous                                                       19,542           (17,984)              92,337
    Minority share of partnership income                               845,873           752,812              664,266
                                                                    ----------        ----------           ----------
Total adjustments                                                      250,031            40,932           (1,175,762)
                                                                    ----------        ----------           ----------

Net cash provided by operating activities                           $2,818,098        $1,985,515           $3,355,317
                                                                    ==========        ==========           ==========

Supplemental noncash disclosures:

    Notes received from sales of foreclosed properties                                   $91,450           $1,261,250
                                                                                      ==========           ==========

    Deferred loan modification fee and deferred interest
      added to sold property note receivable                                                                 $310,000
                                                                                                           ==========

    Transfers to foreclosed properties                                                                       $101,796
                                                                                                           ==========

    Property received in satisfaction of debt                                                                $200,000
                                                                                                           ==========
</TABLE>


See notes to consolidated financial statements.


                                       51
<PAGE>   52

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. General - Presidential Realty Corporation ("Presidential" or the "Company"),
a Real Estate Investment Trust ("REIT"), is engaged principally in the holding
of notes and mortgages secured by real estate and in the ownership of income
producing real estate.

B. Real Estate - Real estate is stated at cost. Generally, depreciation is
provided on the straight-line method over the assets' estimated useful lives,
which range from twenty to fifty years for buildings and leaseholds and from
three to ten years for furniture and equipment. Maintenance and repairs are
charged to operations as incurred and renewals and replacements are charged to
accumulated depreciation. Management reviews the operations of each property on
a monthly basis and inspects the properties on a periodic basis to determine if
an impairment in value has occurred. If an impairment in value is judged under
all of the circumstances to be other than temporary, management will write down
the carrying value to its estimated fair value. The Company estimates fair value
based on the best information available making whatever estimates, judgments and
projections are considered necessary.

C. Mortgage Portfolio - Net mortgage portfolio is the net carrying value of
notes receivable and represents the outstanding principal amounts of the notes
reduced by discounts and/or deferred gains. Real estate is the primary form of
collateral on all notes receivable. The fair value of the collateral is
monitored on an ongoing basis. Such monitoring includes review of operating and
occupancy reports and physical inspection of the property, as well as
independent appraisals where warranted. If the value of the collateral appears
insufficient to secure the net carrying value of the notes receivable, the
Company would establish an allowance for possible loan losses or write down the
loan to reflect the estimated fair value of the underlying collateral, net of
estimated disposition costs.

The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan", effective January 1,
1995, and, accordingly, has classified loans that are within the scope of this
statement as impaired loans. The principal effect on the Company of SFAS No. 114
was the elimination of the categories of loans classified as nonaccrual loans
and loans in process of foreclosure. The adoption of SFAS No. 114 did not result
in additional provisions for loan losses or changes in previously reported net
earnings

                                      52
<PAGE>   53

due to the Company's policy of measuring loan impairment based on the fair value
of the loan's underlying collateral.

D. Sale of Real Estate - Presidential complies with the provisions of SFAS No.
66, "Accounting for Sales of Real Estate". Accordingly, the gains on certain
transactions are deferred and are being recognized on the installment method
until such transactions have complied with the criteria for full profit
recognition.

E. Discounts on Notes Receivable - Presidential assigned discounted values to
long-term notes received from the sales of properties to reflect the difference
between the stated interest rates on the notes and market interest rates at the
time of acceptance. In addition, discounts on notes receivable include discounts
received from the purchase of notes. Such discounts are being amortized using
the interest method.

F. Principles of Consolidation - The consolidated financial statements include
the accounts of Presidential Realty Corporation and its wholly owned
subsidiaries. Additionally, the accompanying consolidated financial statements
include 100% of the account balances of UTB Associates and PDL, Inc. and
Associates Limited Co-Partnership ("Metmor Plaza Associates"), partnerships in
which Presidential is the General Partner and owns a 66-2/3% interest and a 25%
interest, respectively (see Note 6).

All significant intercompany balances and transactions have been eliminated.

G. Rental Income Recognition - Rental income is recorded on the accrual method.
Contingent rents are recognized as income when determinable. Recognition of
rental income is generally discontinued when the rental is delinquent for ninety
days or more, or earlier, if management determines that collection is doubtful.

H. Earnings Per Common Share - Per share data is based on the weighted average
number of shares of Class A and Class B common stock outstanding and common
stock equivalents during each year. For the three years ended December 31, 1996,
no dilution in per share earnings would have resulted from the exercise of the
stock options referred to in Note 15.

I. Cash and Cash Equivalents - Cash and cash equivalents includes cash on hand,
cash in banks and money market funds.

J. Benefits - The Company follows SFAS Nos. 87 and 106 in accounting for pension
(see Note 16) and postretirement benefits (see Note 17), respectively.


                                      53
<PAGE>   54

K. Management Estimates - The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated balance sheets and income and
expense for the period. Actual results could differ from those estimates.

L. Environmental Liabilities and Expenditures - Accruals for environmental
matters are recorded in operating expenses when it is probable that a liability
has been incurred and the amount of the liability can be reasonably estimated.
Accrued liabilities are exclusive of claims against third parties and are not
discounted (see Note 11).

M. Recently Issued Accounting Standard - During 1995, SFAS No. 123 "Accounting
for Stock-Based Compensation" was issued. The Company will comply with
additional disclosures required by this statement but is not required to change
its method of accounting for stock-based compensation. Additional disclosures
are not required as no new options were granted in 1995 and 1996.

2. MORTGAGE PORTFOLIO

The Company's mortgage portfolio includes notes receivable - sold properties and
notes receivable - related parties and includes both accrual and impaired loans.

The Company complies with the provision of SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", and, accordingly, has classified loans that
are within the scope of this statement as impaired loans.

Notes receivable - sold properties consist of:

(1)    Long-term purchase money notes from sales of properties previously owned
       by the Company. These purchase money notes have varying interest rates
       with balloon payments due at maturity. Also included in this category is
       the Fairfield Towers First Mortgage (discussed further below) which the
       Company purchased in the fourth quarter of 1996.

(2)    Notes receivable from sales of cooperative apartment units. Substantially
       all of these notes were either received from Ivy Properties, Ltd. or its
       affiliates (collectively "Ivy") in connection with a settlement agreement
       between the Company and Ivy executed in November, 1991 (the "Settlement
       Agreement") or from


                                   54
<PAGE>   55

       sales of foreclosed cooperative apartments received from Ivy pursuant to
       the Settlement Agreement (see Notes 4 and 19). These notes generally have
       market interest rates and the majority of these notes amortize monthly
       with balloon payments due at maturity.

Notes receivable - related parties are all due from Ivy and consist of:

(1)    Purchase money notes resulting from sales of property or partnership
       interests to Ivy.

(2)    Notes receivable relating to loans made by the Company to Ivy in
       connection with Ivy's cooperative conversion business.

The following table summarizes the components of the mortgage portfolio.


                                      55
<PAGE>   56

MORTGAGE PORTFOLIO
------------------
<TABLE>
<CAPTION>
                                           Sold Properties                                                 Related Parties
                          ------------------------------------------------------------------       -------------------------------
                           Accrual            Impaired            Accrual                                                         
                          Properties         Properties         Cooperative                          Accrual            Impaired  
                          previously         previously          apartment                            Sold                Sold    
                            owned               owned              units            Total          properties          properties 
                          -----------      -----------         ----------        -----------       -----------         -----------
<S>                       <C>                <C>               <C>               <C>               <C>                 <C>

December 31, 1996
-----------------
Notes receivable          $45,058,676      $14,659,841         $1,464,076        $61,182,593          $617,419         $1,567,400 

Less:  Discounts            6,299,192        7,765,964             23,210         14,088,366            28,689                    
       Deferred gains      13,941,255        5,489,113            105,168         19,535,536                            1,567,400 
                          -----------      -----------         ----------        -----------       -----------         ---------- 
Net                       $24,818,229       $1,404,764         $1,335,698        $27,558,691          $588,730         $          
                          ===========      ---========         ==========        ===========       ===========         ========== 

Due within one year          $501,189      $                      $45,276           $546,465           $11,270         $          
Long-term                  24,317,040        1,404,764          1,290,422         27,012,226           577,460                    
                          -----------      -----------         ----------        -----------      ------------         ---------- 
Net                       $24,818,229       $1,404,764         $1,335,698        $27,558,691          $588,730         $          
                          ===========         ========        ===========        ===========       ===========         ========== 

December 31, 1995
-----------------
Notes receivable          $33,087,528      $16,080,144         $1,517,882        $50,685,554          $706,567         $1,639,396 

Less:  Discounts            3,529,610        7,829,694             25,292         11,384,596            32,832                    
       Deferred gains      14,714,513        6,516,474            116,360         21,347,347                            1,639,396 
                          -----------      -----------         ----------        -----------      ------------         ---------- 
Net                       $14,843,405       $1,733,976         $1,376,230        $17,953,611          $673,735         $          
                          ===========      ---========         ==========        ===========       ===========         ========== 

Due within one year          $494,875       $1,300,000            $44,079         $1,838,954           $11,630         $          
Long-term                  14,348,530          433,976          1,332,151         16,114,657           662,105                    
                          -----------      -----------         ----------        -----------      ------------         ---------- 
Net                       $14,843,405       $1,733,976         $1,376,230        $17,953,611          $673,735         $          
                          ===========      ---========         ==========        ===========       ===========         ========== 
</TABLE>


MORTGAGE PORTFOLIO
------------------
<TABLE>
<CAPTION>
                                 Related Parties
                          -----------------------------
                            Accrual                         
                          Cooperative                                   Total
                           conversion                                  mortgage
                             loans             Total                  portfolio
                          -----------       -----------               -----------  
<S>                       <C>                <C>                    <C>
December 31, 1996                                           
-----------------                                           
Notes receivable             $358,722       $2,543,541              $63,726,134
                                                            
Less:  Discounts              117,226          145,915               14,234,281
       Deferred gains                        1,567,400               21,102,936
                          -----------      -----------              -----------  
Net                          $241,496         $830,226              $28,388,917
                          ===========      ===========              =========== 
                                                            
Due within one year           $30,104          $41,374                 $587,839
Long-term                     211,392          788,852               27,801,078
                          -----------      -----------              -----------  
Net                          $241,496         $830,226              $28,388,917
                          ===========      ===========              =========== 
                                                            
December 31, 1995                                           
-----------------                                           
Notes receivable             $384,179       $2,730,142              $53,415,696
                                                            
Less:  Discounts              129,934          162,766               11,547,362
       Deferred gains                        1,639,396               22,986,743
                          -----------      -----------              -----------  
Net                          $254,245         $927,980              $18,881,591
                          ===========      ===========              =========== 
                                                            
Due within one year           $28,062          $39,692               $1,878,646
Long-term                     226,183          888,288               17,002,945
                          -----------      -----------              -----------  
Net                          $254,245         $927,980              $18,881,591
                          ===========      ===========              =========== 
</TABLE>                                                    


                                       56
<PAGE>   57

In June of 1996, the Company received principal prepayments on two of its
long-term purchase money notes, the Hoboken, New Jersey property note in the
amount of $1,188,787 and the Town House, Memphis, Tennessee property note in the
amount of $1,000,000. As a result, the Company recognized income on the Town
House note from the amortization of discount of $76,473 and gain on sale of
$773,258.

