<PAGE>

--------------------------------------------------------------------------------
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON, DC 20549

                                  FORM 10-KSB

/X/ 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, 1997.

/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934 (no fee required) for the Transition Period from      to      .

                         COMMISSION FILE NUMBER 1-12514

                 AMERICAN REAL ESTATE INVESTMENT CORPORATION
                (Name of small business issuer in its charter)
<TABLE>
<CAPTION>
 <S>                                   <C>
             MARYLAND                         84-1246585
      (State or other jurisdiction      (IRS Employer Identification
           of incorporation or                  Number)
              organization)

     620 WEST GERMANTOWN PIKE, SUITE 200,           19462
     Plymouth Meeting, Pennsylvania               (Zip Code)
          (Address of principal
            executive offices)

</TABLE>

    Issuer's Telephone Number (including Area Code): (610) 834-7950

        Securities registered under Section 12(b) of the Exchange Act:
              Title of each Class: Common Stock, $.001 Par Value
      Name of each Exchange on which Registered: American Stock Exchange

    Securities registered under Section 12(g) of the Exchange Act: NONE

Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the Issuer was required to file such reports),
and (2) and been subject to such filing requirements for the past 90 days.
Yes /X/ No / /

Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to the best of the Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. /X/

The Issuer's revenue for the year ended December 31, 1997 was approximately
$8,197,000.

The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 25, 1998 was approximately $46,504,000.

The number of shares outstanding of each of the Issuer's common equity, as of
March 25, 1998, was 5,469,715 shares of Common Stock.
--------------------------------------------------------------------------------
<PAGE>
                                       PART I

ITEM 1. DESCRIPTION OF BUSINESS.
        -----------------------

    American Real Estate Investment Corporation (together with its
subsidiaries, the "Company") is a self-administered, self-managed real estate
investment trust ("REIT") engaged in the ownership, acquisition and
development of industrial and office properties. At December 31, 1997, the
Company owned a portfolio of 23 properties comprised of 10 industrial
properties, 10 office properties and 3 non-core properties comprised of a
community shopping center and 2 multifamily properties (the 3 non-core
properties are referred to herein as the "Non-Core Properties"). Since
January 1, 1998, the Company has acquired 9 industrial properties aggregating
approximately 2.1 million square feet and has sold 1 Non-Core Property. The
Company currently owns, excluding the Non-Core Properties, 29 industrial and
office properties containing an aggregate of 4.2 million square feet (the
"Properties"). The Properties are located principally in the mid-Atlantic and
Northeastern United States and are 97% leased to 60 tenants.

    The Company's industrial properties consist principally of large, high
bay, warehouse and distribution facilities located in close proximity to
major interstate and regional road systems in the mid-Atlantic and
Northeastern United States. The majority of these bulk warehouse facilities
are net leased to single users. Additionally, the Company owns a variety of
single tenant and multi-tenant service, assembly, light manufacturing and
research and development facilities in suburban, mixed-use developments or
business parks.

    The Company's office properties consist principally of modern mid-rise and
single-story suburban buildings, located principally in suburban office
parks, and in certain instances, mixed-use developments. Substantially all of
the office buildings are located within established and growing business
communities with convenient access to regional and interstate road systems
and highways.

    The Company conducts substantially all of its activities through, and
substantially all of the Properties are held directly or indirectly by,
American Real Estate Investment, L.P. (the "Operating Partnership"). The
Company is the sole general partner of the Operating Partnership and owns, at
December 31, 1997,  approximately 57.9% of the limited partnership interests
(the "OP Units") in the Operating Partnership. The remaining OP Units are
owned by limited partners of the Operating Partnership. The officers and the
directors of the Company own approximately 30% of the outstanding OP Units as
of March 27, 1997. Each OP Unit may be redeemed by the holder for one share
of Common Stock (subject to certain anti-dilution provisions), or, at the
Company's option, the cash value of one share of Common Stock. With each such
exchange, the Company's percentage interest in the Operating Partnership will
increase.

    Prior to the Company's reorganization in December 1997, the Company was
engaged in the ownership and acquisition of multi-family residential
properties. Commencing in 1995, the Company began exploring the possible
sale, merger, recapitalization or restructuring of the Company and
subsequently disposed of all but two of its multi-family residential
properties. On December 12, 1997, the Company entered into a series of
transactions to transform the Company from a multi-family residential REIT
into an office and industrial REIT (the "Reorganization"). Since the
Reorganization, the Company has sold one of its multi-family residential
properties and has entered into an agreement to sell the remaining
multi-family residential property. The Reorganization involved (i) the
acquisition by the Company of 15 properties (the "McBride Portfolio")
totaling approximately 1.3 million square feet from McBride Hudson Bay, L.P.
and various entities affiliated with it (collectively, "McBride") in exchange
for approximately 4.1 million shares of Common Stock, 2.9 million OP Units,
and the assumption of $45.0 million in long-term debt, (ii) the contribution
by Jeffrey E. Kelter of a 95% non-voting equity interest in Penn Square
Properties, Inc. ("Penn Square"), a full service real estate development,
management, construction and brokerage company, in exchange for 363,636 OP
Units, and (iii) $30.0 million in cash investments, in exchange for Common
Stock and OP Units, led by Hudson Bay Partners II, L.P. ("Hudson Bay") along
with CRA Real Estate Securities ("CRA"), McBride and Robert Branson (McBride,
Penn Square, Mr. Kelter, Hudson Bay and CRA are collectively referred to
herein as the "Investor Group"). McBride, Mr. Kelter and Hudson Bay received
warrants to purchase 125,000 OP Units, 250,000 OP Units and 300,000 shares of
Common Stock, respectively, at a price of $11.00 per OP Unit or share of
Common Stock. Additionally, in conjunction with the Reorganization, the
Company acquired the right to purchase 7 additional properties (the
"Acquisition Properties"), totaling approximately 1.3 million square feet for
an aggregate cost of approximately $39 million including closing costs. The
Company acquired all 7 of the Acquisition Properties between December 12,
1997 and January 9, 1998. The Investor Group currently owns approximately 76%
of the Company's outstanding Common Stock (assuming conversion of all
outstanding OP Units to Common Stock).

    The Company was originally incorporated in Delaware in 1993 and was
re-incorporated in Maryland in 1994. Since the Reorganization, the Company's
executive offices have been located at 620 West Germantown Pike, Suite 200,
Plymouth Meeting, Pennsylvania and its telephone number is 610-834-7950. The
Company also maintains regional offices in Allentown, Pennsylvania and
Franklin Lakes, New Jersey.


                                       2
<PAGE>

BUSINESS OBJECTIVES AND STRATEGIES FOR GROWTH

    The Company's primary business objectives are to maximize total return to
stockholders through growth in the Company's cash flow per share and to
increase the size and value of its portfolio. The Company intends to pursue
these objectives through aggressive asset and property management, acquiring
and selectively developing new properties and opportunistically reinvesting
capital currently invested in the Non-Core Properties, with a view towards
maximizing cash flow. Though the Company currently is focusing its activities
in the mid-Atlantic and Northeastern United States, no specific geographic
limits have been established.

    The Company intends to accomplish its business objectives (i) through
contractual increases in rental rates from existing leases, (ii) by
maintaining and increasing occupancy levels in its properties, (iii) by
increasing rental rates through aggressive management and re-leasing of
space, (iv) by acquiring primarily new properties and portfolios in strategic
situations and locations, (v) by targeting properties which have potential
for additional growth through adaptive re-use and/or expansion and (vi) by
generating build-to-suit development opportunities, particularly by
maintaining strong landlord/tenant relationships and establishing local
market prominence.

    The Company's strategy is to generate growth opportunities (i) in markets
where it has a significant local market presence through cash acquisitions of
single properties and portfolios and (ii) by entering targeted markets
through strategic transactions with dominant local partners, often through
the issuance of OP Units in tax deferred transactions. Management targets
markets which exhibit strong, stable supply and demand fundamentals yet offer
the opportunity to acquire high quality assets at discounts to replacement
cost with attractive total returns. Management believes that these
opportunities exist in primary markets which have lagged the national real
estate recovery, primary markets in which there is a misperception that the
market is dominated by a one or two significant players, and secondary
markets which offer vital alternatives to cost sensitive tenants. In
implementing its growth strategy, management does not generally aggressively
pursue transactions which involve competitive bid situations.

    The Company believes that the combination of long-term net leased
warehouse/distribution facilities and suburban office properties presents a
balanced and complementary strategy for maximizing total shareholder return.
The warehouse facilities are intended to provide stable long-term cash flow
to the Company, as they generally represent established fixed income, require
low recurring capital expenditures and have modest tenant exposure. The
office portfolio provides greater internal cash flow growth opportunities
through increases in contractual rent, lease-up of existing vacancy and
operating efficiencies derived from economies of scale and management
expertise.

RECENT ACQUISITIONS

    Since the Reorganization, the Company has acquired industrial properties
encompassing an aggregate of approximately 3.0 million square feet for
approximately $92.6 million, including closing costs. Set forth below is a
summary of the Company's acquisition activity since the Reorganization. All
of these properties are located in the mid-Atlantic and Northeastern United
States.

    1.  The Company acquired the Acquisition Properties, including the following
       facilities:

       - One Philips Drive, Mountain Top, PA: a 400,000 square foot
         warehouse/distribution facility on 28.7 acres, 100% net leased to
         Philips Electronics Corporation through 2007. The building was
         originally constructed in 1991 and was expanded in 1993.

       - 100 Oak Hill Road, Mountain Top, PA: a 105,000 square foot
         warehouse/distribution facility on 9.8 acres, 100% net leased to Dana
         Perfumes through October 2001. The building was constructed in 1996 and
         has the capacity to be expanded by 30,000 square feet. The tenant has
         an annual option to terminate upon the payment of certain penalties.

       - 1057 Arnold Road, Reading, PA: a 219,000 square foot
         warehouse/distribution facility on 29.0 acres, 100% net leased to
         Premium Beverage Packers, Inc. through 2000. The building was
         constructed in 1995 and has the capacity to be expanded by 80,000
         square feet.

       - 1091 Arnold Road, Reading, PA: a 133,055 square foot
         warehouse/distribution facility on 28.0 acres, 100% net leased to
         Glidden Company through 2001. The building was constructed in 1996 and
         has the capacity to be expanded by 115,000 square feet.

       - 1305 Goshen Road, West Chester, PA: a 90,000 square foot
         warehouse/distribution facility on 10.2 acres, 100% net leased to Yves
         Rocher, Inc. through 2000. The building was constructed in 1991.

       - One Tabas Lane, Exton, PA: a 150,027 square foot warehouse/distribution
         facility on 10.0 acres, 100% net leased to International Envelope
         through 2007. The building was constructed in 1970 and renovated in
         1990-1991.

        - Two Tabas Lane, Exton, PA: a 150,000 square foot
          warehouse/distribution facility on

                                       3
<PAGE>

          10.1 acres, 100% net leased to Alstrip, Inc., through 2012. The
          building was originally constructed in 1970 and was renovated in 1991.

    2.  The Company acquired on January 8, 1998 a bulk warehouse facility at 101
        Commerce Drive, Mechanicsburg, PA: a 597,100 square foot refrigerated
        warehouse/distribution facility on 48.0 acres, 100% net leased to
        Hershey Foods Corporation through 2012. The building was constructed
        in 1991.

    3.  The Company acquired on March 27, 1998 a 5 building portfolio of
        warehouse/distribution facilities in Liverpool, New York, containing an
        aggregate of 655,500 square feet constructed on 28.0 acres. The
        buildings are 100% net leased to GATX Logistics, Inc. under leases
        expiring in 2001. The portfolio includes:

        - 4472 Steelway Boulevard Section A-F, Liverpool, NY: constructed in
          1977, the facility contains 372,500 square feet, including a 50,000
          square foot cooler.

       - 4472 Steelway Boulevard Section G, Liverpool, NY: constructed in 1978,
         the facility contains 64,000 square feet.

       - 4472 Steelway Boulevard Section H, Liverpool, NY: constructed in 1978,
         the facility contains 96,000 square feet.

       - 4580 Steelway Boulevard South, Liverpool, NY: consisting of 2 buildings
         constructed in 1972, the facility contains 123,000 square feet.

    4.  The Company acquired on March 27, 1998 a 5 building, 468,309 square foot
        portfolio of regional warehouse/distribution facilities in Camp Hill and
        Middletown, PA. The portfolio is 88.1% occupied under leases averaging
        over 6 years. The portfolio includes:

        - Airport Corporate Center, 1011 AIP Drive, Middletown, PA: a 152,908
          square foot warehouse/distribution facility constructed in 1991. The
          building is 80% net leased to Bayard Sales (60%) and, DAS Distributors
          (20%) with leases expiring in 2002 and 2000, respectively.

        - Airport Corporate Center, 1001 AIP Drive, Middletown, PA: a 132,588
          square foot warehouse/distribution facility constructed in 1991. The
          building is 100% net leased to FDA Packaging (45%), T.P.D.C., Inc.
          (31%) and Reese Products (24%) with leases expiring in 2002, 2001, and
          2001, respectively.

        - 2404 Gettysburg Road, Camp Hill, PA: a 124,902 square foot
          warehouse/distribution facility on 10.8 acres, originally constructed
          in 1993. The building is 100% leased, to Ezon, Inc. (58%) and Reckitt
          & Colman Inc. (42%) with leases expiring in 2001 and 1999,
          respectively.

        - 2410 Gettysburg Road, Camp Hill, PA: a 33,600 square foot
          warehouse/distribution facility on 3.2 acres, originally constructed
          in 1952 and renovated in 1993. The building is 100% leased to Purina
          Mills, Inc. through 2001.

        - 2400 Gettysburg Road, Camp Hill, PA: a 24,311 square foot
          warehouse/distribution facility on 1.5 acres, originally constructed
          in 1952 and renovated in 1993. The building was vacated in January
          1998.

    The Company continues to actively seek and evaluate future acquisition
opportunities, and believes that substantial opportunities exist to build
successfully on its activity since the Reorganization.