In October, 1996, the Company acquired a $14,650,867 first mortgage secured by
1,017 condominium units at Fairfield Towers in Brooklyn, New York (the
"Fairfield Towers First Mortgage"). The purchase price for the Fairfield Towers
First Mortgage was $11,150,867, net of a $3,500,000 discount. The Company paid
$2,500,867 in cash and obtained an $8,650,000 purchase money loan from Fleet
Bank National Association ("Fleet") for the balance of the purchase price (see
Note 9). The interest rate on the Fairfield Towers First Mortgage is 1% above
Fleet's prime rate and the loan matures on October 30, 2006. Principal
repayments are required to be made upon the sale of each condominium unit in an
amount equal to substantially all of the net proceeds of sale. The Company also
holds a subordinated note secured by the above condominium units (the "Fairfield
Towers Second Mortgage").

Subsequent to December 31, 1996, the Company received prepayment of its
$1,074,200 Cedarbrooke note receivable and modified its Woodland notes
receivable, extending the maturity date from 2000 to 2005, with interest rates
increasing in 2002 from 9% to 9.25%.

At December 31, 1996, all of the notes in the Company's mortgage portfolio are
current with the exception of those notes which are classified as impaired loans
in accordance with SFAS No. 114.

Two sold property loans, the Kent Terrace loan and the Fairfield Towers Second
Mortgage, and one related party loan, the Overlook loan, were classified as
impaired loans at December 31, 1995. In February, 1996, the Kent Terrace loan
was reclassified to real estate as a result of the Company's foreclosure of its
mortgage on the property and at December 31, 1996, the Fairfield Towers Second
Mortgage and the Overlook loan remain classified as impaired loans. These two
loans are in the aggregate amount of $16,227,241 and have a net carrying value
of $1,404,764 after deducting discounts of $7,765,964 and deferred gains of
$7,056,513. In accordance with SFAS No. 114, the Company has determined that no
allowances for credit losses are required for these loans because the net
carrying value of these loans is less than the fair value of the underlying
collateral.

The Company recognizes income on these impaired loans only to the extent that
such income is actually received. The average recorded investment in these loans
during the years ended December 31, 1996 and December 31, 1995 were $16,510,530
and $17,986,237, respectively.


                                      57
<PAGE>   58

Kent Terrace

The Kent Terrace note, having an outstanding principal balance of $1,300,000 and
a net carrying value of $329,212 after deducting a deferred gain of $970,788,
was classified as an impaired loan at December 31, 1995. This note had been in
default since October of 1994, and in February, 1996, the Company completed the
foreclosure of its mortgage and became the owner of the 112 unit apartment
property in Martinsburg, West Virginia. As a result, in 1996 the $329,212 net
carrying value of the note and the related deferred interest of $338,190 have
been reclassified to real estate (see Note 3).

Fairfield Towers

In the fourth quarter of 1996, the Company acquired the Fairfield Towers First
Mortgage, having an outstanding principal balance of $14,650,867, for a purchase
price of $11,150,867. In connection with the acquisition of the Fairfield Towers
First Mortgage, which was to become due in December of 1996, the maturity date
was extended to October 30, 2006. The Fairfield Towers First Mortgage, which is
nonrecourse except for certain limited personal guarantees made by certain of
the principals of the borrower, provides for principal repayments prior to
maturity upon the sale of individual condominium units in an amount equal to
substantially all of the net proceeds of sale (after payment of $2,916 per unit
to the holder of a $422,500 lien on the property, $3,000 per unit to
Presidential as holder of the Fairfield Towers Second Mortgage, $4,050 per unit
on account of past due real estate taxes and $5,917 per unit to fund various
obligations to the condominium association), which principal repayments have
averaged approximately $27,000 per unit over the sale of the first 135 units.
All accrued interest on this mortgage has been paid to date. However, there are
approximately $4,800,000 of unpaid real estate taxes (including interest accrued
thereon) owed by the owners of the property with respect to this property. Real
estate taxes are now being paid by the owner in an amount equal to the currently
accruing taxes and the unpaid balance is being reduced at the rate of $4,050 per
unit as condominium units are sold and with an additional $200,000 per year from
the cash flow of the property (see Note 22).

Presidential paid $2,500,867 of its $11,150,867 purchase price for the Fairfield
Towers First Mortgage in cash and executed an $8,650,000 bank loan from Fleet
for the balance. The bank loan is secured by a collateral assignment of the
Fairfield Towers First Mortgage and, except for a guarantee of $1,000,000 of
indebtedness, is nonrecourse to Presidential. All payments of principal received
by Presidential under the Fairfield Towers First Mortgage will be utilized to
make principal repayments on the Fleet bank loan. In addition, Presidential is
making principal payments on the Fleet bank loan in amounts sufficient


                                      58
<PAGE>   59

to amortize it at a 9.25% interest rate over a 25 year term, with the entire
outstanding principal balance due on October 30, 2001.

Presidential is also the holder of the Fairfield Towers Second Mortgage on the
condominium units, which it received in 1984 when it sold the Fairfield Towers
property to the present owner. This nonrecourse note has been in default since
March of 1991. The Fairfield Towers Second Mortgage has been classified as an
impaired loan in accordance with SFAS No. 114. At December 31, 1996, the note
has a $14,659,841 outstanding principal balance and a net carrying value of
$1,404,764, after a discount of $7,765,964 and a deferred gain of $5,489,113.

The cash flow from the rental operations of the condominium units is not
sufficient to pay more than a nominal amount of the interest that is due on the
Fairfield Towers Second Mortgage and, accordingly, pursuant to a modification
agreement executed in December, 1992, $1,345,000 of unpaid interest was deferred
and Presidential's basic interest on its loan was increased from 5.1% per annum
to 6.75% per annum, which basic interest is also deferred unless there is
sufficient cash flow from the rental operations of the property available for
payment. While Presidential received $227,001 of interest payments on the
Fairfield Towers Second Mortgage in 1996, it is possible that interest payments
on the Fairfield Towers Second Mortgage will be substantially reduced in 1997
and subsequent years since cash flow from the rental operations of the property
will be partially utilized to pay down the accrued real estate taxes. Until the
Fairfield Towers First Mortgage is repaid in full, Presidential, as holder of
the Fairfield Towers Second Mortgage, will continue to receive release payments
of only $3,000 per unit upon the sale of each condominium apartment unit.
However, after the Fairfield Towers First Mortgage is repaid, Presidential will
receive substantially all of the net proceeds of sales of condominium units in
repayment of the principal amount of the Fairfield Towers Second Mortgage and
all unpaid interest thereon, including additional interest which is based on
percentages of gross sales prices. By acquiring the Fairfield Towers First
Mortgage at a $3,500,000 discount, Presidential believes that, in addition to
obtaining a substantial return on the funds utilized to make the acquisition, it
has protected its position as holder of the Fairfield Towers Second Mortgage
since that position could have been adversely affected upon the maturity of the
Fairfield Towers First Mortgage in December, 1996. Pursuant to the terms of the
Fairfield Towers Second Mortgage, Presidential has implemented substantial
restrictions relating to the operation and condominium conversion of the
property and control of the funds generated from operations and sales.

In June, 1994, the owners of the property closed the first sales of apartment
units pursuant to the conversion of the property to condominium ownership. Since
June, 1994, a total of 135


                                      59
<PAGE>   60

condominium units have been sold, including 44 in 1996. The Company has received
$340,159 in payments from sales of apartment units, which has reduced the
original outstanding principal balance of the Fairfield Towers Second Mortgage
from $15,000,000 to $14,659,841 at December 31, 1996. In addition, the Fairfield
Towers First Mortgage in the original outstanding principal balance of
$18,113,118 has been reduced by $3,462,251 to $14,650,867 at December 31, 1996.
However, the Fairfield Towers Second Mortgage is still classified as an impaired
loan and the Company recognizes interest income on this loan only to the extent
that such interest is actually received (see Note 22).

Overlook Loan

The Overlook loan, which resulted from the sale of property to Ivy in 1984 and
which has been in default since 1990, is classified as an impaired loan in
accordance with SFAS No. 114. Effective April 1, 1995, the Company and Ivy
modified the terms of the Overlook loan extending the maturity date from
November 21, 1994 to December 31, 2003. In accordance with the modification,
from April 1, 1995 through December 31, 1995, the loan bore interest at the rate
of 5-1/2% per annum and from January 1, 1996 until maturity, the loan will bear
interest at the rate of 6% per annum. The Overlook loan, which is a nonrecourse
loan, continues to be secured by three second mortgages (the "Collateral
Security") with face values totalling $1,617,400 at December 31, 1996. Interest
is due and payable only to the extent of interest payments received by Ivy on
the Collateral Security. To the extent that Ivy receives interest on the
Collateral Security in excess of the interest due on the Overlook loan, Ivy is
required to pay such amounts to Presidential to be applied by Presidential (a)
first in reduction of any Deferred Interest (past due interest which has not
been accrued for financial reporting purposes) and (b) then in reduction of the
outstanding principal balance.

The net carrying value of the Overlook loan remains at zero at December 31,
1996. Any principal payments received on the loan will continue to be fully
recognized as gain from sale. In its capacity as a secured creditor, the Company
exercises significant control over, and receives the economic benefits from, the
collateral securing the Overlook loan and, accordingly, the Company has no
current plans to foreclose on its collateral for such loan.

The following table reflects the activity in impaired loans.


                                      60
<PAGE>   61

IMPAIRED LOANS
--------------

<TABLE>
<CAPTION>
                                                 Impaired       Additions     Impaired      Discount     Deferred          Net
                                                   Loan        (Payments or    Loan           on          Gain on        Carrying
                                                  Balance      Adjustments)   Balance        Loans         Loans          Value
       Loan Description                          12/31/95          1996       12/31/96      12/31/96      12/31/96      12/31/96
---------------------------------------          --------      ------------   --------      --------     ---------      ---------
<S>                                            <C>            <C>            <C>           <C>           <C>            <C>
Notes receivable-sold properties:
  Properties previously owned-
      Fairfield Towers Second Mortgage         $14,780,144     ($120,303)    $14,659,841   ($7,765,964)  ($5,489,113)   $1,404,764
      Kent Terrace (1)                           1,300,000    (1,300,000)

Notes receivable-related parties:
  Sold properties-
      Overlook                                   1,639,396       (71,996)      1,567,400                  (1,567,400)
                                               -----------   -----------     -----------   -----------   -----------    ----------
Total                                          $17,719,540   ($1,492,299)    $16,227,241   ($7,765,964)  ($7,056,513)   $1,404,764
                                               ===========   ===========     ===========   ===========   ===========    ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                                          Year ended December 31,
                                                                           ---------------------------------------------------------
                                                                             1996                 1995                     1994
                                                                           --------             --------                 ---------
<S>                                                                      <C>                  <C>                      <C>
Reported Interest Income and
Amortization of Discount (Cash Basis)
--------------------------------------------------------

Fairfield Towers Second Mortgage - interest income                         $227,001              $71,358                   $1,441
Fairfield Towers Second Mortgage - amortization of discount                  63,730               52,474                   63,993
Kent Terrace - interest income  (1)                                                              138,901
Overlook - interest income                                                   97,176              105,570                  130,757
Overlook - additional interest income                                        33,727
                                                                         ----------           ----------               ----------
Total                                                                      $421,634             $368,303                 $196,191
                                                                         ==========           ==========               ==========


Recognized Gain from Sale of Property
--------------------------------------------------------

Fairfield Towers Second Mortgage                                            $56,573              $46,582                  $56,807
Kent Terrace  (1)
Overlook                                                                     71,996                                       906,831
                                                                         ----------           ----------               ----------
Total                                                                      $128,569              $46,582                 $963,638
                                                                         ==========           ==========               ==========


Nonreported Interest Income and Amortization of Discount
--------------------------------------------------------
The following additional amounts would have been reported
if these loans had been fully performing:

Fairfield Towers Second Mortgage - interest income                         $774,945             $935,030               $1,009,135
Fairfield Towers Second Mortgage - additional interest income               191,537              164,306                  187,534
Fairfield Towers Second Mortgage - amortization of discount                 905,894              770,847                  635,100
Kent Terrace - interest income (1)                                                                68,124
Overlook - interest income                                                                        38,469                  290,916
Overlook - additional interest income
                                                                         ----------           ----------               ----------
Total                                                                    $1,872,376           $1,976,776               $2,122,685
                                                                         ==========           ==========               ==========
</TABLE>


(1)  In February, 1996, the Company completed the foreclosure of its $1,300,000
     Kent Terrace mortgage and became the owner of the property. As a result,
     the net carrying value of the loan of $329,212, after a deferred gain of
     $970,788, and deferred interest of $338,190 were reclassified to real
     estate.





                                       61
<PAGE>   62

3. REAL ESTATE

   Real estate is comprised of the following:

                                                      December 31,
                                                      ------------
                                                  1996               1995   
                                                  ----               ----   
Land                                         $ 3,664,548         $ 3,615,176
Buildings and leaseholds                      21,580,207          20,157,963
Furniture and equipment                          124,650              98,479
                                             -----------         -----------
Total real estate                            $25,369,405         $23,871,618
                                             ===========         ===========


As discussed in Note 2, Presidential foreclosed on its Kent Terrace mortgage and
became the owner of the property in February, 1996. The Company intends to hold
this property as a rental property and, accordingly, reclassified the $329,212
net carrying value of the loan plus deferred interest of $338,190 to real estate
on its consolidated balance sheet.

During 1995, Presidential purchased from Ivy, three occupied cooperative
apartments located in White Plains, New York for a purchase price of $10,000.

In November, 1994, the Company reached a settlement with its insurance company
pursuant to which it received $3,300,000 in settlement of all property damage
and lost rental claims resulting from a fire that destroyed approximately 20% of
the rentable space at the Company's Mapletree Industrial Center in Palmer,
Massachusetts. After payment of related costs and expenses and adjustment for
lost rent, the net insurance proceeds available to the Company were $2,727,156.
As a result of the insurance reimbursement, the carrying value of the Mapletree
property was reduced to zero and the Company recognized $1,816,873 of income for
financial reporting purposes in 1994.

4. FORECLOSED PROPERTIES

Presidential has received various properties in satisfaction of loans due to
Presidential. These properties are reported as foreclosed properties on
Presidential's consolidated balance sheets and are carried at the lower of cost
or estimated fair value (net of estimated costs to sell). If the net carrying
value of Presidential's loan had been in excess of the estimated fair value of
the property when received by Presidential in satisfaction of its loan,
Presidential would have recorded a loss on the transaction equal to the amount
of such excess. Similarly, if at any time the estimated fair value of any
foreclosed property declines below the then net carrying value of the property,
the net carrying value would be written down to the


                                      62
<PAGE>   63

estimated fair value (or a valuation allowance would be recorded in an amount
equal to the excess of the carrying value of the property over the current fair
value) and Presidential would record a loss equal to the amount of the
write-down or the allowance.

Net loss from operations of foreclosed properties is reported as a separate line
item on the statement of operations, while net cash receipts from operations of
foreclosed properties reduces the Company's carrying value of the foreclosed
property.

At December 31, 1996, Presidential owns 53 cooperative apartment units which it
had received in satisfaction of certain loans due Presidential. These
cooperative apartment units are located at four locations: 330 W. 72nd St., New
York, N.Y. (3 units); 6300 Riverdale Avenue, Bronx, N.Y. (8 units); Towne House,
New Rochelle, N.Y. (39 units) and Sherwood House, Long Beach, N.Y. (3 units).

Cooperative apartment units at three of the above properties were received from
Ivy in 1991 and 1992 in connection with the Settlement Agreement (see Note 19).
The cooperative apartment units at Long Beach were received from Ivy in 1994 in
payment of the outstanding loan on that property and other amounts due to
Presidential pursuant to the Settlement Agreement.

In September, 1996, the Company sold the 5 remaining cooperative apartment units
at Hastings Gardens, Hastings, N.Y. for a purchase price of $75,000 and recorded
a gain from the sale of $22,490.

The following table presents the Company's foreclosed properties, loss from
operations of foreclosed properties, gain (loss) from sales of foreclosed
properties and number of units sold:


                                      63
<PAGE>   64

Foreclosed properties:
----------------------

<TABLE>
<CAPTION>
                                                                                 Property Name and Location
                                                             ---------------------------------------------------------------------
                                                                                 Hastings     6300 Riverdale                     
                                                             330 W. 72nd St.      Gardens           Ave.          Towne House    
                                                               New York,         Hastings,         Bronx,        New Rochelle,   
                                                               New York         New York (1)      New York         New York      
                                                             ---------------    ------------  --------------     -------------
<S>                                                          <C>              <C>             <C>                <C>
Balance January 1, 1996                                        $53,276           $47,040           $76,196         $365,676      
  Capitalized costs                                                                                                  38,661      
  Net carrying value of property sold                                            (47,040)                                        
  Net cash receipts from operations (3)                         (4,372)                                                          
                                                               -------          --------           -------         --------
Balance December 31, 1996                                      $48,904          $                  $76,196         $404,337      
                                                               =======          ========           =======         ========



Loss from operations of foreclosed properties (3):
--------------------------------------------------                                                                               
                                                                                                                                 
Year ended December 31, 1996                                                      $9,978           $15,741           $6,890      
                                                               =======          ========           =======         ========
Year ended December 31, 1995                                                     $31,237           $18,139          $14,712      
                                                               =======          ========           =======         ========
Year ended December 31, 1994                                                     $18,172           $12,489                       
                                                               =======          ========           =======         ========


Gain (loss) from sales of foreclosed properties (3):
----------------------------------------------------                                                                             
                                                                                                                                 
                                                                                                                                 
Year ended December 31, 1996                                                     $22,490           $11,192                       
                                                               =======          ========           =======         ========
Year ended December 31, 1995                                                     $31,728                            $59,298      
                                                               =======          ========           =======         ========
Year ended December 31, 1994                                   $78,485                                              $51,509      
                                                               =======          ========           =======         ========

Number of units sold:
---------------------                                                                                                            
                                                                                                                                 
                                                                                                                                 
Year ended December 31, 1996                                                           5                                         
                                                               =======          ========           =======         ========
Year ended December 31, 1995                                                          15                                  3      
                                                               =======          ========           =======         ========
Year ended December 31, 1994                                                                                              2      
                                                               =======          ========           =======         ========



                                                                         Property Name and Location
                                                             -----------------------------------------------
                                                                               Various          
                                                             Sherwood House    Buildings            Total
                                                              Long Beach,      Hoboken,           Foreclosed
                                                               New York       New Jersey (2)      Properties
                                                             --------------   --------------      ----------
<S>                                                          <C>              <C>                 <C>
Balance January 1, 1996                                        $59,246           $                 $601,434
  Capitalized costs                                                                                  38,661
  Net carrying value of property sold                                                               (47,040)
  Net cash receipts from operations (3)                                                              (4,372)
                                                               -------           -------           --------
Balance December 31, 1996                                      $59,246           $                 $588,683
                                                               =======           =======           ========



Loss from operations of foreclosed properties (3):
--------------------------------------------------                                                 Total Loss
                                                                                                   ----------
Year ended December 31, 1996                                    $6,465               N/A             $39,074
                                                               =======           =======           =========
Year ended December 31, 1995                                   $18,761               N/A             $82,849
                                                               =======           =======           =========
Year ended December 31, 1994                                    $3,503           $37,192             $71,356
                                                               =======           =======           =========

Gain (loss) from sales of foreclosed properties (3):
----------------------------------------------------                                                  Total
                                                                                                   Gain (Loss)
                                                                                                   -----------
Year ended December 31, 1996                                                         N/A             $33,682
                                                               =======           =======           =========
Year ended December 31, 1995                                   ($2,875)              N/A             $88,151
                                                               =======           =======           =========
Year ended December 31, 1994                                                     ($55,959)           $74,035
                                                               =======           =======           =========

Number of units sold:
---------------------                                                                                Total
                                                                                                   Units Sold
                                                                                                   ----------
Year ended December 31, 1996                                                         N/A                   5
                                                               =======           =======           =========
Year ended December 31, 1995                                         2               N/A                  20
                                                               =======           =======           =========
Year ended December 31, 1994                                                          40                  42
                                                               =======           =======           =========
</TABLE>


(1)  The remaining Hastings Gardens cooperative apartment units were sold in
     September, 1996.
(2)  The remaining Hoboken apartment buildings were sold in June, 1994.
(3)  Includes an allocation for home office overhead.