SUBSEQUENT ACTIVITIES

    On February 4, 1998, the Company signed definitive agreements to acquire
a 10 building portfolio (the "Galesi Portfolio") totaling approximately
790,000 square feet located in suburban Albany, New York for a total purchase
price of $56 million. The portfolio consists of 7 office buildings, totaling
approximately 390,503 square feet, and 3 state-of-the-art, partially
refrigerated industrial buildings totaling approximately 396,645 square feet.
The portfolio is to be contributed to the Operating Partnership by The Galesi
Group, a real estate owner and investment firm, and its partners, in exchange
for the issuance by the Company of approximately 1,362,940 OP Units and the
assumption of certain indebtedness. As part of this transaction, The Galesi
Group and Columbia Development will grant the Company additional rights and
options related to other properties, development projects and land controlled
by the seller. As part of the transaction, Francesco Galesi will be appointed
as a Director of the Company upon the closing of the transaction and will be
nominated as a

                                       4
<PAGE>

Director of the Company at the next meeting of the Company's stockholders.
The closing of this transaction is subject to the receipt of certain
approvals and the satisfaction of customary closing conditions. No assurance
can be given that the Company will acquire these properties.

    The Company is currently evaluating in excess of 4.0 million square feet
of individual and portfolio transactions. There can be no assurance that the
Company will pursue any of these potential acquisitions, or that, if pursued,
the Company will successfully acquire any such properties or that such
properties once acquired will perform as expected.

MANAGEMENT AND EMPLOYEES

    Since the Reorganization, the Company has conducted its real estate
management services business through American Real Estate Management Inc.
(the "Management Company") (formerly Penn Square). At December 31, 1997, the
Company managed all but 3 of the Properties through the Management Company;
the Urban Farms Shopping Center, Americana Lakewood Apartments (sold by the
Company on January 9, 1998) and Quadrangles Village Apartments are managed
for the Company by unaffiliated third parties. The Company also manages,
through the Management Company, additional properties on behalf of third
parties. As of March 27, 1998, the Management Company was managing industrial
and office properties containing an aggregate of approximately 6.9 million
square feet, of which approximately 4.1 million square feet related to
Properties owned by the Company, approximately 1.9 million square feet
related to properties owned by unaffiliated third parties and approximately
865,000 square feet related to 2 properties owned by limited partnerships in
which an officer and director of the Company has general partnership
interests. Through its ownership of 100% of the preferred stock of the
Management Company, the Operating Partnership is entitled to receive 95% of
amounts paid as dividends by the Management Company.

    The Company accounts for its investment in the Management Company in
accordance with the equity method of accounting because it does not control
its operations. The Company currently has 39 full-time employees, of whom 4
are employed in an executive capacity. Such persons provide services to both
the Company and the Operating Partnership. The Company believes that its
relations with its employees are satisfactory.

FINANCINGS

    The Company is in the process of concluding final negotiations with a
lender group, including DLJ Capital Funding, Inc. and BankBoston, N.A., to
enter into a 3-year $100,000,000 senior secured revolving credit facility
(the "Credit Facility"). This Credit Facility will be used to fund new
acquisitions, capital improvements, new development projects and for general
working capital purposes. The Credit Facility will be recourse to the Company
and the Operating Partnership and will be secured by cross-collateralized and
cross-defaulted first mortgage liens on certain properties, either currently
owned by the Operating Partnership or to be acquired as the result of future
transactions. The interest will accrue on outstanding loans under the Credit
Facility at a variable rate per anum equal to the sum of a Eurodollar rate
plus 1.6% per anum. The availability of loans under the Credit Facility will
be limited to 65% of the aggregate purchase price or appraised value of the
respective properties securing the Credit Facility and will be subject to
certain stated debt service coverage ratios. The Credit Facility will be
subject to optional prepayments at any time and mandatory prepayments upon
the occurrence of certain conditions, and will contain financial covenants
which are standard for these types of revolving credit facilities. The Credit
Facility is subject to final negotiation of its terms, and therefore no
assurance can be given that this arrangement will be ultimately consummated,
or if consummated, that it will be based upon the terms described above.

COMPETITION

    The Properties are located in the mid-Atlantic and Northeastern United
States. There are numerous other office and industrial properties and real
estate companies within the market area of each of such properties which
competes with the Company for tenants and development and acquisition
opportunities. The number of competitive properties and real estate companies
in such areas could have a material adverse effect on the Company's (i)
future operations, (ii) ability to rent its properties and the rents charged,
and (iii) development and acquisition opportunities. The Company will compete
for tenants and acquisitions with others who may have greater resources. The
Company's competitive position for tenants is strongly influenced by economic
conditions in its market areas. However, the Company believes that its
responsiveness to tenant needs will enable it to attract and maintain high
quality tenants in the markets in which the properties are located. With
respect to development and acquisition opportunities, the Company competes
with other REITs and investors in office and industrial properties seeking to
develop or acquire properties in the areas where the Company will concentrate
its activities. The Company will experience strong competition in pursuing
development and acquisition opportunities.

    The Company's financial performance and its ability to make distributions
to stockholders continues to be particularly sensitive to the economic
conditions in Northern New Jersey and Eastern Pennsylvania. Like other real
estate markets, the Northern New Jersey and Eastern Pennsylvania commercial
real estate markets have experienced economic downturns in the past, and
future declines in any of these economies or real estate markets could
adversely affect the Company's operations or cash available for distribution.
The Company's revenues and the value of the Properties may be affected by a
number of factors, including the local economic climate (which may be
adversely

                                       5
<PAGE>

impacted by business layoffs or downsizing, industry slowdowns, changing
demographics and other factors) and local real estate conditions (such as
oversupply of or reduced demand for office, industrial and other competing
commercial properties). These factors, when and if they occur in an area in
which the Properties are located, would adversely affect the Company's
ability to make distributions to its stockholders.

ENVIRONMENTAL AND OTHER REGULATORY MATTERS

    Under various federal, state and local laws and regulations, an owner of
real estate is liable for the costs of removal or remediation of certain
hazardous or toxic substances on such property. Such laws often impose such
liability without regard to whether the owner knew of, or was responsible
for, the presence of such hazardous or toxic substances. The costs of
remediation or removal of such substances may be substantial, and the
presence of such substances, or the failure to promptly remediate such
substances, may adversely affect the owner's ability to sell such real estate
or to borrow using such real estate as collateral. In connection with its
ownership and operation of its properties, the Company or the Operating
Partnership, as the case may be, may be potentially liable for such costs.

    All of its properties have been subject to Phase I or similar
environmental assessments, which are intended to discover information
regarding, and to evaluate the environmental condition of, the surveyed
properties and surrounding properties. The Phase I assessments included an
historical review, a public records review, a preliminary investigation of
the site and surrounding properties, screening for the presence of asbestos,
polychlorinated biphenyls ("PCBs") and underground storage tanks and the
preparation and issuance of a written report, but do not include soil
sampling or subsurface investigations. Where Phase I assessments resulted in
specific recommendations for remedial actions, the recommended action has
been taken.

    The Phase I assessments have not revealed any environmental liability
that the Company believes would have a material adverse effect on the
Company's business, assets or results of operations, nor is the Company aware
of any such liability. Nevertheless, it is possible that these assessments do
not reveal all environmental liabilities or that there are material
environmental liabilities of which the Company is unaware. Moreover, no
assurance can be given that (i) future laws, ordinances or regulations will
not impose any material environmental liability or (ii) the current
environmental condition of its properties will not be affected by tenants and
occupants of its properties, by the condition of properties in the vicinity
of its properties (such as the presence of underground storage tanks) or by
third parties unrelated to the Operating Partnership or the Company.

    Environmental inspections indicate that there are minor amounts of
asbestos containing materials ("ACMs") in certain of its properties,
primarily in the form of floor tiles and ceiling materials, which are
generally in good condition. The presence of such amounts of ACMs is in
compliance with current law.

    The Company believes that its properties are in compliance in all
material respects with all federal, state and local ordinances and
regulations regarding hazardous or toxic substances. Neither the Company nor
the Operating Partnership has been notified by any governmental authority, or
is otherwise aware, of any material noncompliance, liability or claim
relating to hazardous or toxic substances in connection with any of its
present properties.

    From time to time legislation is proposed which, if enacted, would
require installation of various items of safety equipment, such as smoke
alarms and sprinkler equipment. If such legislation should be enacted and be
applicable to its properties, the Company could be required to expend
material sums in fulfilling these requirements.

                                       6
<PAGE>

ITEM 2. DESCRIPTION OF PROPERTY.
        -----------------------

SUMMARY PROPERTY TABLE

    The following table sets forth certain information with respect to each
of the Properties and Non-Core Properties (excluding Americana Lakewood
Apartments which was sold by the Company on January 9, 1998) as of December
31, 1997 and includes certain information with respect to the Properties
acquired by the Company since Decemebr 31, 1997 (denoted by an asterisk) as
if such Properties were owned by the Company on December 31, 1997(1):

<TABLE>
<CAPTION>                                                                                                           ANNUALIZED
                                                               % OF                                                   RENT
                                                              PORTFOLIO                            % OF               PER
                                            YEAR              RENTABLE                         PORTFOLIO              LEASED
                                           BUILT/    SQUARE    SQUARE       %     ANNUALIZED   ANNUALIZED  # OF      SQUARE
BUILDINGS                   LOCATION     RENOVATED    FEET      FEET     LEASED    RENT (2)       RENT    LEASES      FOOT(3)
------------------------  ------------- ----------- -------- ----------  ------   -----------  --------  -------   ----------
<S>                      <C>             <C>        <C>       <C>      <C>      <C>          <C>        <C>        <C>
Office:
------
40 Potash Road (4)......  Oakland, NJ          1992   60,994   1.3%      100%    $1,216,377    5.1%        1         $19.94
1655 Valley Road (4)....  Wayne, NJ            1989  155,700   3.4%      100%     2,307,474    9.6%        1          14.82
16-00 Route 208 (4).....  Fairlawn, NJ         1983   54,805   1.2%       64%       527,258    2.2%       17          15.03
128 Bauer Drive.........  Oakland, NJ          1981   41,450   0.9%       84%       189,358    0.8%        3           5.44
22-08 Route 208.........  Fairlawn, NJ      1960/68   78,253   1.7%       74%       673,514    2.8%        6          11.63
15-00 Pollitt Drive (4).  Fairlawn, NJ      1970/92   18,614   0.4%      100%       162,873    0.7%        1           8.75
19-00 Pollitt Drive (4).  Fairlawn, NJ  1970/84, 95   77,262   1.7%      100%       687,632    2.9%        1           8.90
95 Bauer Drive (4)......  Oakland, NJ       1974/91    6,792   0.1%      100%        88,296    0.4%        1          13.00
99 Bauer Drive (4)......  Oakland, NJ          1971   20,449   0.5%      100%       141,303    0.6%        1           6.91
88 Mary Street..........  Paterson, NJ         1976  114,000   2.5%      100%       525,000    2.2%        1           4.61
                                                     -------  -----     -----    ----------   -----     ----         ------
Sub-Total Office Properties                          628,319  13.8%     92.6%    $6,519,085   27.2%       33         $10.38

Industrial:
----------
5 Thornton Road (4).....  Oakland, NJ       1973/81  151,874    3.3%      100%   $  905,169    3.8%        1         $ 5.96
2 Volvo Drive...........  Rockleigh, NJ     1966/93   67,460    1.5%      100%      502,577    2.1%        1           7.45
17-01 Pollitt Drive (4).  Fairlawn, NJ         1968  105,367    2.3%       71%      547,000    2.3%        2           7.31
19-05 Nevins Road (4)...  Fairlawn, NJ         1955  151,700    3.3%      100%      620,930    2.6%        1           4.09
1 Philips Drive*........  Mountaintop, PA   1991/93  400,000    8.8%      100%    1,188,000    5.0%        1           2.97
100 Oak Hill Road.......  Mountaintop, PA      1996  105,000    2.3%      100%      366,590    1.5%        1           3.49
1057 Arnold Road........  Reading, PA          1995  219,120    4.8%      100%      654,766    2.7%        3           2.99
1091 Arnold Road........  Reading, PA          1996  133,055    2.9%      100%      465,692    1.9%        1           3.50
1305 Goshen Parkway.....  West Chester, PA     1991   90,000    2.0%      100%      503,280    2.1%        1           5.59
One Tabas Lane..........  Exton, PA         1970/91  150,027    3.3%      100%      450,084    1.9%        1           3.00
Two Tabas Lane..........  Exton, PA         1970/91  150,000    3.3%      100%      762,520    3.2%        1           5.08
101 Commerce Drive*.....  Mechanicsburg, PA    1991  597,100   13.2%      100%    2,376,446    9.9%        1           3.98
4472 Steelway Boulevard*  Syracuse, NY      1977/78  532,500   11.7%      100%    1,462,200    6.1%        3           2.75
4580 Steelway Boulevard*  Syracuse, NY         1972  123,000    2.7%      100%      307,500    1.3%        1           2.50
1001 Airpark Drive*.....  Middletown, PA       1991  132,588    2.9%      100%      454,980    1.9%        3           3.43
1011 Airpark Drive*.....  Middletown, PA       1991  152,908    3.4%       80%      394,758    1.6%        2           3.23
2400 Gettysburg Road*...  Camp Hill, PA     1952/93   24,311    0.5%        0%            0      0%        0              0
2404 Gettysburg Road*...  Camp Hill, PA        1993  124,902    2.8%      100%      456,780    1.9%        2           3.66
2410 Gettysburg Road*...  Camp Hill, PA     1952/93   33,600    0.7%      100%      109,200    0.5%        1           3.25
                                                   ---------  -----     -----    ----------   -----     ----         ------
Sub-Total Industrial
Properties..............                           3,444,512   75.9%     97.5%  $12,528,472   52.3%       27         $ 3.64
                                                   ---------  -----     -----    ----------   -----     ----         ------
Non-Core Properties:
--------------------
Urban Farms Shopping
Center.................. Franklin Lakes, NJ 1965/82   91,008    2.0%       90%    1,129,570    4.7%       35          13.79
1255 East University
Drive (Quadrangles
Village Apartments)(5)..  Tempe, AZ            1987  375,660    8.3%       97%     3,761,460   15.7%     493          10.32
                                                   ---------  -----     -----    ----------   -----     ----         ------
Sub-Total Non-Core
Properties..............                             466,668   10.3%     95.6%    $4,891,030   20.4%     528         $10.48
                                                   ---------  -----     -----    ----------   -----     ----         ------
GRAND TOTAL.............                           4,539,499  100.0%     95.2%   $23,938,587  100.0%     588         $ 5.27
                                                   ---------  -----     -----    ----------   -----     ----         ------
                                                   ---------  -----     -----    ----------   -----     ----         ------
 </TABLE>

------------------------------
 (1) The information provided in this Summary Property Table and throughout this
     Item 2: (a) includes 101 Commerce, One Philips Drive, 4472 and 4580
     Steelway Boulevard, 1001 and 1011 Airpark Drive and 2400, 2404 and 2410
     Gettysburg Road, all of which were acquired between January 8, 1998 and
     March 27, 1998, and (b) does not include the Americana Lakewood

                                       7
<PAGE>

     Apartments located at 12598 West Dakota Avenue, Lakewood, Colorado, which
     was sold by the Company on January 9, 1998.