                                       64
<PAGE>   65

5.  LOAN IN PROCESS OF FORECLOSURE

In 1991, the owners of the Brookline Manor property defaulted on payments of
interest on Presidential's equity portion of the wraparound mortgage note
secured by this property, and as a result, Presidential commenced foreclosure
proceedings.

Presidential's note wrapped around and was subordinate to a first mortgage which
had an outstanding principal balance of $1,317,289 at January 31, 1992. Since
January of 1992, no payments had been made on the first mortgage. The first
mortgage was assigned by the mortgagee to the Department of Housing and Urban
Development ("HUD"), and subsequently, HUD commenced its own foreclosure
proceedings.

As a result, in 1994, the Company wrote off the $1,556,931 net carrying value of
the loan in process of foreclosure and the related $1,317,289 mortgage debt,
resulting in a bad debt expense of $67,200 and a loss from sales of properties
and securities of $172,442.


6. MINORITY PARTNERS' INTEREST

Presidential is the General Partner of UTB Associates and Metmor Plaza
Associates, partnerships in which Presidential has a 66-2/3% interest and a 25%
interest, respectively. As the General Partner of these partnerships,
Presidential exercises effective control over the business of these
partnerships, and, accordingly, has included 100% of the account balances of
these partnerships in the accompanying financial statements (see Note 1-F). The
minority partners' interest reflects the minority partners' equity in the
partnerships.

Included in the Company's mortgage debt is a mortgage note payable by the Metmor
Plaza Associates partnership which is substantially in excess of the historical
cost of the property. This was due to a refinancing of the original mortgage
note on the building and subsequent distribution of these proceeds to the
partners. This event resulted in a negative partnership interest for each
partner and a negative minority partners' interest on the Company's books. The
estimated fair value of the building is significantly greater than the mortgage
debt and the minority partners' interest is expected to be recovered when the
building is sold and the partnership is liquidated.

Subsequent to December 31, 1996, Presidential acquired an additional 1% interest
in Metmor Plaza Associates for a purchase price of $60,000.




                                      65
<PAGE>   66

Minority partners' interest is comprised of the following:

                                                  December 31,
                                                  ------------
                                                1996        1995
                                                ----        ----

Metmor Plaza Associates                     $4,036,858   $4,218,947
UTB Associates                                (206,834)    (247,899)
                                            ----------   ----------

Total minority partners' interest           $3,830,024   $3,971,048
                                            ==========   ==========

7. SECURITIES AVAILABLE FOR SALE

The Company's investments are in marketable equity securities consisting of
stocks of listed corporations. Effective January 1, 1994, the Company adopted
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company does not acquire securities for purposes of engaging in
trading activities and, as a result, the Company's investments are classified as
securities available for sale in accordance with this pronouncement. Disposition
of such securities may be appropriate for either liquidity management or in
response to changing economic conditions.

SFAS No. 115 requires that securities available for sale be reported at fair
value with unrealized gains and losses excluded from earnings and reported in a
separate component of stockholders' equity until realized. The adoption of SFAS
No. 115 resulted in the reversal of the lower of aggregate cost or market
adjustment of $37,617 that had been recognized prior to the adoption of SFAS No.
115. This amount is reflected as a cumulative effect of change in accounting
principle in the Company's consolidated statement of operations for the year
ended December 31, 1994. SFAS No. 115 resulted in a $285,057 adjustment to
stockholders' equity for the net unrealized loss on securities available for
sale at December 31, 1994.

Net unrealized gain (loss) on securities available for sale decreased by
$273,852 from a loss of $285,057 at December 31, 1994 to a loss of $11,205 at
December 31, 1995 and then changed by $60,219 to a gain of $49,014 at December
31, 1996.

The cost and fair value of securities available for sale are as follows:

                                            December 31,
                                            ------------
                                        1996          1995
                                        ----          ----

Cost                                  $926,194    $2,401,551
Gross unrealized gains                  71,033        37,845
Gross unrealized losses                (22,019)      (49,050)
                                      --------    ----------

Fair value                            $975,208    $2,390,346
                                      ========    ==========


                                      66
<PAGE>   67

Sales activity results for securities available for sale are as follows:

                                     Year Ended December 31,
                                    ------------------------
                                    1996      1995      1994
                                    ----      ----      ----

       Gross sales proceeds     $2,667,350  $147,200  $162,875
                                ==========  ========  ========

       Gross realized gains       $ 12,975   $10,494  $
       Gross realized losses       (69,751)   (1,002)  (13,596)
                                  --------   -------  --------

       Net realized gain (loss)   $(56,776)  $ 9,492  $(13,596)
                                  ========   =======  ========


Gains and losses on sales of securities are determined using the specific
identification method.

8. MORTGAGE DEBT

All mortgage debt is secured by individual properties and is nonrecourse to the
Company with the exception of the mortgage on the Mapletree Industrial Center
property in Palmer, Massachusetts, which is guaranteed by Presidential.

In June, 1996, the Company completed the refinancing of the mortgage on its
Mapletree Industrial Center property. The existing mortgage of $238,181 was
repaid from the proceeds of a new $300,000 mortgage. The interest rate is 8.25%
for the first year and will be adjusted annually to equal the Lender's prime
rate. The mortgage matures in June, 2011 and requires monthly payments of
principal and interest in the initial amount of $2,910.

Mortgage debt - wrap mortgage debt on sold properties in the amount of
$5,613,041 at December 31, 1996 and $6,060,537 at December 31, 1995, relates to
mortgage debt on properties sold by Presidential. Payments of principal and
interest on these mortgages will be paid from the proceeds (principal and
interest) on the wraparound notes receivable from the buyers of these
properties. Interest income and interest expense related to wrap mortgages are
shown as gross amounts in the consolidated statements of operations. These
mortgages are nonrecourse to Presidential and are liens only against the
individual properties.


                                      67
<PAGE>   68

Amortization requirements of all mortgage debt as of December 31, 1996, are
summarized as follows:

                                                    FHA Insured          Other  
                                     Total           Mortgages         Mortgages
                                     -----           ---------         ---------
Year ending December 31:
                                                             
1997                              $ 1,053,553       $  482,282       $   571,271
1998                                1,123,284          500,845           622,439
1999                               11,123,296          520,177        10,603,119
2000                                1,609,337          540,315         1,069,022
2001                                  728,888          561,296           167,592
2002 - 2029                        16,488,148        6,168,615        10,319,533
                                  -----------       ----------       -----------
TOTAL                             $32,126,506       $8,773,530       $23,352,976
                                  ===========       ==========       ===========

Interest on mortgages is payable at annual rates, summarized as follows:



                                                    FHA Insured          Other  
                                     Total           Mortgages         Mortgages
                                     -----           ---------         ---------
Interest rates:

3%                                $ 2,504,569       $2,504,569       $
5 1/4%                              3,108,472        3,108,472
7%                                  2,884,821                          2,884,821
7 7/16%-7 7/8% (1)                 11,399,359                         11,399,359
8 1/4%-8 1/2%                       3,455,313        3,160,489           294,824
9%-10%                              8,773,972                          8,773,972
                                  -----------       ----------       -----------
TOTAL                             $32,126,506       $8,773,530       $23,352,976
                                  ===========       ==========       ===========


(1) The interest rate on this mortgage is a variable rate and the chart reflects
    the current rate at December 31, 1996.

9. NOTE PAYABLE TO BANK

The Company obtained an $8,650,000 bank loan in the fourth quarter of 1996 from
Fleet bank in connection with the purchase of the Fairfield Towers First
Mortgage (see Note 2). The note, which matures on October 30, 2001, is secured
by a collateral assignment of the Fairfield Towers First Mortgage and, except
for a guarantee by Presidential of $1,000,000 of the indebtedness, is
nonrecourse to Presidential. The Company has the option of selecting each month
among three interest rates: 1% over Fleet's prime rate; 3% in excess of a cost
of funds rate set by the bank for a period of 90 days and 3% in excess of the
LIBOR rate for a one, two or three month period. The note amortizes monthly
based on a 9.25% interest rate for a 25 year term. In addition, upon


                                      68
<PAGE>   69

the sale of condominium units, the Company is required to make principal
payments to Fleet in an amount equal to the amount of principal payments
received by the Company on the Fairfield Towers First Mortgage. The outstanding
note balance at December 31, 1996 was $8,642,600.

10. INCOME TAXES

Presidential elected to qualify as a Real Estate Investment Trust effective
January 1, 1982 under Sections 856-860 of the Internal Revenue Code. Under those
sections, a REIT which distributes at least 95% of its real estate investment
trust taxable income to its shareholders each year by the end of the following
year and which meets certain other conditions will not be taxed on that portion
of its taxable income which is distributed to its shareholders.

Upon filing the Company's income tax return for the year ended December 31,
1995, Presidential applied its available 1995 stockholders' distributions and
elected to apply (under Section 858 of the Internal Revenue Code) all but
approximately $735,000 of its 1996 stockholders' distributions to reduce its
taxable income for 1995 to zero.

For the year ended December 31, 1996, the Company had taxable income (before
distributions to stockholders) of approximately $2,316,000 ($.65 per share),
which included approximately $1,441,000 ($.41 per share) of capital gains. This
amount will be reduced by the 1996 distributions that were not utilized in
reducing the Company's 1995 taxable income and by any eligible 1997
distributions that the Company may elect to utilize as a reduction of its 1996
taxable income.

As previously stated, in order to retain REIT status, Presidential is required
to distribute 95% of its REIT taxable income (exclusive of capital gains).
Presidential will apply the available 1996 distributions (approximately $.20 per
share) and will be required to pay additional distributions of not less than
$0.03 per share in 1997 to maintain REIT status, which it intends to do. In
addition, although no assurances can be given, it is the Company's present
intention to distribute all of its 1996 taxable income during 1996 and 1997 so
that it will not have to pay Federal income taxes for 1996. Therefore, no
provision for income taxes has been made at December 31, 1996.

Presidential has, for tax purposes, reported the gain from the sale of certain
of its properties using the installment method.

11. COMMITMENTS AND CONTINGENCIES

The Company has incurred environmental costs for environmental site
investigations and the related response action outcome for


                                      69
<PAGE>   70

potentially hazardous drums found at three sites on its Mapletree Industrial
Center property in Palmer, Massachusetts. As of December 31, 1996, the response
action outcome and cleanup at the first and second disposal sites have been
completed. The site investigation at the third disposal site has been completed
and as a result, in the third quarter of 1996, the Company accrued an additional
$120,500 of environmental costs to complete further site investigations and
cleanup costs at this site. This work is scheduled to be accomplished over the
next four years. For 1996, 1995 and 1994, the amounts charged to operations for
environmental costs were $129,129, $83,536, and $17,758, respectively. Actual
costs incurred may vary from these estimates due to the inherent uncertainties
involved.

12. CONCENTRATIONS OF CREDIT RISK

Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of its mortgage portfolio, cash and cash
equivalents, and securities available for sale.

The Company's mortgage portfolio consists of long-term notes receivable
collateralized by real estate located in five states (primarily New York,
Connecticut and Ohio). At December 31, 1996, the aggregate principal amount of
these notes was $63,726,134 with a net carrying value (after the deduction of
discounts and deferred gains) of $28,388,917. The real estate securing these
notes, consisting primarily of moderate income apartment properties and, to a
lesser extent, cooperative apartment units, has at a minimum an estimated fair
value equal to the net carrying value of the notes. The value of the collateral
is monitored by the Company on an ongoing basis. If the Company were to
determine that the value of the collateral for a particular loan is insufficient
to secure the net carrying value of the loan, the Company would reduce the net
carrying value of the note receivable to reflect the estimated fair value of the
underlying collateral.

Included in the Company's mortgage portfolio are the Fairfield Towers First
Mortgage and the Fairfield Towers Second Mortgage in the aggregate principal
amount of $29,310,708 with a net carrying value of $12,584,312 after deduction
of discounts and deferred gain of $16,726,396. The Fairfield Towers First
Mortgage in the outstanding principal amount of $14,650,867 was purchased by the
Company in the fourth quarter of 1996 for a purchase price of $11,150,867. All
payments due under the terms of this first mortgage are current. The Fairfield
Towers Second Mortgage in the outstanding principal amount of $14,659,841 was
received by the Company in 1984 when it sold the Fairfield Towers property to
the present owner. The Fairfield Towers Second Mortgage has been in default
since 1991, is classified as an impaired loan and


                                      70
<PAGE>   71

income on this loan is only recorded to the extent that such income is actually
received. The mortgages are secured by 1,017 condominium units at Fairfield
Towers in Brooklyn, New York and, in addition, the Fairfield Towers First
Mortgage is also secured by certain limited personal guarantees made by certain
of the principals of the borrower. There are approximately $4,800,000 of unpaid
real estate taxes (including interest accrued thereon) owed by the owners of the
property (see Notes 2 and 22).

The mortgage portfolio also includes notes receivable due from a related party,
Ivy, with a net carrying value of $830,226 at December 31, 1996.

The Company generally maintains its cash in money market funds with high credit
quality financial institutions. Periodically, the Company may invest in time
deposits with such institutions. Although the Company may maintain balances at
these institutions in excess of the FDIC insurance limit, the Company has not
experienced any losses.

The Company also invests its funds in marketable equity securities available for
sale. Such investments are reflected on the Company's consolidated balance sheet
at their fair value.


13. COMMON STOCK

The Class A and Class B common stock of Presidential have identical rights
except that the holders of Class A common stock are entitled to elect two-thirds
of the Board of Directors and the holders of Class B common stock are entitled
to elect one-third of the Board of Directors.

Other than as described in Note 15, no shares of common stock of Presidential
are reserved for officers, employees, warrants or other rights.


14. DISTRIBUTIONS ON COMMON STOCK

For income tax purposes, distributions paid on common stock are allocated as
follows:

                  Total             Taxable         Taxable
 Year          Distribution     Ordinary Income   Capital Gain

 1996             $0.60              $0.50            $0.10
 1995              0.60               0.31             0.29
 1994              0.60               0.32             0.28


                                         71
<PAGE>   72

15. STOCK OPTION PLANS

In July, 1987, Presidential adopted a Nonqualified Stock Option Plan (the
"Plan"). The Plan provided that options to purchase up to 320,000 shares of
Presidential's Class B authorized but unissued common stock could be granted
prior to July 1, 1992 to certain key employees at exercise prices equal to the
market value on the date the option was granted. Options granted have a maximum
expiration period of five years. At December 31, 1994, there were options for
7,500 shares (granted in 1990) outstanding at an exercise price of $6.00 per
share, which options expired on June 1, 1995. No options have been granted,
exercised or cancelled under this plan for the three years ended December 31,
1996 with the exception of the expiration of the 7,500 shares referred to above.
No further options can be granted under this plan.

In 1993, the Company adopted a Nonqualified Stock Option Plan (the "1993 Stock
Option Plan"). The 1993 Stock Option Plan provides that options to purchase up
to 250,000 shares of the Company's Class B common stock may be issued prior to
December 31, 1998 to the Company's key employees at exercise prices equal to the
market value on the date the option is granted. On November 17, 1993, options to
purchase 60,000 shares were granted to three employees at an exercise price of
$6.125 per share. Pursuant to the employees' contracts, options to purchase (i)
a total of 20,000 shares may only be exercised on or after January 1, 1995, (ii)
a total of an additional 20,000 shares may only be exercised on or after January
1, 1996 and (iii) a total of an additional 20,000 shares may only be exercised
on or after January 1, 1997. All of the options expire on November 17, 1999. No
other options have been granted, exercised or cancelled under this plan from
inception to December 31, 1996.


                                         Number of   Weighted Average
       1993 Stock Option Plan             Shares       Option Price
       ----------------------            ---------   ----------------
       Options outstanding at
         December 31, 1994, 1995
         and 1996                         60,000          $6.125
                                          ======          ======

       Exercisable:
         December 31, 1994                 None
                                          ======

         December 31, 1995                20,000
                                          ======

         December 31, 1996                40,000
                                          ======

16. PENSION PLANS

Defined Benefit Plan

Effective January 1, 1994, the Company adopted a noncontributory defined benefit
pension plan, which covers substantially all of its employees. The plan provides
monthly retirement benefits commencing at age 65. The monthly benefit is equal
to the sum of (1) 6.5% of average monthly compensation multiplied by the total
number of plan years of service (up to a maximum of 10 years),


                                      72
<PAGE>   73

plus (2) .62% of such average monthly compensation in excess of one-twelfth of
covered compensation multiplied by the total number of plan years of service (up
to a maximum of 10 years). The Company makes annual contributions that meet the
minimum funding requirements and the maximum contribution limitations under the
Internal Revenue Code.

Periodic pension costs are reflected in general and administrative expenses in
the Company's consolidated statements of operations.

Net periodic pension cost included the following components:

                                               Year Ended December 31,
                                               -----------------------
                                              1996      1995      1994
                                              ----      ----      ----
  Service cost-benefits earned
    during the year                         $279,493  $254,681  $257,318
  Interest cost on projected
    benefit obligation                        37,379    18,012
  Return on plan assets                      (65,817)  (32,068)
  Net amortization and deferrals              21,885    14,453
                                            --------  --------  --------
  Net periodic pension cost                 $272,940  $255,078  $257,318
                                            ========  ========  ========

The following sets forth the plan's funded status and amount recognized in the
Company's consolidated balance sheets:

                                              December 31,
                                              ------------
                                           1996          1995
                                           ----          ----
  Actuarial present value of 
    accumulated benefit obligation:
      Vested                             $363,241     $209,931
      Non-Vested                          396,295      249,815
                                         --------     --------

  Total accumulated benefit obligation    759,536      459,746

  Additional amount due to future
    pay increases                          33,098       64,251
                                         --------     --------

  Total projected benefit obligation      792,634      523,997

  Less: fair value of plan assets         794,735      483,020
                                         --------     --------

  Plan assets less (greater) than
    projected benefit obligation           (2,101)      40,977
  Unrecognized net gain                   102,898       22,791
                                         --------     --------

  Pension liability recognized in
    accrued expenses in the
    consolidated balance sheet           $100,797     $ 63,768
                                         ========     ========


                                         73
<PAGE>   74

Plan assets consisted of the following:
                                              December 31,
                                              ------------
                                           1996          1995
                                           ----          ----
  Cash and cash equivalents              $ 51,570     $ 35,417

  Securities available for sale           743,165      447,603
                                         --------     --------

  Total plan assets                      $794,735     $483,020
                                         ========     ========

The assumptions used in determining net periodic pension cost and funded status
information for 1996, 1995 and 1994 were 7% for the discount rate, 7% for the
expected long-term rate of return on assets, and 5% for average increase in
compensation.

Additionally, the Company had sponsored a 401(k) defined contribution plan for
all eligible employees. The plan permitted both pretax and after-tax employee
contributions. The Company has not made any contributions to this plan. Such
plan was terminated on July 31, 1996.

Executive Pension Plan

Presidential has employment contracts with several active and retired key
officers and employees. Such contracts are being accounted for as constituting
pension agreements. The contracts generally provide for annual benefits in
specified amounts for each participant for life, commencing upon retirement,
with an annual adjustment for an increase in the consumer price index.
Presidential complies with the provisions of SFAS No. 87, "Employers' Accounting
for Pensions". The principal assumption used in the accounting was a discount
rate of 7% in 1996 and 1995 and 7-1/2% in 1994. Periodic pension costs are
reflected in general and administrative expenses in the Company's consolidated
statement of operations.

Net periodic pension cost included the following components:

                                                    Year Ended December 31,
                                                    -----------------------
                                                  1996        1995        1994 
                                                  ----        ----        ----
Service cost-benefits earned during the year   $ 13,856    $ 10,911    $  9,077
Interest cost on projected benefit obligation   189,213     187,093     200,376
Net amortization                                 65,956      34,157      32,685
                                               --------    --------    ---------
Net periodic pension cost                      $269,025    $232,161    $242,138
                                               ========    ========    ========

Presidential has elected not to fund expenses accrued under these contracts. The
following sets forth the pension liability included in Presidential's
consolidated balance sheets:

                                      74
<PAGE>   75

                                                         December 31,
                                                         ------------
                                                     1996           1995
                                                     ----           ----

Projected benefit obligation                      $2,885,486     $2,883,135
Unrecognized net gain (loss)                      (1,205,171)    (1,081,438)
Unrecognized prior service cost                       35,797         40,162
                                                  ----------     ----------
Pension liability recognized in the consolidated                           
  balance sheets                                  $1,716,112     $1,841,859
                                                  ==========     ==========

17. POSTRETIREMENT BENEFITS

Presidential has employment contracts with several active and retired key
officers and employees which provide for postretirement benefits other than
pensions (such as health care benefits). The Company complies with the provision
of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions". SFAS No. 106 requires the Company to accrue the estimated cost of
retiree benefit payments during the years the employee provides services.