(2)  Annualized Rent, as used throughout this Annual Report, represents the
     total contractual rent under existing leases for the month ended
     December 31, 1997 before any rent abatement and excluding any expense
     reimbursements.

(3)  Annualized Rent Per Leased Square Foot, as used throughout this Annual
     Report, represents Annualized Rent, as described in Footnote (2) above,
     presented on a per leased square foot basis.

(4)  This property secures the Nomura debt. See "--Summary of Indebtedness."


(5)  The Company entered into an agreement to sell this property on February
     26, 1998. The consummation of sale is subject to the buyer's due
     diligence and related approvals from the United States Department of
     Housing and Urban Development ("HUD") and the lender under the bond
     indenture.

SIGNIFICANT PROPERTIES

    Other than Quadrangle Village Apartments, which the Company has agreed to
sell, as of December 31, 1997, the only property with a book value that
accounted for 10% or more of the Company's total assets was 1655 Valley Road,
Wayne, New Jersey. The following table sets forth certain information for
this property for the years indicated.

<TABLE>
<CAPTION>
                                           ANNUALIZED RENT
             % LEASED     ANNUALIZED RENT  PER SQUARE FOOT
           -------------  ---------------  ---------------
<S>        <C>            <C>              <C>
1993.....          100%    $   2,050,676      $   13.20
1994.....          100%    $   3,070,404      $   19.70
1995.....          100%    $   2,879,670      $   18.50
1996.....          100%    $   2,307,474      $   14.80
1997.....          100%    $   2,307,474      $   14.80

</TABLE>

    The property is occupied by a single tenant, Reckitt & Colman, Inc. and
is used for office space related to food distribution activities. The
property is subject to the Nomura debt described in "--Summary of
Indebtedness." There are no plans to make any material renovations or
improvements to this property. The property has a Federal tax basis of
approximately $10.7 million and depreciation is being taken on the property
on a straight line basis at the rate of 3.2% per year. The property has an
estimated life of 31.5 years. Real estate taxes in 1997 were $494,050, equal
to $2.41 per $100 of assessed valuation. See "--Description of
Properties--Office Properties" for additional information relating to this
property.

    On January 8, 1998, the Company acquired a property located at 101
Commerce Drive in Mechanicsburg, PA which had a purchase price in excess of
10% of the company's total assets at December 31, 1997. The following table
sets forth certain information for this property for the years indicated.

<TABLE>
<CAPTION>
                                            ANNUALIZED RENT
             % LEASED     ANNUALIZED RENT   PER SQUARE FOOT
           -------------  ---------------  -----------------
<S>        <C>            <C>              <C>
1993.....          100%    $   2,933,822       $    4.91
1994.....          100%    $   2,933,822       $    4.91
1995.....          100%    $   2,933,822       $    4.91
1996.....          100%    $   2,933,822       $    4.91
1997.....          100%    $   2,788,293       $    4.67

</TABLE>

    The property is occupied by a single tenant, Hershey Foods Corporation,
and is used as a food warehouse/distribution facility. The property is
subject to the mortgage described under "--Summary of Indebtedness." There
are no plans to make any material renovations or improvements to this
property. The property has a Federal tax basis of approximately $26.2 million
and depreciation is being taken on the property on a straight line basis at
the rate of 3.2% per year. The property has an estimated useful life of 31.5
years. Real estate taxes are paid directly by the tenant under the terms of
this lease. See "--Description of Properties--Industrial Properties" for
additional information relating to this property.

DESCRIPTION OF PROPERTIES

OFFICE PROPERTIES

    40 POTASH ROAD was constructed in 1992 and is located in the Oakland
Industrial Park, Oakland, New Jersey. The park is located within five miles
of each of US Route 202, US Route 208 and I-287. The building is a 3-story
office building with 60,994 square feet, a 3-bay truck service area, loading
docks, 2 elevators, ample parking spaces and is situated on 7

                                       8

<PAGE>

acres. As of December 31, 1997, the building was 100% leased to TCI of Northern
New Jersey under a lease expiring November 10, 2012, subject to four 5-year
renewal options, and generated an Annualized Rent of $1,216,377 on a net basis.
The tenant has the right to purchase the premises during 2002 and 2012 at fair
market value.

    1655 VALLEY ROAD was constructed in 1989 as an office building and is
located in the Wayne Office and Research Park, Wayne, New Jersey. The park is
located within 10 miles of each of US Route 202, US Route 208 and I-287. The
building contains 155,700 square feet and 6 elevators and is situated on 11
acres with 438 parking spaces. As of December 31, 1997, the building was 100%
leased to Reckitt & Colman Inc. under a lease expiring December 14, 2003,
subject to two 5-year renewal options, and generated an Annualized Rent of
$2,307,474 on a net basis.

    16-00 Route 208 was constructed in 1983 and renovated by the Company in
1998 and is located in the Fair Lawn Industrial Park, Fair Lawn, New Jersey.
The park is located on US Route 208 and is within 5 miles of each of US Route
4 and I-80 and within 10 miles of I-287. The building is a 4-story
multi-tenanted office building with 54,805 square feet, 2 elevators, 235
parking spaces and is situated on 3.3 acres. As of December 31, 1997, the
building was 64% leased and generated Annualized Rent of $527,258. No tenant
leases more than approximately 8,500 square feet.

    128 Bauer Drive was constructed in 1981 and is located in the Oakland
Industrial Park, Oakland, New Jersey. The park is located within 5 miles of
each of US Route 202, US Route 208 and I-287. The building is a one-story
office building containing 41,450 square feet and is situated on 5 acres. It
has 80 parking spaces, 4 tailgate loading docks, 2 drive-in ramps and 22'
clear ceiling heights in the warehouse. As of December 31, 1997, the building
was 84% leased and generated an Annualized Rent of $189,358. Effective July
1, 1997, the major tenants were Total Office which leases 25% of the
building, N-D Industries, which leases 34% of the building, and TCI of
Northern New Jersey, Inc., which leases approximately 25% of the building.

    22-08 Route 208 was constructed in 1960 as a light industrial building,
which has since been converted to a multi-tenanted office building, and is
located in the Fair Lawn Industrial Park, Fair Lawn, New Jersey. The park is
located on US Route 208 and is within 5 miles of each of US Route 4 and I-80
and within ten miles of I-287. The building is a one-story multi-tenanted
office building containing 78,253 square feet (including a partial basement)
and is situated on 5.5 acres. It has 330 parking spaces. As of December 31,
1997, the building was 75% leased and generated an Annualized Rent of
$673,514. The major tenant is Maxell Corp. of America which leases 28% of the
building.

    15-00 Pollitt Drive was constructed in 1970 and was completely renovated
in 1992 at which time all mechanical and electrical systems, windows and
entries were replaced. It is located in the Fair Lawn Industrial Park, Fair
Lawn, New Jersey. The park is located on US Route 208 and is within 5 miles
of each of US Route 4 and I-80 and within 10 miles of I-287. The building is
a one-story office building containing 18,614 square feet, 106 parking spaces
and is situated on 2.7 acres. As of December 31, 1997, the building was
leased 100% to New Jersey Bell Telephone Company under a lease expiring
February 28, 2001 and generated an Annualized Rent of $162,873 on a net basis.

    19-00 Pollitt Drive was constructed in 1970 as an office building and is
located in the Fair Lawn Industrial Park, Fair Lawn, New Jersey. The park is
located on US Route 208 and is within 5 miles of each of US Route 4 and I-80
and within 10 miles of I-287. In 1984 the building was completely renovated
and in 1995 was extensively upgraded. The building is a one-story
office/computer center containing 77,262 square feet with approximately 400
parking spaces and is situated on 5.1 acres. As of December 31, 1997, the
building was 100% leased to Paid Prescriptions, Inc., and guaranteed by Merck
& Co., Inc., under a lease expiring January 31, 2006, subject to two 5-year
renewal options, and generated an Annualized Rent of $687,632 on a net basis.

    95 Bauer Drive was constructed in 1974 as a two-story office building and
is located in the Oakland Industrial Park, Oakland, New Jersey. The park is
located within 5 miles of each of US Route 202, US Route 208 and I-287. In
1991, the building was retro-fitted to accommodate its current use as a day
care center. It contains 6,792 square feet, 29 parking spaces, a partial
basement and is situated on 2 acres. As of December 31, 1997, the building
was 100% leased to Greentree Learning Centers Inc. under a lease expiring
September 30, 2004, subject to one 5-year renewal option, and is guaranteed
by Children's Discovery Centers of America, Inc. and generated an Annualized
Rent of $88,296 on a net basis.

    99 Bauer Drive was constructed in 1971 as an office building and is
located in the Oakland Industrial Park, Oakland, New Jersey. The park is
located within 5 miles of each of US Route 202, US Route 208 and I-287. It
contains 20,449 square feet with 75 parking spaces and is situated on 3
acres. As of December 31, 1997, the building was 100% leased to
Addison-Wesley Educational Publishers, Inc., successor to Scott, Forsman and
Company, under a lease expiring September 11, 2001 and generated an
Annualized Rent of $141,303 on a net basis. Effective April 17, 1997, the
lease was assigned to Stratton Travel, Inc. for the balance of the lease
term. Stratton Travel, Inc. executed a primary lease to commence upon
expiration of the current lease and to continue until September 11, 2006,
subject to one 5-year renewal

                                       9
<PAGE>

option.

    88 Mary Street was constructed in 1976 and is located in Paterson, New
Jersey. It is within 1/4 mile of I-80 and is adjacent to St. Joseph's
Hospital and Medical Center, which uses the building for medical offices and
residential units for the staff. The building is an eleven-story office/
residential building containing 114,000 square feet, 3 elevators and is
situated on 1 acre. The land on which the building is situated is owned by
St. Joseph's Hospital and Medical Center and is leased to the Company for $1
per year, and the Company in turn subleases the building to St. Joseph's
Hospital and Medical Center under a sublease expiring July 1, 2004. As of
December 31, 1997, the building was 100% subleased to St. Joseph's Hospital
and Medical Center and generated an Annualized Rent of $525,000 on a net
basis. The sub-tenant has the right to purchase the building at the
expiration of the sublease for $10.00.

INDUSTRIAL PROPERTIES

    5 Thornton Road was constructed in 1973 as an industrial building, was
expanded in 1976, 1978 and 1981 and is located in the Oakland Industrial
Park, Oakland, New Jersey. The park is located within 5 miles of each of US
Route 202, US Route 208 and I-287. It contains 151,874 square feet with 230
parking spaces and is situated on 8.7 acres. As of December 31, 1997, the
building was 100% leased to Aramis, Inc., successor to Len-Ron Mfg. Co., and
guaranteed by Estee Lauder, Inc., under a lease expiring April 30, 2003,
subject to two 5-year renewal options, and generated an Annualized Rent of
$905,169 on a net basis. The tenant has a right of first refusal in the event
of a sale of the property to a third party unrelated to the owner.

    2 Volvo Drive was constructed in 1966 and is located in the Rockleigh
Office/Research Park, Rockleigh, New Jersey. The park is located within 10
miles of each of US Route 9W, I-87 and I-287. In 1993 the office area was
completely renovated. The building is a one-story industrial building with
mezzanine containing 67,460 square feet with 173 parking spaces and is
situated on 5 acres. As of December 31, 1997, the building was 100% leased to
National Medical Care Medical Products Division, Inc. under the terms of a
lease expiring December 12, 2002, subject to two 5-year renewal options, and
generated an Annualized Rent of $502,577 on a net basis. The tenant vacated
these premises in 1997 but is continuing to pay the rent under the terms of
the lease.

    17-01 Pollitt Drive was constructed in 1968 and is located in the Fair
Lawn Industrial Park, Fair Lawn, New Jersey. The park is located on US Route
208 and is within 5 miles of each of US Route 4 and I-80 and within 10 miles
of I-287. The building is a one-story multi-tenanted industrial building
containing 105,367 square feet, 255 parking spaces, 4 tailgate loading docks,
16'8" ceiling heights in the warehouse and is situated on 7.1 acres. As of
December 31, 1997, the building was 71% leased and generated an Annualized
Rent of $547,000 on a net basis. The tenants are MDA Services, Inc., which
leases 40% of the building and Symtron Systems, Inc., which leases 31% of the
building.

    19-05 Nevins Road was constructed in 1955 and is located in the Fair Lawn
Industrial Park, Fair Lawn, New Jersey. The park is located on US Route 208
and is within 5 miles of each of US Route 4 and I-80, within 10 miles of
I-287 and has a railroad siding. The building is a one-story industrial
building containing 151,700 square feet with 100 parking spaces and is
situated on 8.4 acres. As of December 31, 1997, the building was 100% leased
to RoadCon Systems, Inc. under the terms of a lease expiring September 30,
2004, and generated an Annualized Rent of $620,930 on a net basis.

    1 Philips Drive was constructed between 1991 and 1993 and is located in
Mountaintop, Pennsylvania, near Wilkes-Barre, Pennsylvania. The property is
within 1 to 10 miles of 4 major highways; Interstates 80, 81 and 476 and US
Route 309. The building is a 400,000 square foot, one-story warehouse/
distribution structure with 25 to 33 foot clear ceiling heights, 34 tailgate
dock doors and is situated on 28.7 acres. As of December 31, 1997, the
building was 100% leased to Philips Electronics North American Corporation
and generated Annualized Rent of $1,188,000 on a net basis. The lease expires
December 31, 2007, subject to two 5-year renewal options, and the tenant has
an option to terminate the lease effective January 1, 2003 with a termination
penalty of $1,500,000. The Company acquired this property on January 9, 1998.

    100 Oak Hill Road was constructed in 1996 and is also located in
Mountaintop, Pennsylvania, near Wilkes-Barre, Pennsylvania. The property is
within 1 to 10 miles of 4 major highways; Route 309 and Interstates 80, 81
and 476. The building is a 105,000 square foot, one-story warehouse/
distribution structure with 30 foot clear ceiling heights, 8 tailgate dock
doors and is situated on 9.8 acres. As of December 31, 1997, the building was
100% leased to Dana Perfumes Corporation and generated Annualized Rent of
$366,590 on a net basis. The lease expires October 31, 2001 (subject to two
5-year renewal options). The tenant has an option to terminate the lease
effective November 1, 1998 and each year thereafter with decreasing
termination penalties of 12, 6, 6 and 3 months rent. Additionally, the tenant
has an ongoing option to purchase the property.

    1057 Arnold Road was constructed in 1995 and is located in Reading,
Pennsylvania. The building is adjacent to the

                                       10

<PAGE>

Reading Regional Airport and within 1 mile of US Routes 222 and 61. The
property is a ground leasehold interest together with the improvements built
thereon. The ground lease expires in 2029 with one 14-year renewal option. At
December 31, 1997, the Annualized Rent under the ground lease was $56,971.
The building is a 219,120 square foot one-story warehouse/distribution
structure with 30 foot clear ceiling heights, 47 tailgate dock doors and is
situated on 29 acres. As of December 31, 1997, the building was 100% leased.
The primary tenant, Premium Beverage Packers, Inc., leases 91% of the
building. The building generates aggregate Annualized Rent of $654,766 on a
net basis. The Company acquired this property on December 24, 1997.

    1091 Arnold Road was constructed in 1996 and is located in Reading,
Pennsylvania. The building is adjacent to the Reading Regional Airport and
within 1 mile of US Routes 222 and 61. The property is a ground leasehold
interest together with the improvements built thereon. The ground lease
expires in 2031 with one 14-year renewal option. The Annualized Rent under
the ground lease is $34,594, the payment of which has been waived until
October 31, 1999. The building, consisting of 133,055 square feet, is a
one-story warehouse/distribution structure with 24 foot clear ceiling
heights, 16 tailgate dock doors and is situated on 28 acres. As of December
31, 1997, the building was 100% leased to The Glidden Company and generated
on Annualized Rent of $465,692 on a triple net basis. The tenant has the
right to require the lessor to expand the building by up to 100,000 square
feet with the additional rent to be negotiated in good faith or as determined
by arbitration. The Company acquired this property on December 19, 1997.

    1305 Goshen Parkway was constructed in 1991 and is located in West
Chester, Pennsylvania. The building is located within 1 mile of US Route 202
and less than 10 miles from the Pennsylvania Turnpike (I-76). The building is
a 90,000 square foot, one-story warehouse/distribution structure with 18 foot
clear ceiling heights and is situated on 10.2 acres. As of December 31, 1997,
the building was 100% leased to Yves Rocher, Inc. and generated on Annualized
Rent of $503,280 on a net basis. The lease expires December 31, 2000, subject
to one 3-year renewal option, and the tenant has an option to terminate the
lease effective December 31, 1998 with a termination penalty of 1 year's rent
and additional rent. This property was purchased on December 17, 1997.

    One Tabas Lane was constructed in 1970 and is located in Exton,
Pennsylvania. The building is located within 1 mile of US Route 202 and
within 10 miles of the Pennsylvania Turnpike (I-76). The building is a
150,027 square foot, one-story warehouse/distribution structure with 24 foot
clear ceiling heights. As of December 31, 1997, the building was 100% leased
to Alstrip, Inc., a subsidiary of Allegheny Ludum, and generated Annualized
Rent of $450,084 on a net basis. The lease expires in 2011 and Alstrip has an
option to terminate the lease effective August 31, 2001 and 2006 with
termination penalties of $200,000 and $100,000 respectively. The tenant has a
right of first refusal to purchase the premises. This property was purchased
on December 17, 1997.

    Two Tabas Lane was constructed in 1970 and is located in Exton,
Pennsylvania. The building is located within 1 mile of US Route 202 and
within 10 miles of the Pennsylvania Turnpike (I-76). The building is a
150,000 square foot building with 24 foot ceiling heights substantially
renovated in 1991 with a 90,000 square foot air-conditioned production area,
22,000 square feet of 2 story office space and the balance is warehouse. As
of December 31, 1997, the building was 100% leased to International Envelope
Co. and generated Annualized Rent of $762,520 on a net basis. The lease
expires in 2007 and International Envelope has an option to terminate its
lease effective March 31, 2002 with a termination penalty of $1,295,592. This
property was purchased on December 17, 1997.

    101 Commerce Drive was constructed in 1991 and is located in
Mechanicsburg, Pennsylvania. The building is located within 20 miles of
Harrisburg, Pennsylvania. The building is a 597,100 square foot, one-story
refrigerated warehouse/distribution center with 28 foot clear ceiling
heights, 82 tailgate dock doors and is situated on 48 acres. As of December
31, 1997, the building was 100% leased to Hershey Foods Corporation and
generated Annualized Rent of $2,376,446 on a net basis. The lease expires
December 31, 2012, subject to four 5-year renewal options. The Company
acquired this property on January 8, 1998. The purchase price of the
property, including closing costs, was $26.2 million.

    4472 Steelway Boulevard consists of 3 buildings constructed in 1977
through 1978 located in suburban Syracuse, New York. The buildings are
located in close proximity to major highways such as I-90, I-81 and the New
York State Thruway. The buildings are one-story warehouse/distribution
facilities, totaling 532,500 square feet, of which 50,000 square feet is
cooler space. The buildings have clear ceiling heights ranging from 24 to 30
feet, and includes 5 rail doors and 42 truck doors with levels and closures.
As of December 31, 1997, the buildings were 100% leased by GATX Logistics,
Inc. and generated Annualized Rent of $1,462,200 on a net basis. The leases
expire May 31, 2001. The Company acquired this property on March 27, 1998.
The purchase price of the property was approximately $13.0 million including
closing costs. Included in the purchase price is 4580 Steelway Boulevard
(described below).

    4580 Steelway Boulevard consists of 2 buildings constructed in 1972 and
is located in suburban Syracuse, New York. The facility is located in close
proximity to major highways such as I-90, I-81 and the New York State
Thruway. The


                                       11

<PAGE>

buildings are one-story warehouse/ distribution facilities, totalling 123,000
square feet. The buildings have 24 foot clear ceiling heights and include 10
rail doors and 24 truck doors with levels and closures. As of December 31,
1997, the facility is 100% leased by GATX Logistics, Inc. and generated
Annualized Rent of $307,500 on a net basis. The lease expires May 31, 2001.
The Company acquired this property on March 27, 1998. The purchase price of
the property was approximately $13.0 million including closing costs.
Included in the purchase price is 4472 Steelway Boulevard (described above).

    1011 Airpark Drive was constructed in 1991 and is located in Middletown,
Pennsylvania. The building is located within 20 miles of Harrisburg,
Pennsylvania. The building is a 152,908 square foot, one-story industrial
facility with 30 foot clear ceiling heights and 28 tailgate dock doors. As of
March 27, 1998, the building was 80% leased and generated Annualized Rent of
$394,758. As of March 27, 1998, the major tenants were Bayard Sales
Corporation which leases 60% of the building, and DAS Distributors which
leases approximately 20% of the building. The Company acquired this property
on March 27, 1998. The purchase price of the property was approximately $14.4
million including closing costs. Included in the purchase price are 1001
Airpark Drive and 2400, 2404 and 2410 Gettysburg Road.

    1001 Airpark Drive was constructed in 1991 and is located in Middletown,
Pennsylvania. The building is located within 20 miles of Harrisburg,
Pennsylvania. The building is a 132,588 square foot one-story industrial
facility with 30 foot clear ceiling heights and 24 tailgate dock doors. As of
March 27, 1998, the building was 100% leased and generated Annualized Rent of
$454,980. As of March 27, 1998, the major tenants were T.P.D.C., Inc. which
leases 31% of the building, Reese Products which leases 23% of the building
and FDA Packaging which leases 45% of the building. The Company acquired this
property on March 27, 1998. The purchase price of the property was
approximately $14.4 million including closing costs. Included in the purchase
price are 1011 Airpark Drive and 2400, 2404 and 2410 Gettysburg Road.

    2404 Gettysburg Road was constructed in 1993 and is located in Camp Hill,
Pennsylvania. The building is located within 10 miles of Harrisburg,
Pennsylvania. The building is a 124,902 square foot, one-story
warehouse/distribution facility with 30 foot clear ceiling heights and 20
tailgate dock doors. As of March 27, 1998, the building was 100% leased and
generated Annualized Rent of $456,780 on a net basis. The Company acquired
this property on March 27, 1998. The purchase price of the property was
approximately $14.4 million including closing costs. Included in the purchase
price are 1001 and 1011 Airpark Drive and 2400 and 2410 Gettysburg Road.

    2410 Gettysburg Road was constructed in 1952 with an expansion in 1993
and is located in Camp Hill, Pennsylvania. The building is located within 10
miles of Harrisburg, Pennsylvania. The building is a 33,600 square foot,
one-story warehouse/distribution facility with 16 foot clear ceiling heights
and 5 tailgate dock doors. As of March 27, 1998, the building was 100% leased
and generated Annualized Rent of $109,200 on a net basis. The Company
acquired this property on March 27, 1998. The purchase price of the property
was approximately $14.4 million including closing costs. Included in the
purchase price are 1001 and 1011 Airpark Drive and 2400 and 2404 Gettysburg
Road.

    2400 Gettysburg Road was constructed in 1952 with an expansion in 1993
and is located in Camp Hill, Pennsylvania. The building is located within 10
miles of Harrisburg, Pennsylvania. The building is a 24,311 square foot,
one-story warehouse/distribution facility with 17 foot clear ceiling heights
and 6 tailgate dock doors. As of March 27, 1998, the building was 100% vacant
and generated no Annualized Rent. The Company acquired this property on March
27, 1998. The purchase price of the property was approximately $14.4 million
including closing costs. Included in the purchase price are 1001 and 1011
Airpark Drive and 2404 and 2410 Gettysburg Road.

NON-CORE PROPERTIES

    Urban Farms Shopping Center consists of 3 buildings constructed in stages
between 1965 and 1982 and is located in Franklin Lakes, New Jersey. It is
located within 5 miles of US Route 202, US Route 208 and I-287. The property
contains 3 buildings totaling approximately 91,008 square feet, including an
office building, a retail shopping center/office building and a gas station.
As of December 31, 1997, the property was 90% leased and generated an
Annualized Rent of approximately $1.2 million. At such time, the major
tenants were Market Basket which leases 12% of the property, Hudson United
Bank which leases 10% of the property and Clarks Hallmark which leases 7% of
the property.

    1255 East University Drive was constructed in 1987 and is located in
Tempe, Arizona. Known as the Quadrangles Village Apartments, the property is
a 510 unit multifamily residential apartment complex and includes 18 studio
apartments, 246 one bedroom apartments and 246 two bedroom two bathroom
apartments. The apartments range in size from 493 to 848 square feet with a
total of 375,660 square feet or an average of approximately 736 square feet
per unit. The complex is located on approximately 17.9 acres and contains 498
covered parking spaces and 478 open parking spaces. Amenities include 3
swimming pools, of which one is heated, 2 Jacuzzi/spas, a clubhouse, a
workout/exercise

                                       12
<PAGE>

room and barbecue grills. As of December 31, 1997 asking rental rates per
unit ranged from $555 to $745 with an average asking rental rate of
approximately $663 per unit ($.86 per square foot). The average occupancy
rate for Quadrangles Village apartments was 97% as of December 31, 1997.
Average occupancy was 94%, 95% and 92% for 1996, 1995 and 1994, respectively.
Average rental rate per square foot was $.79, $.75 and $.69 for 1996, 1995
and 1994, respectively. This property was acquired on December 2, 1994. At
December 31, 1997, the property had a Federal tax basis of approximately
$20.8 million and depreciation is being taken at the rate of 3.7% per year.
Annual property taxes were approximately $169,000 ($1.22 per $100 of assessed
valuation) at December 31, 1997. On February 26, 1998, the Company signed an
Agreement to sell Quadrangles Village Apartments for a gross selling price of
approximately $27,000,000. The consummation of this sale is subject to the
buyer's due diligence and related approvals from HUD and the lender under the
bond indenture.

PRINCIPAL TENANTS

    The following table sets forth information regarding the leases with
respect to the current 10 largest tenants at the properties, based on the
Annualized Rent received from such tenants as of December 31, 1997 including
the Properties acquired after December 31, 1997 as if such Properties were
owned by the Company on December 31, 1997:

<TABLE>
<CAPTION>
                                                                                 PERCENTAGE OF                PERCENTAGE OF
                                                                        TOTAL      AGGREGATE                    AGGREGATE
                                                         REMAINING     LEASED      PORTFOLIO                    PORTFOLIO
                                                         LEASE TERM    SQUARE       LEASED       ANNUALIZED    ANNUALIZED
TENANT(1)                             PROPERTY           IN MONTHS      FEET      SQUARE FEET       RENT          RENT
-------------------------     -------------------------  ----------   ---------  -------------   -----------  -------------
<S>                           <C>                        <C>          <C>        <C>             <C>          <C>

Hershey Foods Corporation     101 Commerce Drive (3)(4)     180         597,100      13.2%       $ 2,376,446       9.9%
Reckitt & Colman, Inc.        1655 Valley Road               70         155,700       3.4          2,307,474       9.6
GATX Logistics, Inc.          4472/4580 Steelway Blvd. (3)   41         655,500      14.4          1,769,700       7.4
TCI of Northern NJ            40 Potash Road                177          60,994       1.3          1,216,377       5.1
Philips Lighting Co., a       1 Philips Drive (3)           118         400,000       8.8          1,188,000       4.9
  Division of Philips
  Electronics North
  American Corp.
Len Ron Mfg. Co./Aramis       5 Thornton Road                62         151,874       3.3            905,169       3.8
International Envelope        Two Tabas Lane                111         150,000       3.3            762,520       3.2
  Co.
Merck-Medco                   19-00 Pollitt Drive            95          77,262       1.7            687,632       2.9
Road Con Systems, Inc.        19-05 Nevins Lane              93         151,700       3.3            620,930       2.6
Premium Beverage Packers,     1057 Arnold Road               26         199,520       4.4            574,618       2.4
  Inc.
                                                            ---       ---------      ----        -----------      ----
Total/Weighted Average(2)                                    98       2,599,650      57.3%       $12,408,866      51.6%
                                                            ---       ---------      ----        -----------      ----
                                                            ---       ---------      ----        -----------      ----

<FN>
------------------------------
(1) This list is not intended to be representative of the Company's tenants
    as a whole.