The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation at the adoption date (January 1, 1993) was 13%
for participants age 65 and over and 15% for participants under age 65,
decreasing linearly each successive year until it reaches 6% in 2002, after
which it remains constant. A one-percentage point increase in the assumed health
care cost trend rate for each year subsequent to adoption would increase the
accumulated postretirement benefit obligation and net postretirement health care
cost by approximately 5%. The assumed discount rate used in determining the
accumulated postretirement benefit obligation was 7%.

The accumulated postretirement benefit obligation and recorded liability, none
of which has been funded, was as follows:

                                                           December 31,
                                                           ------------
                                                        1996         1995
                                                        ----         ----
Accumulated postretirement benefit obligation:
    Retirees                                          $288,172     $323,452
    Fully eligible plan participants                   138,482      129,422
    Other active plan participants                     108,530       95,952
                                                      --------     --------

Total accumulated postretirement
  benefit obligation                                   535,184      548,826

Unrecognized net gain                                   57,269       68,490
                                                      --------     --------

Accumulated postretirement
  benefit liability                                   $592,453     $617,316
                                                      ========     ========


                                      75
<PAGE>   76

Postretirement benefit cost included the following components:

                                             Year ended December 31,
                                             -----------------------
                                             1996      1995     1994
                                             ----      ----     ----

Service cost - benefits earned             $ 5,861   $ 5,478  $ 5,120
Interest cost on accumulated
  postretirement benefit obligation         36,520    37,359   38,518
Net amortization                            (8,459)   (9,504)  (8,860)
                                           -------   -------  -------
Postretirement benefit cost                $33,922   $33,333  $34,778
                                           =======   =======  =======

18. DIVIDEND REINVESTMENT AND SHARE PURCHASE PLAN

Presidential initiated a Dividend Reinvestment and Share Purchase Plan (the
"Plan") effective April 12, 1988. Under the Plan, stockholders may reinvest cash
dividends and make optional cash payments to purchase Class B common stock
without incurring any brokerage commission or service charge. Additionally, the
price of Class B common stock purchased with reinvested cash dividends will be
discounted by 5% from the average of the high and low market prices of the five
days immediately prior to the dividend payment date, as reported on the American
Stock Exchange.

Class B Common Shares issued under the Plan are summarized below:

                                                                 Net Proceeds
                                                   Shares          Received
                                                   ------        ------------
Total shares issued at December 31, 1994          259,018        $1,808,024
Shares issued during the year ended
  December 31, 1995                                19,019           118,343
                                                  -------        ----------
Total shares issued at December 31, 1995          278,037         1,926,367
Shares issued during the year ended
  December 31, 1996                                22,694           131,677
                                                  -------        ----------
Total shares issued at December 31, 1996          300,731        $2,058,044
                                                  =======        ==========

19. RELATED PARTY TRANSACTIONS

Ivy Properties, Ltd. and various affiliated companies (collectively "Ivy") are
owned by Thomas Viertel, Steven Baruch and Jeffrey Joseph (the "Ivy
Principals"), who are also the sole partners of Pdl Partnership, which since
1991 has owned 198,735 shares of the Company's Class A common stock. From 1985
through 1991, these 198,735 shares of Class A common stock were owned by BJV
Partnership, another partnership wholly owned by the Ivy Principals. As a result
of the ownership of the 198,735 shares of Class A common stock described above
and 24,601 additional shares of Class A common stock owned in the aggregate
individually by the Ivy Principals, Pdl Partnership and the Ivy


                                      76
<PAGE>   77

Principals have, and BJV Partnership and the Ivy Principals had, beneficial
ownership of an aggregate of approximately 47% of the outstanding shares of
Class A common stock of the Company, which class of stock is entitled to elect
two-thirds of the Board of Directors of the Company. By reason of such
beneficial ownership, the Ivy Principals are in a position substantially to
control elections of the Board of Directors of the Company.

Thomas Viertel is the son of Joseph Viertel, a Director and a former President
of Presidential, and the nephew of Robert E. Shapiro, Chairman of the Board of
Directors and a former President of Presidential. Steven Baruch is the cousin of
Robert E. Shapiro and Joseph Viertel.

From 1979 to 1989, Presidential made loans to Ivy in connection with Ivy's
cooperative conversions of apartment properties in the New York metropolitan
area. In 1981, UTB Associates, a partnership controlled by Presidential, sold an
apartment property to Ivy in return for purchase money notes. In addition, in
1984, Presidential sold to Ivy its 50% partnership interest in the partnership
which owned Overlook Gardens, a 308 unit apartment complex in Alexandria,
Virginia for a purchase money note.

Prior to January 1, 1990, Ivy had never defaulted on any of its loans from
Presidential. During 1989 and 1990 the sales market for cooperative apartments
in the New York metropolitan area deteriorated and as a result in 1990 and 1991
Ivy defaulted on certain of its outstanding loans from Presidential. In early
1990, Ivy began negotiations with Presidential with respect to a workout of the
loans then in default. Because of the relationships described above between the
Ivy Principals and Presidential, the negotiations with Ivy were conducted on
behalf of Presidential by a committee of three members of the Board of Directors
with no affiliations with the Ivy Principals (the "Independent Committee") and
an officer of Presidential who was not affiliated with the Ivy Principals. On
November 14, 1991, Presidential and Ivy consummated a Settlement Agreement with
respect to various outstanding loans to Ivy, which was approved unanimously by
the Board of Directors of Presidential.

In connection with the Settlement Agreement, Presidential received, among other
things, a number of vacant and occupied cooperative apartment units in the New
York metropolitan area and certain third party promissory notes held by Ivy.
Presidential received these assets in exchange for (i) the satisfaction of all
of Ivy's recourse debt to Presidential and certain of its nonrecourse debt to
Presidential with respect to which Presidential held first priority security
interests and (ii) the release by Presidential of certain subordinate security
interests in collateral securing some of the defaulted loans.


                                      77
<PAGE>   78

Most of Ivy's remaining nonrecourse debt to Presidential was consolidated, on
modified terms, into two nonrecourse loans (collectively, the "Consolidated
Loans") which were collateralized by substantially all of Ivy's remaining
business assets with respect to which Presidential either did not previously
have any security interest or had a junior security interest (collectively, the
"Consolidated Collateral"). The terms of the Settlement Agreement permit Ivy to
use the proceeds of each sale of Consolidated Collateral to (1) pay existing
indebtedness of Ivy to its bank and trade creditors and certain operating
expenses and (2) create and fund specified reserves to provide for payment of
future obligations and potential liabilities. At December 31, 1996, the
Consolidated Loans have an outstanding principal balance of $4,886,837 and a net
carrying value of $116,787. Since, as permitted by the terms of the Consolidated
Loans, most of Ivy's assets have been sold with the sales proceeds used to pay
other recourse obligations of Ivy, Presidential does not expect to recover any
material amount on the Consolidated Loans in excess of their net carrying value.

In 1996 Presidential and the Ivy Principals agreed to a modification of the
Settlement Agreement to provide that the Ivy Principals will make payments on
the Consolidated Loans in an amount equal to 25% of the operating cash flow
(after provision for certain reserves) of Scorpio Entertainment, Inc.
("Scorpio"), a company owned by the Ivy Principals which acts as a producer of
theatrical productions. This agreement, and Presidential's decision not to
exercise an option (which it had received as part of the original Settlement
Agreement) to acquire the capital stock of Scorpio, was made pursuant to the
unanimous determination of the Independent Committee that such actions were in
the best interests of Presidential. Presidential does not expect to receive any
material payments on the Consolidated Loans in 1997.

All outstanding loans to Ivy at December 31, 1996 (see table below) are in good
standing except for the Overlook loan. In connection with the Settlement
Agreement, Ivy agreed to give Presidential upon request a deed or assignment in
lieu of foreclosure to the various assets held by Presidential as security for
the Overlook loan. In 1995, the terms of the Overlook loan were modified,
including the interest rate and the maturity date (see Note 2). Management
believes that it holds sufficient collateral to protect its interests in the
loans that remain outstanding to Ivy to the extent of the net carrying value of
these loans.

Presidential received interest of $242,225, $223,520 and $259,990 from Ivy
during 1996, 1995 and 1994, respectively, on the loans referred to above.


                                      78
<PAGE>   79

In addition, in 1996, 1995 and 1994, Presidential recognized $6,626, $8,952 and
$18,150, respectively, of income representing the amortization of discounts on
notes receivable. (See Note 1-E).

Jeffrey Joseph is the President and a Director of Presidential, Thomas Viertel
is an Executive Vice President and the Chief Financial Officer of Presidential
and Steven Baruch is an Executive Vice President of Presidential.

Any transactions relating to the implementation of the terms of the Settlement
Agreement, or otherwise involving the Ivy Principals, are subject to the
approval of the Independent Committee.

All outstanding loans to Ivy are set forth in the table below:


                                      79
<PAGE>   80

MORTGAGE PORTFOLIO:  NOTES RECEIVABLE - RELATED PARTIES

<TABLE>
<CAPTION>
                                                                                                           Loan Balance
             Original                                                                                      December 31,
               Loan                                                             Basic           ----------------------------------
  Date       Advanced                Description                            Interest Rate          1996                  1995
-------      --------         -------------------------                     -------------       ------------         -------------
<S>        <C>          <C>                                                 <C>                 <C>                   <C>

1981       $5,285,000   UTB Associates, a partnership in                    11.8 to 25.33%      $   617,419           $ 706,567
                        which Presidential owns a 66-2/3%
                        interest, sold an apt. property in New
                        Haven, CT to Ivy for long-term, non-
                        recourse purchase money notes.

1984        4,305,500   Sale by Presidential to Ivy of                      6.0%                  1,567,400(1)         1,639,396
                        50% interest in a partnership
                        which owns an apartment complex
                        in Alexandria, VA (Overlook loan)

1991          526,454   UTB End Loans:  Purchase money notes                Various                 241,935              258,168
                        on co-op apts. These notes were transferred
                        to Presidential as part of the Ivy settlement.

1991          155,084   Consolidated Loans:  Replaced previously            Chase Prime             116,787(2)           126,011
                            defaulted loans.
                                                                                                 ----------            ---------
                            Total Loans                                                           2,543,541            2,730,142

                            Less:  Discounts                                                        145,915              162,766
                                   Deferred gain on Overlook loan                                 1,567,400            1,639,396
                                                                                                 ----------            ---------
                            Net Carrying Value                                                     $830,226             $927,980
                                                                                                 ==========            =========
</TABLE>

(1)  This loan has been in default since 1990 and is classified as an impaired
     loan.