(2) Weighted average calculation based on total rentable square footage leased
    by each tenant.

(3) These properties were acquired subsequent to December 31, 1997.

(4) This tenant did not take possession until January 1998.

</TABLE>


                                      13
<PAGE>

LEASE EXPIRATIONS

    The following table sets forth the annual lease expirations and certain
other information for leases existing at the Properties and Non-Core
Properties (other than Quadrangles Village Apartments), including information
with respect to those Properties acquired after December 31, 1997 as if such
Properties were owned by the Company on December 31, 1997 (assuming that no
tenants exercise renewal or cancellation options and that there are no tenant
bankruptcies or other tenant defaults):

<TABLE>
<CAPTION>
                                             Square                      Annualized    Annualized Rent
                                          Footage of    Percentage of    Rent of          Per Leased
  Year of Lease            Number of       Expiring     Total Leased     Expiring      Square Foot of
   Expiration           Expiring Leases     Leases      Square Feet      Leases            Leases
--------------------   -----------------  -----------  ---------------  ----------     ---------------
<S>                    <C>              <C>            <C>            <C>               <C>
1998................          13           185,867        4.5%         $  588,628        $  3.17
1999................           9            72,339        1.7             387,952           5.36
2000................          16           407,873        9.8           1,894,312           4.64
2001................          19         1,134,310       27.2           3,806,754           3.36
2002................          16           274,855        6.6           1,572,448           5.72
2003................           5           314,053        7.5           3,298,630          10.50
2004................           3           272,492        6.5           1,234,226           4.53
2005................           1             7,000        0.2              29,748           4.25
2006................           4           102,806        2.5             919,600           8.94
2007................           3           551,850       13.3           1,974,520           3.58
Thereafter..........           6           840,394       20.2           4,470,309           5.32
                              --        -----------     -----          ----------      ---------
TOTAL...............          95         4,163,839      100.0%        $20,177,127      $    4.85
                              --        -----------     -----         ----------       ---------
                              --        -----------     -----         ----------       ---------
SUMMARY OF INDEBTEDNESS

</TABLE>

                                       14
<PAGE>


<TABLE>
<CAPTION>
                                                                       Amortization
                              December 31, 1997 Interest   Maturity      Period           Annual
Debt Component                     Balance        Rate       Date      (in years)         Payment         Collateral
------------------------------  --------------   --------   --------   ------------   --------------     --------------
                                   (in thousands)                                     (in thousands)
<S>                             <C>              <C>        <C>        <C>            <C>
Nomura Asset Capital Corp.....     $ 44,910         7.71%   10/2022         25           $ 4,065         (1)
First Union...................        1,155           (2)    9/2000        N/A                90         100 Oak Hill Road
Equitable of Iowa.............        2,872         8.25     9/2000         20               309         One Tabas Lane
Equitable of Iowa.............        4,374         8.50     9/2005         20               479         Two Tabas Lane
Equitable of Iowa.............        3,351         8.50     9/2005         20               367         1305 Goshen Parkway
HUD...........................       16,251         6.35     5/2026         33             1,236         Quadrangles Village
GECC..........................       10,088(3)        (3)    4/2000         (3)              975         Americana Lakewood
Column Financial..............        3,500           (4)    4/1998        N/A               810         1057 Arnold Road
                                     ------                                               ------
Total December 31, 1997.......     $ 86,501                                               $8,331
                                     ------                                               ------
Column Financial..............                               1/2008         30           $   600         1 Philips Drive(5)
Column Financial..............                               1/2008         30             1,356         101 Commerce Drive(5)
Column Financial..............                               7/1998        N/A               162         4472 Steelway Blvd (5)
                                                                                                         4580 Steelway Blvd(5)
Column Financial..............                               7/1998        N/A               180         1001 Airpark Drive(5)
                                                                                          ------
                                                                                                         1011 Airpark Drive(5)
                                                                                                         2400 Gettysburg Road(5)
                                                                                                         2404 Gettysburg Road(5)
                                                                                                         2410 Gettysburg Road (5)

Total ........................                                                           $10,629
                                                                                         -------
                                                                                         -------



                                 March 27, 1998
Debt Component                     Balance
-----------------------------    --------------
                                 (In thousands)
Nomura Asset Capital Corp.....        44,759
First Union...................         1,155
Equitable of Iowa.............         2,860
Equitable of Iowa.............         4,356
Equitable of Iowa.............         3,338
HUD...........................        16,199
GECC..........................           --
Column Financial..............         3,500

Column Financial..............         7,488
Column Financial..............        16,972
Column Financial..............         8,430

Column Financial..............         9,350
                                   ------------
Total March 27, 1998                $118,407
                                   ------------
                                   ------------

                                       15

<PAGE>

------------------------------
(1) Secured by a first lien on 10 properties (see "--Summary Property Table")
      subject to certain permitted release provisions. The loan facility contains
      covenants and agreements customary in such borrowings.

(2) Debt service is payable monthly at LIBOR Plus 175 basis points, interest
      only. Rate as of December 31, 1997 was 7.50%. The Company has 2 one-year
      renewal options which allows the extension of the maturity of this debt
      through 9/2000.

(3) Debt service is payable monthly at the GECC commercial paper rate plus 245
      basis points. Rate at December 31, 1997 was 8.24%. Quarterly principal
      payments are required based on a stipulated percentage of Excess Cash
      Flow, as defined, from Americana Lakewood Apartments. This debt was
      re-paid from the proceeds of the sale of Americana Lakewood on
      January 9, 1998.

(4) Debt service is payable monthly at LIBOR plus 200 basis points, interest
      only. Rate as of December 31, 1997 was 7.71%. Annual payment is based on
      interest payments only at 7.71% until April 2, 1998.

(5) These properties were acquired between January 8, 1998 and March 27, 1998.

(6) Debt service is payable monthly at LIBOR plus 200 basis points, interest
      only. Rate as of March 27, 1998 was 7.70%. Annual payment is based on
      interest payments only at 7.70% until July 1, 1998.

</TABLE>

DEPRECIATION

    See "Schedule III -- Real Estate and Accumulated Depreciation" herein.

GENERAL

    In the opinion of management, the Properties are adequately covered by
insurance. The Company has no plans to make any material renovations or
improvements to any of the Properties.

POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

    The following is a discussion of the Company's current investment and
financing policies. The Company's policies with respect to these activities
have been determined by the Directors of the Company and may be amended or
revised from time to time at the discretion of the Directors without a vote
of the stockholders of the Company.

INVESTMENT POLICIES

    The Company's primary business objectives are to maximize total return to
stockholders through growth in the Company's cash flow per share and to
increase the size and value of its portfolio. The Company intends to pursue
these objectives through aggressive asset and property management, acquiring
and selectively developing new properties and opportunistically reinvesting
capital currently invested in the Non-Core Properties with a view towards
maximizing cash flow. Though the Company is currently focusing its activities
in the mid-Atlantic and Northeastern United States, no specific geographic
limitations have been established.

    The Company intends to accomplish its business objectives (1) through
contractual increases in rental rates from existing leases, (ii) by
maintaining and increasing occupancy levels in its properties, (iii) by
increasing rental rates through aggressive management and re-leasing of
space, (iv) by acquiring primarily new properties and portfolios in strategic
situations and locations, (v) by targeting properties which have potential
for additional growth through adoptive re-use and/or expansion) and (vi) by
generating build-to-suit development opportunties, particuarly by maintaining
strong landlord/tenant relationships and establishing local market
prominence. The Company has not adopted any policy as to the amount or
percentage of its assets that can be invested in

                                       16

<PAGE>

a single property. The key criterion for new investments will be that they
offer total returns likely to enhance stockholder value and the opportunity
for growth in cash flows from operating activities and asset value.

    The Company may purchase or develop properties for long-term investment,
expand, renovate and improve its properties or sell any of its existing or
acquired properties, in whole or in part, when circumstances warrant. The
Company may also participate with other entities in property ownership
through joint ventures or other types of shared ownership. Equity investments
may be subject to existing mortgage financing and other indebtedness which
have priority over the equity interest of the Company.

    Future investments are not limited (as to percentage of assets or
otherwise) to any geographic area or any specified type of property. The
Company may decide, under favorable economic circumstances, to develop
properties.

    While the Company intends to emphasize equity real estate investments, it
may, in its discretion, invest in mortgages and other real estate interests.
Mortgage investments may include participating or convertible mortgages. The
Company's investment in mortgages may include investments as a strategy for
ultimately acquiring a property, and might also include the purchase of
non-performing loans at a discounted price. Subject to the percentage of
ownership limitations and gross income and asset tests necessary for REIT
qualification, the Company may also invest in securities of entities engaged
in real estate activities or securities of other issuers. In the future, the
Company may acquire all or substantially all of the securities or assets of
other REITs or similar entities where such investments are consistent with
the Company's investment policies. In any event, the Company does not intend
that its investments in securities will require the Company to register as an
"investment company" under the Investment Company Act of 1940, and the
Company intends to divest securities before any such registration would be
required.

FINANCING POLICIES

    The Company has not adopted any policy to limit the amount or percentage
of debt the Company may incur or to maintain any maximum debt-to-Total Market
Capitalization ratio. As of December 31, 1997 and March 27, 1998 the Company
had a debt-to-Total Market Capitalization ratio of approximately 37.8% and
46.4%, respectively (based on the closing price of $19.25 and $17.88 per
share of Common Stock on December 31, 1997 and March 27, 1998 ,
respectively). "Total Market Capitalization" means the sum of the aggregate
market value of the Company's outstanding Common Stock, the carrying amount
of the minority interest and the total debt of the Company on the date
thereof. The debt-to-Total Market Capitalization ratio, which is based upon
the market value of the Company's equity and, accordingly, fluctuates with
changes in the price of the Common Stock, differs from a debt-to-book
capitalization ratio. To the extent the Company incurs or assumes
indebtedness with respect to properties in connection with pending or future
acquisitions, the Company's debt-to-Total Market Capitalization may change.
The Company believes that debt-to-Total Market Capitalization provides a more
appropriate indication of leverage for a company whose assets are primarily
operating real estate.

    The Company may in the future adopt a debt policy in light of then
current economic conditions, relative costs of debt and equity capital,
market values of properties, growth and acquisition opportunities and other
factors, and may modify any debt financing policy from time to time. If the
Board of Directors determines that additional funding is required, the
Company may raise such funds through additional equity offerings (including
offers of senior securities), debt financing or retention of cash flow
(subject to provisions in the Internal Revenue Code of 1986, as amended (the
"Code") concerning taxability of undistributed REIT income), or a combination
of these methods. The Company has agreed to use all commercially reasonable
efforts to maintain a level of indebtedness at least equal to the level of
indebtedness immediately following the closing of the Reorganization and to
cause its lenders to permit McBride to guarantee such level of indebtedness.

    In the event the Board of Directors determines to raise additional equity
capital, the Board of Directors has the authority, without stockholder
approval, to issue additional shares of Common Stock up to the maximum number
authorized, or other capital stock, on such terms and for such consideration
it deems appropriate, including in exchange for property. Existing
stockholders will have no preemptive right to purchase capital stock issued
in any such offerings, and any such offerings might cause a dilution of a
stockholder's investment in the Company.

    To the extent that the Board of Directors determines to obtain additional
debt financing, the Company intends to do so generally through loans secured
by mortgages on its properties and lines of credit. These mortgage loans may
be recourse, non-recourse or cross-collateralized and may contain
cross-default provisions. The Company does not have a policy limiting the
number of mortgages that may be placed on any particular property or the
amount of the loans secured by such mortgages, but mortgage financing
instruments usually limit additional indebtedness on such properties.
Indebtedness incurred by the Company may be in the form of bank borrowings,
secured and unsecured, and publicly and privately placed debt instruments.
Such indebtedness may be with recourse to all or any part of the property of
the Company, or may be limited to the particular property to which the
indebtedness relates. The proceeds from any borrowings by the Company may be
used for the payment of distributions, for working capital, to refinance
existing indebtedness or to finance acquisitions of new properties or
expansions of existing or new properties.

                                       17

<PAGE>

    The Company intends to seek to acquire additional real estate assets
using shares of Common Stock to pay all or a portion of the purchase price.
The Company may also issue senior equity securities or shares of preferred
stock for this purpose. There can be no assurance that such issuances may not
be dilutive to the Company's existing stockholders. In addition, shares of
Common Stock may be issued on terms which grant the recipient the right to
require the Company to register the shares under the Securities Act of 1933,
as amended (the "Securities Act"). Sales of those shares may adversely affect
the market price of the Company's outstanding shares of Common Stock.

    The Company may also acquire additional real estate assets in exchange
for OP Units. This creates the opportunity for tax deferred transactions for
the seller.

EXECUTIVE OFFICES

    The Company's executive offices are located at 620 West Germantown Pike,
Suite 200, Plymouth Meeting, Pennsylvania 19462. These facilities, which
include approximately 5,900 square feet of office space, are sub-leased from
Platinum Technology, Inc., pursuant to a sub-lease expiring March 31, 2000 at
an annual rental of approximately $112,000 plus the Company's proportionate
share of costs of services and property taxes.

ITEM 3. LEGAL PROCEEDINGS.
        ------------------

    Neither the Company nor the Properties are presently subject to any
litigation which the Company believes will result in any liability that will
be material to the Company, other than routine litigation arising in the
ordinary course of business, substantially all of which is expected to be
covered by liability insurance.

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

    During the 4th quarter of the year ended December 31, 1997, a Special
Meeting of Stockholders of the Company was held on Thursday, December 11,
1997 in which the following matters were submitted to a vote of the
stockholders of the Company in connection with the Reorganization.

        1.  A proposal to approve the consummation of an agreement with McBride
    providing for the contribution to the Company or the Operating Partnership
    of (i) interests in certain entities owning real properties, cash and
    agreements to acquire office and industrial properties, and (ii) $2 million,
    in exchange for Common Stock and OP Units;

        2.  A proposal to approve the consummation of the merger (the "Merger")
    of Fair Lawn Industrial Park, Inc., a New York corporation ("FLIP"), which
    was owned by certain persons associated with McBride, with and into the
    Company pursuant to which the Company issued to the stockholders of FLIP
    shares of Common Stock of the Company and, as a consequence of the Merger,
    resulted in the adoption of Amended and Restated Articles of Incorporation
    of the Company and the reconstitution of the Company's Board of Directors;
    and

        3.  A proposal to approve the consummation of an agreement providing for
    the purchase by Hudson Bay and certain other investors of a total of
    1,963,635 shares of Common Stock of the Company.

    The Stockholders of the Company approved all 3 matters by the following
votes in person or by proxy:

<TABLE>
<CAPTION>
                        VOTES CAST
           -------------------------------------
<S>        <C>        <C>        <C>              <C>            <C>

MATTER        FOR      AGAINST      WITHHELD    ABSTENTIONS   BROKER NON-VOTES
---------  ---------  ---------     ---------  -------------  -----------------
    1      619,767     12,750           0           2,460            5,054
    2      620,667     12,750           0           2,460            4,154
    3      619,467     11,750           0           2,460            6,354

</TABLE>

                                       18

<PAGE>

                                    PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
        --------------------------------------------------------

    On January 26, 1994, the Company's Board of Directors declared an initial
cash dividend of $0.11 per share to each stockholder of record on February 7,
1994. As set forth below, the Company has paid a cash dividend for each
calendar quarter subsequent to its initial cash dividend.

    The Company's Common Stock is traded on the American Stock Exchange
("AMEX") under the symbol REA. The high and low last sale prices as reported
by the AMEX for each calendar quarter from January 1, 1996 to December 31,
1997 and the dividends with respect to the Company's operations for each such
calendar quarter were as follows:

<TABLE>
<CAPTION>
                              SALES PRICE
                          --------------------
  YEAR/QUARTER        HIGH        LOW       DIVIDENDS
-------------------  --------   --------  -------------
<S>                   <C>         <C>         <C>

1996:
  1st Quarter....... $8 5/8      $7 7/8     $0.21125
  2nd Quarter....... $9 1/4      $8 1/4      $0.2125
  3rd Quarter....... $8 11/16    $7 11/16   $0.21375
  4th Quarter....... $8 3/4      $7 3/4      $0.2150
1997:
  1st Quarter....... $10 1/4     $8 1/2     $0.21625
  2nd Quarter....... $9 15/16    $8 5/8      $0.2175
  3rd Quarter....... $16 3/4     $9 5/8     $0.21875
  4th Quarter....... $19 1/4     $13 7/8     $0.2200

</TABLE>

    As of December 31, 1997, the Company had 93 stockholders of record and
believes that it had in excess of 1,200 beneficial holders.

    The following table lists the number of shares of Common Stock of the
Company and each recipient of such shares who received shares pursuant to the
Reorganization. The Company issued these shares to such recipients without
registration under the Securities Act pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act. In determining
that the issuance of Common Stock of the Company to each of such recipients
complied with Section 4(2) of the Securities Act, the Company relied on each
such recipient's declaration that it is an accredited investor as that term
is defined in the Securities Act.

<TABLE>
<CAPTION>

NAME                                                NUMBER OF SHARES
                                                    ----------------
<S>                                                 <C>

Hudson Bay Partners II, L.P.......................     1,454,545
CRA Real Estate Securities, L.P...................       454,545
Robert Branson....................................        27,273
The Branson Family L.L.C..........................        27,272
Urban Holdings, L.L.C.............................           882
Margaret Mary McBride Revocable
         Trust UID 3/10/88,
         Timothy B. McBride, Trustee..............           202
Mary Kay McBride..................................           101
John Nevins McBride, Article Third Testamentary
  Trust "B", UWD 3/26/93, David F. and W. Peter
  McBride, Trustees...............................           101
Joseph A. McBride.................................           203

</TABLE>

                                       19

<PAGE>
<TABLE>

<S>                                                 <C>
Urban Holdings, L.L.C.............................        14,580
Francis V. McBride, Jr. Revocable Trust UID
  4/22/96, Antoinette R. McBride, Trustee.........       163,528
Joan H. McBride...................................       163,528
M. Virginia DeKorte...............................       163,528
Timothy B. McBride................................       163,528
Timothy B. and Marcia G. McBride..................        11,364
Kathryn Kruckel...................................       130,823
Miora Murphy......................................       130,822
J. Nevins McBride, Jr.............................       130,822
W. Peter McBride..................................       130,822
David F. McBride..................................       130,822
Terence A. McBride................................       163,528
Sheila James......................................       163,528
Michael X. McBride................................       174,892
Mark J. McBride...................................       163,528
Evan Zucker.......................................        30,253
Evan Zucker Rabbi Trust...........................        45,434
James Mulvihill...................................        30,253
James Mulvihill Rabbi Trust.......................        38,616
Rick A. Burger....................................        26,710
                                                    ----------------
        Total.....................................     4,136,033

</TABLE>

                                       20
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
  CONDITION AND RESULTS OF OPERATION.

OVERVIEW

    The following discussion should be read in conjunction with the 1997 and
1996 financial statements appearing elsewhere herein.

    At a special meeting of the Company's stockholders on December 11, 1997,
the Company's stockholders approved a series of transactions, as part of the
Reorganization, that effectively transferred the Company from a multi-family
residential REIT into an office and industrial REIT. The
Reorganization, which was consummated on December 12, 1997, involved the
following transactions (i) the acquisition by the Company of interests in 15
properties totaling 1.2 million square feet located in Northern New Jersey and
$8,400,000 in cash from McBride in exchange for approximately 4.1 million shares
of common stock, 2,998,867 OP Units, 125,000 OP Unit warrants with an exercise
price of $11 per OP Unit and the assumption of $45,000,000 in mortgage debt,
(ii) the contribution by Jeffrey Kelter of a non-voting equity interest in Penn
Square, a full service real estate development, management, construction and
brokerage company, in exchange for approximately 363,636 OP Units and 250,000
7-year OP Unit warrants with an exercise price of $11 per OP Unit, and (iii)
$30,000,000 in cash investments, in exchange for common stock and OP Units, led
by Hudson Bay along with CRA, McBride and Robert Branson. The Company has also
acquired 15 additional industrial properties aggregating approximately 3.0
million square feet between December 12, 1997 and March 27, 1998.

    Additionally, the Company has implemented its strategy to dispose of all its
remaining multi-family properties in order to re-invest the proceeds in office
and industrial properties. Two multifamily properties and an equity interest in
another property were sold in 1997. At December 31, 1997, 2 multifamily
properties remained, 1 of these properties was sold on January 9, 1998. On
February 26, 1998, the Company signed an agreement to sell the last multi-family
property for a gross selling price of approximately $27,000,000. The
consummation of this sale is subject to the completion of the buyer's due
diligence and the receipt of certain approvals from HUD and the lender under the
bond indenture.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

    Net income of the Company was $1,243,000 in 1997 as compared to $1,104,000
in 1996.

    Rents and fees revenues decreased from $9,943,000 in 1996 to $7,732,000 in
1997 primarily as a result of the sale of International Apartments
("International") on December 20, 1996, the sale of Timberleaf Apartments
("Timberleaf") on February 28, 1997 and the sale of Sedona Apartments ("Sedona")
on August 29, 1997. Americana Lakewood Apartments ("Americana") and Quadrangles
Village Apartments ("Quadrangles"), the Company's 2 remaining properties as of
December 31, 1997, both experienced higher rents and fees revenues in 1997 as a
result of higher rental rates. Lower vacancies occurred at Americana in 1997,
contributing to higher rents and fees revenues. In addition, rent revenue
increased by $675,000 in 1997 as a result of the acquisition of the McBride
Portfolio and other industrial properties on December 12, 1997.

    Other income increased to $465,000 in 1997 from $297,000 in 1996 primarily
as a result of interest earned on the net cash proceeds generated from sales of
various multifamily properties in 1997 and of International in December 1996.
This increase was partially offset by reductions in other income from the sale
of International, Timberleaf and Sedona.

    Operating expenses increased to $11,090,000 in 1997 from $10,128,000 in
1996. This increase was the result of the following: a $217,000 increase in
general and administrative expenses from additional legal fees incurred by the
Company primarily in conjunction with the settlement of the lawsuit relating to
the Company's 50% general partner interest in Emerald Vista Associates, L.P.
("Emerald Vista"); $3,203,000 of non-recurring expenses in 1997 associated with
the buyout of employment contracts with 3 former Company officers and the
cancellation of outstanding options held by these officers and warrants held by
certain other individuals in conjunction with the transactions which were
consummated on December 12, 1997. These increases were offset by various
decreases in property operating expenses as a result of the various multifamily
property sales in 1997 and the fourth quarter of 1996. Operating expenses
increased approximately $200,000 as a result of the acquisitions which occurred
on December 12, 1997.

    The $2,893,000 operating loss for 1997 is primarily the result of the
$3,203,000 expense associated with the buyout of the employment agreements and
options of the former executives of the Company. Excluding this non-recurring
expense, operating income would have increased approximately $200,000 over 1996.

                                       21

<PAGE>

    The minority interest allocation was $876,000 in 1997 as compared to
$1,364,000 in 1996. Income before the allocation to minority interest for 1997
and 1996 was $2,119,000 and $2,468,000, respectively. The proportionate decrease
in the minority interest's share of income in 1997 is primarily a result of the
$605,000 carryover preference allocated to the minority interest in 1996, which
reduced the cumulative carryover amount due to the limited partners in the
Operating Partnership to zero at December 31, 1996.

    The $4,608,000 aggregate gain from property sales in 1997 was the result of
the Company's successful execution of it's decision to sell the various
multi-family assets. In 1997, the Company realized gains from the sales of
Timberleaf ($403,000) on February 28, 1997, the sale of Sedona ($3,453,000) on
August 29, 1997 and the September 26, 1997 sale of the Company's 50% general
partner interest in Emerald Vista which generated a gain of approximately
$752,000. This compares to the $1,786,000 gain realized in December 1996 related
to the sale of International apartments for a gross sales price of $3,050,000.

LIQUIDITY AND CAPITAL RESOURCES

    As of December 31, 1997, cash and cash equivalents totaled $17,672,000 and
additional amounts aggregating $3,764,000 were available to the Company from
escrows for use in future acquisitions. As discussed above, on December 12,
1997, the Company consummated the Reorganization with the Investor Group which
resulted in a cash infusion of $30,000,000, of which $8,400,000 was provided by
McBride. This equity infusion combined with the $9,600,000 of net cash proceeds,
after debt repayment, generated from the sale of several multifamily assets in
1997, allowed the Company to consummate the acquisition of 6 industrial
properties in December 1997 which contained an aggregate of 847,000 square
feet for an aggregate purchase price of approximately $27,900,000, including
$11,773,000 of assumed debt, and to pay transaction costs related to the
Reorganization. During January 1998, the Company utilized approximately
$12,400,000 of these cash reserves and $24,500,000 of debt financing at
7.03%, a 10-year term and 30-year amortization period, to fund the
acquisition of 2 additional industrial facilities which aggregated 997,000
square feet for an aggregate purchase price of $37,400,000. On March 27,
1998, the Company acquired 7 industrial facilities aggregating approximately
1,100,000 square feet for an aggregate purchase price of $27,400,000. These
acquisitions were funded with $17,780,000 of variable rate debt (LIBOR plus
2%) and $9,620,000 in cash payments.

    As of December 31, 1997, the Company had approximately $86,501,000 of
mortgage notes outstanding consisting of 8 mortgage loans which had a weighted
average interest rate of 7.59%. Approximately $4,600,000 of this debt matures in
1998. At December 31, 1997, the Company's total market capitalization was
approximately $229 million, and the Company's consolidated debt represented
approximately 37.8% of total market capitalization. As of March 27, 1998, after
the effect of the 1998 acquisitions discussed herein, the Company's total market
capitalization was approximately $255 million, and the Company's consolidated
debt represented approximately 46.4% of total market capitalization.

    The Company is in the process of concluding final negotiations with a lender
group, including DLJ Capital Funding, Inc. and BankBoston, N.A., to enter into a
3-year $100,000,000 senior secured revolving credit facility. This Credit
Facility will be used to fund new acquisitions, capital improvements, new
development projects and for general working capital purposes. The Credit
Facility will be recourse to the Company and the Operating Partnership and will
be secured by cross-collateralized and cross-defaulted first mortgage liens on
certain properties, either currently owned by the Operating Partnership or to be
acquired as the result of future transactions. The interest will accrue on
outstanding loans under the Credit Facility at a variable rate per anum equal to
the sum of a Eurodollar rate plus 1.6% per anum. The availability of loans under
the Credit Facility will be limited to 65% of the aggregate purchase price or
appraised value of the respective properties securing the Credit Facility and
will be subject to certain stated debt service coverage ratios. The Credit
Facility will be subject to optional prepayments at any time and mandatory
prepayments upon the occurrence of certain conditions, and will contain
financial covenants which are standard for these types of revolving credit
facilities. The Credit Facility is subject to final negotiation of its terms,
and therefore no assurance can be given that this arrangement will be ultimately
consummated, or if consummated, that it will be based upon the terms described
above.

    During 1997 and 1996, the Company paid distributions totaling $.87 and $.85
per common share, respectively, which aggregated $985,000 and $943,000. On
February 18, 1998, the Company announced a dividend of $.22 per common share for
the fourth quarter of 1997 which was paid on March 16, 1998. In addition, the
Company announced its intention to adjust the amount of its quarterly dividend
annually. Management currently anticipates that it will review its dividend
payout at the end of the second quarter of 1998, at which time, the Company will
adjust the dividend amount to better reflect: (i) the increase in earnings and
cash flow expected from recent acquisitions and (ii) capital needs associated
with future growth opportunities.

    The Company expects to meet its short-term (1 year or less) liquidity needs
based on its cash flow from operations. The Company believes that its principal
short-term liquidity needs are to fund normal recurring operating expenses,
recurring capital improvements, debt service and distributions to its
stockholders and holders of OP Units.