(2)  The Consolidated Loans have a net carrying value of $116,787 and an
     outstanding principal balance of $4,886,837.


                                       80
<PAGE>   81

20.  ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

Effective December 31, 1995, the Company adopted SFAS No. 107, "Disclosures
about Fair Value of Financial Instruments" which requires that the Company
disclose estimated fair values for certain financial instruments. Estimated fair
values are as of December 31, 1996 and 1995, and have been determined using
available market information and various valuation estimation methodologies.
Considerable judgement is required to interpret the effects on fair value of
such items as future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. The
estimates presented herein are not necessarily indicative of the amounts that
the Company could realize in a current market exchange. Also, the use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair values.

The following table summarizes the estimated fair values of financial
instruments:


                                         81
<PAGE>   82

FINANCIAL INSTRUMENTS
---------------------

<TABLE>
<CAPTION>
                                                          December 31, 1996                      December 31, 1995
                                                    -------------------------------       --------------------------------

                                                         Net             Estimated            Net             Estimated
                                                       Carrying            Fair            Carrying             Fair
                                                      Value (1)            Value            Value (1)           Value
                                                    -------------       -----------       -------------      -------------
<S>                                                 <C>                <C>                <C>                <C>
Assets:
  Cash and cash equivalents                         $1,392,135         $1,392,135         $1,306,505          $1,306,505
  Securities available for sale                        975,208            975,208          2,390,346           2,390,346
  Notes receivable-sold properties-
    accrual                                         26,153,927         43,521,767         16,219,635          31,145,279
  Notes receivable-related parties-
    accrual                                            830,226            962,219            927,980           1,161,615
  Notes receivable-related parties-
    impaired                                                            1,597,761                              1,620,559

Liabilities:
  Mortgage debt on properties owned                 26,513,465         24,736,627         26,977,997          25,196,761
  Wrap mortgage debt                                 5,613,041          4,854,619          6,060,537           5,093,213
  Note payable to bank                               8,642,600          8,395,742
</TABLE>


(1) Net carrying value is net of discounts and deferred gains where applicable.


                                       82
<PAGE>   83

The fair value estimates presented above are based on pertinent information
available to management as of December 31, 1996 and 1995. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued since
December 31, 1996 and, therefore, current estimates of fair value may differ
significantly from the amounts presented above.

Fair value methods and assumptions are as follows:

Cash and Cash Equivalents - The estimated fair value is based on current rates
for similar assets.

Securities Available for Sale - The fair value of securities available for sale
is estimated based on quoted market prices or dealer quotes, if available. If a
quote is not available, fair value is estimated using quoted market prices for
similar securities.

Notes Receivable - The fair value of notes receivable has been estimated by
discounting projected cash flows using current rates for similar notes
receivable. The fair value of impaired notes receivable - sold properties having
a net carrying value of $1,404,764 at December 31, 1996 and $1,733,976 at
December 31, 1995, are not included in the above table because it is not
practical to reasonably assess the timing of the cash flows or the credit
adjustment that would be applied in the marketplace for such notes receivable.

Mortgage Debt on Properties Owned, Wrap Mortgage Debt and Note Payable to Bank -
The fair value of mortgage debt on properties owned, wrap mortgage debt and note
payable to bank has been estimated by discounting projected cash flows using
current rates for similar debt.


                                         83
<PAGE>   84

21.  QUARTERLY FINANCIAL INFORMATION - UNAUDITED
     (Amounts in thousands, except earnings per common share)

                            Income Before
                            Net Gain from
                            Sales of Properties
                            and Securities and                     Earnings
Year                        Cumulative Effect of                   Per
Ended                       Change in Accounting                   Common
December 31     Revenues    Principle                 Net Income   Share
-----------     --------    --------------------      ----------   --------

1996
----
First           $3,270              $410              $   435       $0.12
Second           3,249               584                1,415        0.40
Third            3,085               270                  304        0.09
Fourth           3,335               459                  414        0.12


1995
----
First           $2,963              $371              $   398       $0.11
Second           2,975               502                  505        0.15
Third            3,148               496                  504        0.14
Fourth           3,085               505                  538        0.15


22.   SUBSEQUENT EVENTS

At December 31, 1996, there were approximately $4,800,000 of unpaid real estate
taxes (including interest accrued thereon) owed by the owners of the property
with respect to the Fairfield Towers condominium units securing Presidential's
First and Second Mortgages (see Note 2). Approximately $3,000,000 of this amount
arose prior to the condominium conversion of the property and was covered by a
deferred payment agreement with the City of New York which required payments as
condominium units were sold. However, as a result of the slower than projected
pace of sales, the term of the deferred payment agreement expired. Subsequent to
December 31, 1996, the Company advanced $600,000 to the owner to be used to pay
a portion of the unpaid taxes and interest. The $600,000 advance was added to
the $14,650,867 indebtedness secured by the Fairfield Towers First Mortgage and
the interest rate will be the same as the interest rate on the Fairfield Towers
First Mortgage. The holder of the $8,650,000 bank note (Fleet) has agreed to
advance to Presidential $600,000 to reimburse it for its $600,000 advance. The
owner is in the process of negotiating a new deferment agreement with the City
of New York. However, no assurances can be given that the owner will be
successful in negotiating a satisfactory deferment agreement with the City of
New York, and if a satisfactory agreement is not obtained, a continuing default
in the payment of real estate taxes could adversely affect the success of the
condominium conversion at Fairfield Towers and the value of Presidential's First
and Second Mortgages.


                                         84
<PAGE>   85

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
------------------------------------------------

VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994                SCHEDULE II
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                               ADDITIONS
                                                         ----------------------
                                                                       CHARGED
                                          BALANCE AT      CHARGED        TO                                          BALANCE
                                          BEGINNING         TO          OTHER                                         AT END
    CLASSIFICATION                         OF YEAR       EXPENSES      ACCOUNTS             DEDUCTIONS               OF YEAR
----------------------                    ----------     --------      --------             ----------               -------
<S>                                     <C>              <C>          <C>                <C>                      <C>
      1996
      ----
Discount on mortgage
portfolio and valuation
allowance for other receivables         $11,691,101      $110,936     $3,500,000 (1)       $882,966 (2)(3)        $14,419,071
                                        ===========      ========     ==========         ==========               ===========

      1995
      ----
Discount on mortgage
portfolio and valuation
allowance for other receivables         $12,348,837      $108,351                          $766,087 (2)(4)        $11,691,101
                                        ===========      ========     ==========         ==========               ===========

      1994
      ----
Discount on mortgage
portfolio and valuation
allowance for other receivables         $12,989,212       $78,351                          $718,726 (2)(5)        $12,348,837

Valuation allowance for
foreclosed properties                       853,610                                         853,610 (6)
                                        -----------      --------     ----------         ----------               -----------
                                        $13,842,822       $78,351                        $1,572,336               $12,348,837
                                        ===========      ========     ==========         ==========               ===========
</TABLE>


(1)  Represents the discount received on the purchase of the Fairfield Towers
     First Mortgage.
(2)  Represents amortization of discount on mortgages and notes using the
     interest method.
(3)  Includes a write-off of discount of $10,224 on some notes due to payoffs on
     the notes.
(4)  Includes a write-off of discount of $22,133 on some notes due to payoffs on
     the notes.
(5)  Includes a write-off of discount of $10,896 on some notes due to payoffs on
     the notes.
(6)  The Hoboken, NJ, foreclosed property, for which this valuation allowance
     applies, was sold in June, 1994.


                                       85
<PAGE>   86

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
------------------------------------------------

REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996                                                   SCHEDULE III
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                               INITIAL COST TO                        GROSS AMOUNT AT WHICH CARRIED
                                                                   COMPANY               COSTS              AT CLOSE OF YEAR
                                                           ----------------------     CAPITALIZED     -----------------------------
                                                                         BUILDING     SUBSEQUENT TO                 BUILDING
                                            AMOUNT OF                      AND        ACQUISITION                      AND       
         PROPERTIES                       ENCUMBRANCES      LAND       IMPROVEMENTS   IMPROVEMENTS      LAND      IMPROVEMENTS
----------------------------              ------------      ----       ------------   ------------      ----      ------------
<S>                                       <C>              <C>         <C>            <C>              <C>        <C>

Office and Commercial except
  where otherwise indicated:

Building Industries Center,
  White Plains, NY                          $949,208       $61,328        $496,198      $464,636       $61,328       $960,834 

*Cambridge Green,
  Council Bluffs, IA                       3,160,489       200,000       2,034,315       817,919       200,000      2,852,234 

*Continental Gardens
  Miami, FL                                7,800,000     2,448,000       7,389,786       169,490     2,448,000      7,559,276 

*Crown Court, New Haven, CT                2,884,821       168,000       3,077,445        58,481       168,000      3,135,926 

*Kent Terrace
 Martinsburg, WV                                            71,408         657,805       591,870        71,408      1,249,675 

Mapletree Industrial Center, (1)
  Palmer, MA                                 294,824        79,100                        48,083        79,100         48,083 

Metmor Plaza,
  Hato Rey, Puerto Rico                   11,399,359       636,712       5,070,769       758,914       636,712      5,829,683 

Towers Shoppers Parcade,
  New Haven, CT                               24,764                         7,000                                      7,000 

University Towers
  New Haven, CT                                                                           52,146                       52,146 

**Broad Park Lodge
    White Plains, NY                                                        10,000                                     10,000 

Undeveloped Land  (2)                                       22,036                       (22,036)

                                         -----------    ----------     -----------    ----------    ----------    -----------  
TOTAL                                    $26,513,465    $3,686,584     $18,743,318    $2,939,503    $3,664,548    $21,704,857      
                                         ===========    ==========     ===========    ==========    ==========    ===========      

<CAPTION>
                                                                                                         YEARS ON WHICH
                                                                                                         DEPRECIATION IN
                                                                                                         LATEST INCOME
                                                         ACCUMULATED       DATE OF          DATE         STATEMENT IS
         PROPERTIES                         TOTAL       DEPRECIATION    CONSTRUCTION      ACQUIRED       COMPUTED
----------------------------                -----       ------------    ------------      --------       ----------------
<S>                                       <C>           <C>             <C>               <C>              <C>
Office and Commercial except
  where otherwise indicated:

Building Industries Center,
  White Plains, NY                        $1,022,162      $846,376          1956           1966                    25

*Cambridge Green,
  Council Bluffs, IA                       3,052,234       382,211          1974           1992                    50

*Continental Gardens
  Miami, FL                               10,007,276       420,226          1971           1994                27-1/2

*Crown Court, New Haven, CT                3,303,926     2,449,544          1973           1973                    40

*Kent Terrace
 Martinsburg, WV                           1,321,083        13,043          1964           1996                    50

Mapletree Industrial Center, (1)
  Palmer, MA                                 127,183         2,939     1902-1966           1974                    20

Metmor Plaza,
  Hato Rey, Puerto Rico                    6,466,395     1,522,633     1966-1967           1966                    40

Towers Shoppers Parcade,
  New Haven, CT                                7,000         7,000          1962           1962                33-1/3

University Towers
  New Haven, CT                               52,146        36,136

**Broad Park Lodge
    White Plains, NY                          10,000                                       1995

Undeveloped Land  (2)                    

                                         -----------    ----------
TOTAL                                    $25,369,405    $5,680,108
                                         ===========    ==========
</TABLE>
*    Apartments

**   Cooperative Apartment Shares

(1)  In 1994, as a result of the fire insurance settlement on the Mapletree
     property, $1,375,575 of cost for building and improvements and $465,292 of
     accumulated depreciation were written off against the insurance proceeds.
     The $79,100 cost for the land remained in real estate. Subsequent costs
     capitalized are for additions since 1995.
(2)  In 1996, the Company wrote off this undeveloped land.