    The Company expects to meet long-term liquidity requirements including
property acquisitions, debt maturities, major

                                       22
<PAGE>

renovations, expansions and other non-recurring capital improvements through
long-term secured and non-secured indebtedness and the issuance of additional
equity securities. Additional cash flow will be generated from the sale of 2
remaining multifamily assets in 1998, 1 of which was sold on January 9, 1998
which resulted in $4,500,000 of additional net cash proceeds available to fund
future acquisitions. As discussed above, the last remaining multi-family asset
is under agreement of sale which is subject to the completion of the buyer's due
diligence and the receipt of certain approvals from HUD and the lender under the
bond indenture. Based upon the current agreed selling price for this asset of
approximately $27,000,000, additional net cash proceeds of approximately
$10,000,000 would be available in 1998 for reinvestment in future acquisitions.

CASH FLOWS

    Cash and cash equivalents were approximately $17,700,000 and $1,342,000 at
December 31, 1997 and 1996, respectively. The overall increase in cash and cash
equivalents primarily resulted from proceeds generated from the sale of
multifamily properties and the cash infusions into the Company as a result of
the Reorganization.

    Net cash provided by operating activities was $2,087,000 in 1997 compared
to $2,254,000 in 1996. Operating cash flows in 1997 were positively effected
by an increase of approximately $140,000 in net income and increases in
accrued expenses. These increases in cash flow were offset by reductions in
operating cash flow as a result of the multifamily asset sales which occurred
in 1997.

    Investing activities in 1997 resulted in a use of cash of $3,134,000 as
compared to net cash provided of $2,571,000 in 1996. The increase in the use of
cash in investing activities primarily resulted from an increase in capital
improvements at 1 of the multifamily properties (Sedona) in order to improve the
property prior to its sale and the increase in cash held in escrows of
$3,764,000 which resulted from the sale of Sedona in the 3rd quarter of 1997
which were not yet reinvested until the January 1998 acquisition of 101 Commerce
Drive.

    Cash provided by financing activities increased by approximately $21,500,000
in 1997 over 1996 primarily as a result of the Investor Group's net investment
of $20,780,000 as part of the Reorganization. Additionally, the Company
refinanced a $4,200,000 bank installment loan outstanding at December 31, 1996
with a $5,700,000 mortgage note on January 31, 1997. This mortgage note was
later repaid from the proceeds of the sale of Sedona on August 29, 1997. A
$3,500,000 mortgage note was obtained in order to finance the acquisition of
1057 Arnold Road in December 1997. The Company incurred $694,000 of financing
costs related to the various acquisitions which were consummated in December
1997.

FUNDS FROM OPERATIONS

    Funds From Operations ("FFO"), which is a commonly used measurement of the
performance of an equity REIT, as defined by the National Association of Real
Estate Investment Trusts, Inc. ("NAREIT"), is net income (computed in accordance
with generally accepted accounting principles), excluding gains (or losses) from
debt restructuring and sales of property, plus depreciation and amortization,
and after adjustments for unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures will be
calculated to reflect funds from operations on the same basis. Management
believes the presentation of FFO is a useful disclosure as a general measurement
of its performance in the real estate industry, although the Company's FFO may
not necessarily be comparable to similarly titled measures of other REITs.
NAREIT recently clarified the application of its FFO definition and recommended
the implementation of the new application of its FFO definition no later than
for fiscal periods beginning in 1996. The Company implemented the new
application of the NAREIT FFO definition in the 1st quarter of 1996 and all
amounts shown conform to the new NAREIT definition. FFO does not represent cash
generated from operating activities in accordance with generally accepted
accounting principles and is not necessarily indicative of cash available to
fund cash needs and should not be considered as an alternative to net income as
an indicator of the Company's operating performance or as an alternative to cash
flow as a measure of liquidity.

    FFO, Pro Forma FFO and cash flows and Pro Forma cash flows for the 2 years
ended December 31, 1997 and 1996 are summarized in the following table ( in
thousands, except per share data):

                                       23

<PAGE>

<TABLE>
<CAPTION>
                                                                               1997                     1996
                                                                             PROFORMA       1997      PRO FORMA      1996
                                                                            -----------  ----------  -----------  ----------
<S>                                                                         <C>          <C>         <C>          <C>
                                                                            (UNAUDITED)              (UNAUDITED)
Net income before minority interest.......................................       7,121       $2,119       5,634       $2,468
(Less) Plus:
  Gains on sales of real estate...........................................      --           (4,608)     --           (1,786)
  Equity in (earnings) losses from investments in partnership and
    management company....................................................         340         (404)        268         (570)
(Less) Plus:
  Depreciation related to real estate.....................................       4,763          909       4,740        1,306
  Termination of employment agreements and options and warrants buyout....      --            3,203      --           --
  Cash received in excess of revenue recognized on direct financing
    lease.................................................................         183       --             157       --
FFO contribution (loss) from equity investments...........................        (180)         630        (108)         748
                                                                            -----------  ----------  -----------  ----------
Funds from Operations.....................................................     $12,227       $1,849     $10,691       $2,166
                                                                            -----------  ----------  -----------  ----------
                                                                            -----------  ----------  -----------  ----------
Cash flow from operating activities.......................................      13,541       $2,087      12,390       $2,254
Cash flow from investing activities.......................................     (53,028)      (3,134)    (49,180)       2,571
Cash flow from financing activities.......................................      49,657       17,377      47,211       (4,119)
                                                                                         ----------               ----------
Net increase in cash......................................................       -          $16,330        -            $706
                                                                            -----------  ----------  -----------  ----------
                                                                            -----------  ----------  -----------  ----------
Weighted average number of common shares--basic...........................   5,363,281    1,347,297   5,242,297    1,106,379
Weighted average number of common shares--diluted.........................   9,461,426    2,404,004   9,285,546       --

</TABLE>

    Pro forma FFO and Pro forma cash flow information for 1997 and 1996 as shown
above, combines the Company's historical operating results with the incremental
rental income and operating expenses of the properties acquired in 1997 and
subsequent to December 31, 1997, including adjustments for depreciation, based
upon the acquisition price associated with the property acquisitions, and
interest costs assuming the borrowings to finance the property acquisitions
had occurred at the beginning of the respective year. The above pro forma
amounts are also adjusted to reflect the impact of the multi-family property
dispositions in 1997 and 1996 as if they were disposed of as of the beginning
of the respective year.

    These pro forma amounts are not necessarily indicative of what the actual
results of the Company would have been, assuming the above property acquisitions
had been consummated at the beginning of 1997 or 1996, nor do they purport to
represent the future results of the Company.

    In 1997, the Company added back to FFO the $3,203,000 of costs associated
with the termination of employment agreements and options issued to certain
officers and the costs associated with the buyout of certain outstanding
warrants in order to eliminate their impact on FFO as these items are unusual
and were associated with the Reorganization and therefore will not have a
continuing impact on the Company.

    The decrease in FFO from 1996 is a direct result of the Company's execution
of its disposition plan for the multifamily assets in 1997. The sales of
International (December 20, 1996), Timberleaf (February 28, 1997), Sedona
(August 29,

                                       24
<PAGE>

1997) and its partnership interest in Emerald (September 26, 1997) all adversely
impacted FFO in 1997 as the transactions, which reorganized the Company as an
office and industrial REIT, occurred on December 12, 1997. Accordingly, reported
FFO for 1997 only includes a slight amount of the accretive effects of the
December 1997 transactions. Additionally, it is negatively impacted by the
reduced FFO from the multifamily assets which were sold throughout 1997 and the
lack of complete reinvestment of these sale proceeds in 1997 which reinvestment
occurred or will occur in the first half of 1998.

    Cash flows from operating activities in 1997 did not decrease in proportion
to the decrease in FFO in 1997 as a result of the increase in certain accrued
expenses in 1997 which resulted in a source of cash flow from operating
activities. Cash flows from operating, investing and financing activities are
discussed in further detail above in "--Cash Flows."

INFLATION

    The Company's leases for commercial office and industrial properties
generally require tenants to pay either their share of operating expenses,
including common area maintenance, real estate taxes and insurance or pay 100%
of these costs directly (for triple net leases), as a result, the Company's
exposure to increases in costs and operating expenses is reduced. The Company
does not anticipate that inflation will have a significant impact on its
operating results in the near future.

THE YEAR 2000 ISSUE

    The Company utilizes 3rd party software in order to maintain its accounting
and property management systems. This software is either already year 2000
compliant or is scheduled to be upgraded in order to be compliant by the end of
the 3rd quarter of 1998. Based upon its review of the status of the existing
systems, management does not anticipate that the Company will incur significant
costs in 1998 in order to bring the existing systems into compliance with year
2000 requirements.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

    The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included herein is
forward-looking, such as information set forth above in Management's Discussion
and Analysis of Financial Condition and Results of Operations. Such
forward-looking information involves important risks and uncertainties that
could cause actual future results to differ significantly form those expressed
in any forward-looking statements made by, or on behalf of, the Company or to
render the Company unable to accomplish its business objectives. These risks and
uncertainties include, but are not limited to, uncertainties relating to
economic conditions, acquisitions, development and divestitures of properties,
operational and management changes, possible rapid growth of the Company,
geographic concentrations of real estate, possible future tenant breaches of
leases, and changes in the competitive environment in which the Company and its
investors operate.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

    The response to this Item 7 is included as a separate section of this annual
report on Form 10-KSB. See pages F-1, et seq.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
       ACCOUNTING AND FINANCIAL DISCLOSURE.

    The Company's principal independent accountant neither resigned nor was
dismissed during the 2 most recent fiscal years.

                                       25
<PAGE>
                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
       PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE
       EXCHANGE ACT.

DIRECTORS AND EXECUTIVE OFFICERS

    The following table sets forth, for each person who was a Director or
Executive Officer of the Company as of December 31. 1997, the class of Directors
to which such Director belongs or the title of such Executive Officer, the name
and age of such Director, and the year in which such person first became a
Director or Executive Officer of the Company:

<TABLE>
<CAPTION>
                                                                                                    YEAR FIRST
                                                                                                    ELECTED AS
                                                                                                     DIRECTOR/
                                                                                                     EXECUTIVE
NAME                                                                                TITLE             OFFICER        AGE
--------------------------------------------------------------------------  ----------------------  -----------      ---
<S>                                                                         <C>                     <C>          <C>
Directors Whose Terms Will Expire at the Annual Stockholders Meeting held
  in 1998:
  Evan Zucker.............................................................         Director               1993           32
  Timothy McBride.........................................................         Director               1997           51
Directors Whose Terms Will Expire at the Annual Stockholders Meeting held
  in 1999:
  Jeffrey E. Kelter.......................................................         Director               1997           43
  Robert Branson..........................................................         Director               1997           49
Directors Whose Terms Will Expire at the Annual Stockholders Meeting held
  in 2000:
  James Mulvihill.........................................................         Director               1993           33
  David Lesser............................................................         Director               1997           32
  David F. McBride........................................................         Director               1997           50
Executive Officers:
  David F. McBride........................................................         Chairman               1997           50
  Jeffrey E. Kelter.......................................................        President               1997           43
  Steven J. Butte.........................................................   Vice President/Secretary/    1997           38
                                                                                Assistant Treasurer
  Rick A. Burger..........................................................        Treasurer               1993           39
</TABLE>

    Mr. Zucker was President of the Company from August 1993 until December 1997
when he was replaced by Jeffrey E. Kelter pursuant to the terms of the
Reorganization. From its inception in 1990, he has been President of Alpine Real
Estate Investments, Inc., and subsequently of Black Creek Capital, LLC, both
Denver-based real estate investment firms. At Alpine and Black Creek Capital,
LLC, Mr. Zucker's responsibilities include acquisitions and financing of all
real property purchased by the firms. From 1988 to 1990, he served as General
Partner in charge of acquisition and finance for Zucker Properties, a local
Denver real estate investment firm. In 1985, Mr. Zucker traded on The New York
Futures Exchange for his own account. Mr. Zucker graduated from Stanford
University in 1987 with a B.A. in Economics.

    Timothy McBride has been the Director of Tax and Finance of McBride since
1991 and a board member of McBride and affiliated companies since 1979. A
graduate of Santa Clara University and Georgetown University Law Center with
both a law degree and a Masters of Law in Taxation, Mr. McBride was a partner in
the Washington, DC law firm of Heenan Althen & Roles where he remains Of
Counsel. In addition, Mr. McBride has served as disinterested trustee of several
non-McBride private funds since 1991. Mr. McBride also has served on Georgetown
University's Board of Regents since 1996. Mr. McBride is a member of the bars of
Washington, DC, Virginia, and New Jersey. He is a former U.S. Air Force officer
and served as an Assistant U.S. Attorney in the Department of Justice, Tax
Division. Messrs. Timothy and David McBride are first cousins.

    Mr. Kelter has been President of the Company since December 1997 pursuant to
the terms of the Reorganization. He has over 17 years of experience in all
phases of commercial real estate including development, third-party management
and construction. Upon graduating from Trinity College in Hartford, Connecticut
in 1976, Mr. Kelter was employed by The Bankers Trust Corporation where he was
an assistant treasurer in the Corporate Finance division. In 1982, Mr. Kelter
was employed by Vector Properties in Tulsa, Oklahoma, where he was in charge of
the development and finance of several downtown Tulsa office building
renovations. In 1982, Mr. Kelter

                                       26
<PAGE>

founded Penn Square Properties, Inc. in Philadelphia and has served as chief
executive officer and president. Mr. Kelter also serves on the Board of
Directors of the Central Philadelphia Development Corporation (CPDC), a
non-profit urban planning commission. He has developed, owned, managed and
leased more than 4.5 million square feet of office and warehouse projects
throughout the Pennsylvania and New Jersey markets.

    Mr. Branson has been a principal of Branson & Associates, a real estate
consulting firm, since January 1997. Prior thereto, from October 1981 to
December 1996, he was a principal of Linden & Branson, a certified public
accounting firm specializing in the real estate industry. Prior to October 1981,
Mr. Branson was employed by Arthur Andersen & Co.