                                       86
<PAGE>   87

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
------------------------------------------------

REAL ESTATE AND ACCUMULATED DEPRECIATION                           SCHEDULE III
DECEMBER 31, 1996                                                    (CONCLUDED)
-------------------------------------------------------------------------------

(3)  The aggregate cost of real estate for Federal income tax purposes is
     $24,459,240 at December 31, 1996.

(4)  The reconciliations of the total cost of real estate at the beginning
     of each year with the total cost at the end of each year are as follows:

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                       ------------------------------------------------
                                           1996                1995             1994
                                       -----------         -----------      -----------
<S>                                    <C>                 <C>              <C>
Balance at the beginning of year       $23,871,618         $23,479,627      $14,547,082
Additions during the year:
  Acquisitions through foreclosure         729,213
  Additions and improvements               790,610             391,991       10,315,749
                                       -----------         -----------      -----------
                                        25,391,441          23,871,618       24,862,831

Deductions during the year:
   Dispositions                             22,036 (6)                        1,383,204
                                       -----------         -----------      -----------
Balance at end of year                 $25,369,405         $23,871,618      $23,479,627
                                       ===========         ===========      ===========
</TABLE>

(5)  The reconciliations of the accumulated depreciation at the beginning of
     each year with the total shown at the end of each year are as follows:

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                        ------------------------------------------------
                                            1996                1995             1994
                                        -----------         -----------      -----------
<S>                                     <C>                 <C>              <C>
Balance at the beginning of year         $5,073,887          $4,475,288       $4,467,984
Additions during the year:
  Depreciation charged to income            651,652             606,999          480,123
                                        -----------         -----------      -----------
                                          5,725,539           5,082,287        4,948,107
Deductions during the year:
  Dispositions and replacements              45,431               8,400          472,819
                                        -----------         -----------      -----------
Balance at end of year                   $5,680,108          $5,073,887       $4,475,288
                                        ===========         ===========      ===========
</TABLE>


(6)  Write-off of undeveloped land.


                                       87
<PAGE>   88

 PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
-------------------------------------------------
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1996                                                    SCHEDULE IV
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                PERIODIC
                                           INTEREST       MATURITY               PAYMENT         PRIOR          FACE AMOUNT 
        DESCRIPTION                         RATE           DATE                   TERMS        MORTGAGES        OF MORTGAGE 
-------------------------------            --------       -------               ---------      ---------        -----------
<S>                                      <C>              <C>                   <C>           <C>               <C>
First Mortgages:
  Apartment buildings:
    Columbus, OH                         7.50-8.50%       2001        (2)         (3)         $                 $ 6,250,000
    Brooklyn, NY                         Prime plus 1%    2006        (4)         (5)                            14,650,867
    Hartford, CT                         9.00-9.25%       2005        (6)         (6)                             1,609,813

  Sold Co-op Apartments:
    Flushing, NY (8 notes)               7.00-9.50%       2002-2008               (7) (8)                           225,410
    New York, NY (3 notes)               8.25-9.25%       2003-2016               (7) (8)                           196,581
    New Rochelle, NY (26 notes)          7.50-9.50%       1998-2014               (7)                               769,350
    Riverdale, NY (3 notes)              7.50-8.25%       2003                    (8)                                31,352
    Bronx, NY (2 notes)                  9.00%            2003                    (8)                                38,660
    Long Beach, NY (3 notes)             9.00-9.50%       2002-2010               (7)                                44,246
    Rye, NY (2 notes)                    8.00-10.00%      2009-2010               (8)                               132,847
    Hastings, NY (2 notes)               6.00-9.00%       2005-2011               (7) (8)                            25,630
                                                                                              -----------------------------
Total First Mortgage Loans
                                                                                                                 23,974,756
                                                                                              -----------------------------
Junior Mortgages:                                                                                           
  Apartment buildings:
    Bronx, NY                            5.16%            1999        (9)         (5)           2,832,549         2,244,000
    Brooklyn, NY                         6.75%            1999        (9)         (5)          14,650,867        14,659,841
    Des Moines, IA                       12.00%           2001                    (5)           5,962,441           417,662
    New Haven, CT                        9.75%            1999        (9)         (10)          3,108,472        14,108,472
    White Plains, NY                     7.33%            1998                    (11)          2,504,569         3,528,162
    Wichita, KS                          8.00-9.00%       2015                    (5)           5,165,624         2,249,700
                                                                                              -----------------------------
Total Junior Mortgage Loans                                                                    34,224,522        37,207,837
                                                                                              -----------------------------
Total Mortgage Loans                                                                          $34,224,522       $61,182,593 
                                                                                              =============================
</TABLE>

                                          CARRYING      PRINCIPAL AMT. OF LOANS
                                         AMOUNT OF      SUBJECT TO DELINQUENT
        DESCRIPTION                      MORTGAGE (1)   PRINCIPAL OR INTEREST
-------------------------------          ------------   -----------------------
First Mortgages:
  Apartment buildings:
    Columbus, OH                      $ 3,258,150       $
    Brooklyn, NY                       11,179,548
    Hartford, CT                        1,112,995

  Sold Co-op Apartments:
    Flushing, NY (8 notes)                218,608
    New York, NY (3 notes)                136,949
    New Rochelle, NY (26 notes)           718,956
    Riverdale, NY (3 notes)                31,176
    Bronx, NY (2 notes)                    38,660
    Long Beach, NY (3 notes)               40,626
    Rye, NY (2 notes)                     132,847
    Hastings, NY (2 notes)                 17,876
                                      ------------      --------------
Total First Mortgage Loans
                                       16,886,391
                                      ------------      --------------
Junior Mortgages:
  Apartment buildings:
    Bronx, NY                             934,982
    Brooklyn, NY                        1,404,764
    Des Moines, IA                        199,128
    New Haven, CT                       5,225,938
    White Plains, NY                    2,504,569
    Wichita, KS                           402,919
                                      ------------      --------------
Total Junior Mortgage Loans            10,672,300
                                      ------------      --------------
Total Mortgage Loans                  $27,558,691       $
                                      ============      ==============


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<PAGE>   89

PRESIDENTIAL REALTY CORPORATION AND SUBSIDIARIES
------------------------------------------------
MORTGAGE LOANS ON REAL ESTATE                                       SCHEDULE IV
DECEMBER 31, 1996                                                   (CONCLUDED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                          YEAR ENDED
                                        ---------------------        ---------------------          ---------------------
                                          December 31, 1996            December 31, 1995              December 31, 1994
                                        ---------------------        ---------------------          ---------------------
<S>                                   <C>           <C>              <C>         <C>              <C>            <C>

Balance at beginning of year                        $17,953,611                  $17,770,779                     $16,310,486
  Additions during the year:
    New mortgage loans                $14,676,563                    $237,049                     $1,625,997
  Less:
    Discounts on additions              3,500,000                                                        350
    Deferred gains on additions                                         7,754
                                      -----------                    --------                     ----------
  Net addition to carrying amount                    11,176,563                      229,295                       1,625,647

  Deductions during the year:
    Reclass of loan foreclosed            329,212
    Collections of principal            2,879,524                     774,756                        983,119
  Less:
    Amortization of discounts             796,230                     653,295                        622,472
    Deferred gains recognized             841,023                      74,998                        195,293
                                      -----------                    --------                     ----------
  Net reduction of carrying amount                    1,571,483                       46,463                         165,354
                                                    -----------                  -----------                     -----------
Balance at end of year                              $27,558,691                  $17,953,611                     $17,770,779
                                                    ===========                  ===========                     ===========
</TABLE>

(1)  Carrying value is net of discounts and deferred gains. The aggregate net
     carrying value of this portfolio for tax purposes at December 31, 1996, is
     $22,647,000.
(2)  Interest is paid on this note at the rate of 6% per annum through July 31,
     1999 and a rate of not less than 7.5% per annum through maturity. In
     connection with the modification of the note in 1994, the borrower paid a
     fee of $628,863 in order to increase the effective interest rate on the
     note to 8.5% per annum through July 31, 1999.
(3)  Varying amounts in 1998 and 1999. Balloon of $6,000,000 due in 2001.
(4)  This note was purchased by the Company in the fourth quarter of 1996 at a
     discount of $3,500,000. The interest rate, currently 9.25%, is a variable
     rate equal to 1% above the prime rate.
(5)  Entire principal due at Final Maturity Date.
(6)  In December, 1995, the borrower excercised its option to extend the
     maturity date of the notes from 1995 to 2000. Subsequent to December 31,
     1996, the maturity dates of these loans were further extended to 2005. The
     interest rate is 9% per annum through December 31, 2002 and 9.25% per annum
     thereafter. The notes are amortizing monthly, based on a 20 year term at
     the above rates, and have balloon payments of $1,136,621 due at maturity.
(7)  Principal amortization each year with a balloon payment in the year of
     maturity.
(8)  Principal amortization each year through maturity.
(9)  The maturity dates of these notes may be extended at the option of the
     buyer for periods ranging up to ten years.
(10) Varying amounts to 1999 and balloon of $13,328,421 due in 1999.
(11) Varying amounts to 1998 and balloon of $3,259,897 due in 1998.


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