    Mr. Mulvihill was Chairman of the Board of the Company from December 1993
until December 1997. Since 1990, Mr. Mulvihill has been actively investing in
the Denver real estate market. In 1993, he formalized his activities with the
formation of Black Creek Capital, LLC, a firm specializing in Denver real estate
investment, including residential and commercial land development, tax exempt
housing and golf course construction and ownership. Prior to November 1993, he
was, commencing in November 1992, Senior Vice President of Finance and
Acquisitions at Jerry J. Moore Investments, an owner and manager of shopping
centers in Texas. Previously, from January 1992 to November 1992, Mr. Mulvihill
was a Vice President of Chemical Bank's Real Estate Investment Banking Group,
where he managed the Real Estate Owned Distribution Group. From 1986 to January
1992, Mr. Mulvihill was an officer of Manufacturers Hanover Trust Company's Real
Estate Banking and Investment Banking Groups. Mr. Mulvihill graduated from
Stanford University in 1986 with a B.A. in Political Science.

    Mr. Lesser formed Hudson Bay in May 1996 and is the President of its general
partner. Prior to founding Hudson Bay, from April 1995 until May 1996, he was
the Senior Vice President for Business Development of Crescent Real Estate
Equities Company, in charge of acquisition, finance and strategic investments.
From July 1988 until April 1995, Mr. Lesser worked for Merrill Lynch & Co. in
the Real Estate Investment Banking Division where he was a Director. Mr. Lesser
received a B.S. and M.B.A. from Cornell University.

    David F. McBride has been Chairman of the Board of the Company since
December 1997 pursuant to the terms of the Reorganization. He was appointed
Secretary of the Company in January 1998. He has served as Chief Executive
Officer of McBride and affiliated family real estate, construction and
brokerage companies since 1987 and has been a director of McBride and such
enterprises since 1975. Mr. McBride has served as a Director of Midlantic
Corporation, Midlantic National Bank and various subsidiaries for thirteen
years prior to its merger with PNC Bank in 1996. Prior to 1987, he was a
partner in the law firm of Harwood Lloyd from 1981 to 1987, a partner in the
law firm of Murphy, Ellis & McBride from 1977 to 1981, and an associate in
the firm of Robinson, Wayne & Greenberg from 1973 to 1977, all located in New
Jersey. He received B.A. and J.D. degrees from Georgetown University in 1969
and 1973, respectively. He remains Of Counsel to Harwood Lloyd and is a
member of the bars of New Jersey and New York. Messrs. David and Timothy
McBride are first cousins.

    Mr. Butte is a Certified Public Accountant and currently serves as a
Vice-President of the Company with primary responsibility for acquisition due
diligence and financing. Prior to joining Penn Square Properties, Inc. in 1988,
he spent 5 years in pubic accounting as a manager in the audit department of
Asher & Company, specializing in providing financial and accounting services to
companies in the real estate industry. Mr. Butte is a 1984 graduate of Villanova
University with a B.S. in Accounting and obtained a Masters in Taxation from
Villanova in 1994.

    Mr. Burger is a Certified Public Accountant and has been Treasurer and Chief
Financial Officer of the Company since its inception in November 1993. Mr.
Burger was employed performing specialized consulting services in finance, audit
and acquisitions from May 1992 to November 1993. Mr. Burger was previously
employed from 1984 to 1992 by the Maddox Interests, a private equity syndication
firm. From 1981 to 1984, Mr. Burger was employed by Arthur Andersen & Co. as a
senior auditor in the real estate and financial services division. Mr. Burger
graduated in 1981 from the University of Illinois with a B.S. in Accounting.

FAMILY RELATIONSHIPS

    Timothy McBride and David McBride are first cousins.

RECENT DEVELOPMENTS

    In January 1998, the Board of Directors of the Company elected Timothy
McKenna as Treasurer of the Company. Mr. Burger is employed by the Company
through April 1998.

    Mr. McKenna is a Certified Public Accountant and serves as Treasurer of
the Company. Mr. McKenna was previously employed as a Senior Manager in the Real
Estate Services Group of Arthur Andersen LLP's


                                       27
<PAGE>

Philadelphia office. He has over 12 years of experience in providing consulting
and accounting services to publicly and privately-owned real estate companies,
over 11 years of his experience was obtained as an employee of Arthur Andersen
LLP. Mr. McKenna is a 1985 graduate of the University of Scranton with a B.S. in
Accounting.


    Upon consummation of the acquisition of the Galesi Portfolio, Francesco
Galesi will be appointed as a Director of the Company and will be nominated
as a Director of the Company at the next meeting of the Company's
stockholders.

ITEM 10. EXECUTIVE COMPENSATION.

COMPENSATION OF EXECUTIVE OFFICERS

    The following table sets forth, for the 3 years ended December 31, 1997, the
compensation earned by or paid to each of the Company's chief executive officers
who served in such capacity during such fiscal year, as well as each other
executive officer of the Company serving as an executive offer of the Company on
December 31, 1997 whose total annual salary and bonus for the fiscal year ended
December 31, 1997 exceeds $100,000.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                             ANNUAL COMPENSATION            LONG-TERM COMPENSATION
                                      ----------------------------------   -------------------------
<S>                             <C>   <C>         <C>       <C>            <C>          <C>
NAME AND                                                    OTHER ANNUAL   AWARDS OF     ALL OTHER
  PRINCIPAL POSITION(1)         YEAR   SALARY      BONUS    COMPENSATION   OPTIONS(#)   COMPENSATION
------------------------------  ----  --------    --------  ------------   ----------   ------------
David F. McBride
  Chairman....................  1997  $235,000    $ 70,000     $    0             0      $         0
Jeffrey E. Kelter
  President...................  1997  $320,000    $      0     $    0             0      $         0
Evan Zucker
  President...................  1997  $ 71,000(2) $ 25,000     $    0        25,000      $ 1,116,383(5)
                                1996  $ 75,000(3) $ 25,000     $    0        25,000      $         0
                                1995  $ 75,000    $ 25,000     $    0        25,000      $         0
Rick A. Burger(4)
  Treasurer...................  1997  $ 85,000    $ 25,000     $    0        20,000      $   393,972(5)
</TABLE>

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

(1) Mr. Zucker resigned as President and Mr. Kelter and Mr. McBride became
    Executive Officers of the Company on December 12, 1997 as part of the
    Reorganization. Messrs. Kelter and McBride have executed Employment
    Agreements with the Company whereby their respective annual base salary is
    set at $200,000 each. See "Employment Agreements" below.

(2) Mr. Zucker's compensation of $71,000 for the year ended December 31, 1997
    was paid through the issuance of 2,027 shares of Common Stock at the fair
    market value on the last trading date of the quarter ended 3/31/97 and
    $52,250 in cash payments.

(3) Mr. Zucker's compensation of $75,000 for the year ended December 31, 1996
    was payable quarterly by issuance of shares of the Company's Common Stock at
    their fair market value on the last trading date of the quarter with respect
    to which payment was made. During 1996, Mr. Zucker was issued an aggregate
    of 9,005 shares pursuant to the foregoing arrangement.

(4) In January 1998, Timothy McKenna was named by the Board of Directors as
    Treasurer of the Company. Mr. Burger is employed by the Company through
    April 1998 in a similar capacity.

(5) Evan Zucker and Rick Burger's employment agreements were terminated
    effective December 12, 1997. As a result of the termination of these
    agreements all outstanding options held by these individuals were cancelled.
    Messrs. Zucker and Burger received 75,687 and 26,710 shares, respectively,
    as payment for the termination of these agreements and the options. The
    market value of these shares on December 12, 1997 was $14.75 per share. See
    "Termination of Employment and Consulting Agreements" below.

OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1997

    The following table provides information with respect to the above named
executive officers regarding options or stock appreciation rights ("SARs")
granted to such persons during the Company's year ended December 31, 1997. All
options granted in 1997 vested 25% for each quarter in the fiscal year and had
an exercise price in excess of the market price on the date of the grant.

                                       28
<PAGE>

                     OPTION/SARS GRANTS IN LAST FISCAL YEAR
                              (INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
                                                                                         PERCENT OF
                                                                           NUMBER OF    TOTAL OPTIONS
                                                                          SECURITIES    SARS GRANTED
                                                                          UNDERLYING    TO EMPLOYEES    EXERCISE OR
                                                                         OPTIONS/SARS     IN FISCAL     BASE PRICE    EXPIRATION
NAME                                                                      GRANTED(1)        YEAR         PER SHARE       DATE
-----------------------------------------------------------------------  -------------  -------------  -------------  -----------
<S>                                                                      <C>            <C>            <C>            <C>
David F. McBride (1)...................................................            0              0%        --            --
Jeffrey E. Kelter (1)..................................................            0              0%        --            --
Evan Zucker (2)........................................................       25,000           55.5%         10.00      12/31/06
Rick A. Burger (2).....................................................       20,000           44.5%         10.00      12/31/06
                                                                              ------         ------
                                                                              45,000         100.00%
                                                                              ------         ------
                                                                              ------         ------
</TABLE>

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

(1) Excludes the 7-year warrant issued to Jeffrey Kelter and David McBride,
    respectively, to purchase 250,000 and 125,000 OP Units at $11 per OP Unit in
    conjunction with the Reorganization.

(2) These option grants were cancelled effective December 12, 1997. See
    "Termination of Employment and Consulting Agreements" below.

    During the year ended December 31, 1997, none of such executive officers
owned or exercised any stock option or SARs other than Messrs. Zucker and
Burger, whose option grants were cancelled effective December 12, 1997. See
"Termination of Employment and Consulting Agreements" below.

COMPENSATION OF DIRECTORS

    During the year ended December 31, 1997, Mr. Mulvihill was paid cash
compensation at the quarterly rate of $18,750 payable quarterly commencing April
1, 1997, in addition to a $25,000 bonus earned and paid in 1997. In addition,
Mr. Mulvihill received compensation in the form of 2,027 shares of the Company's
Common Stock at a fair market value of $9.25 as of the last trading date of the
quarter (March 31, 1997) with respect to which payment was made.

    In 1997, each of Messrs. Rotchford, Hardin and O'Keefe received compensation
of $3,784 which consisted of cash payments aggregating $2,785 and 108 shares of
Common Stock at a fair market value of $9.25 as of the last trading date of the
quarter (March 31, 1997) with respect to which payment was made.

    Messrs. Timothy McBride, Kelter, Branson, Lesser and David McBride became
directors of the Company on December 12, 1997 and therefore did not receive any
compensation as directors for the year ended December 31, 1997.

    The Company reimburses the Directors for travel expenses incurred in
connection with their activities on behalf of the Company.

EMPLOYMENT AGREEMENTS

    Concurrently with the closing of the Reorganization, the Company entered
into employment agreements with each of David F. McBride and Jeffrey E. Kelter
to serve as the Chairman and President of the Company, respectively. The initial
term of each of such agreements is for 3 years with successive one-year renewal
terms thereafter until terminated. Each agreement provides for an annual base
salary of $200,000 together with such additional compensation as may be awarded
from time to time by the Company's Board of Directors and further provides that
each of Messrs. McBride and Kelter shall devote substantially all of their
working time to the Company's business activities. In the event of the death,
disability or termination of the employment without cause or the involuntary
termination of such executive's employment, the executive is entitled to receive
a lump sum payment equal to the executive's base salary plus the prior year's
bonus times the longer of 1 year or the remainder of the term of the employment
agreement. Each agreement also restricts such executive from engaging in
activities in competition with the Company in the ownership, development,
construction, management or operation of office or industrial properties (except
that Mr. McBride may continue to be a Director of certain McBride family real
estate related companies) during his term of employment and during the period
during which he serves as a Director of the Company and ending 1 year after the
later of the termination of his employment and the date he ceases to be a
Director of the Company.

TERMINATION OF EMPLOYMENT AND CONSULTING AGREEMENTS

    Upon the closing of the Reorganization, the employment agreements of Messrs.
Zucker and Burger and the oral consulting agreement of Mr. Mulvihill were
terminated. The Company agreed to pay to such persons the sums of $225,000,
$85,000 and $150,000, respectively, in consideration for the termination of
such agreements. Such persons

                                       29
<PAGE>

elected to receive such payments in the form of shares of Common Stock valued
at $11 per share. Accordingly, they received 68,869, 75,687 and 26,710
shares, respectively, in order to terminate these Agreements and cancel their
existing options, which had a fair market value of $14.75 per share on
December 12, 1997. In addition, each of Messrs. Zucker and Mulvihill executed
a non-competition agreement with the Company which agreement will continue in
effect throughout the term he is a Director of the Company and prohibits him
from engaging in activities involving the acquisition, development or
operation of office and industrial properties throughout the United States.

    The aggregate amount payable to such persons was arrived at in negotiations
with the Investor Group on the basis of the terms of the employment agreements
between Messrs. Zucker and Burger and the oral consulting agreement of Mr.
Mulvihill with the Company. Messrs. Zucker's and Burger's employment agreements
provided that in the event of certain major corporate transactions, such persons
are to be paid an amount equal to twice their current base salary. The Investor
Group agreed to pay such persons an aggregate amount approximately equal to
twice their currently expected compensation from the Company. The amounts of the
aggregate sum payable to each of Messrs. Mulvihill, Zucker and Burger was
determined by discussions among such persons.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

    The following table sets forth, as of December 31, 1997, information with
respect to each person (including any "group" as that term is used in the
instructions to Item 403 of Regulation S-B) who is known to the Company to be
the beneficial owner of more than 5% of the Company's Common Stock as well as
shares of Common Stock beneficially owned by all Directors and executive
officers of the Company and all Directors and executive officers of the Company
as a group. The table also includes the number of OP Units owned, as of December
31, 1997, by such persons. Any owner of OP Units may convert its OP Units into
shares of Common Stock (the "Conversion Right"), or, at the election of the
Company, the cash equivalent thereof. As of December 31, 1997, the Company had
5,363,281 shares of Common Stock outstanding, not including 4,058,270 and
731,500 shares, respectively, reserved for issuance upon conversion of OP Units
and other outstanding options and OP Unit and Common Stock warrants.

<TABLE>
<CAPTION>
                                                                              AMOUNT AND
                                                                              NATURE OF
                     NAME AND ADDRESS OF BENEFICIAL                           BENEFICIAL      PERCENT OF   OWNERSHIP OF
                      HOLDER OR IDENTITY OF GROUP                              OWNER(1)          CLASS       OP UNITS
------------------------------------------------------------------------  ------------------  -----------  ------------
<S>                                                                       <C>                 <C>          <C>
Evan Zucker.............................................................           127,685(2)       2.37%       29,391(2)
  1670 Broadway--Suite 3350
  Denver, CO 80202
Rick A. Burger..........................................................            37,210(3)       0.69%            0
  1670 Broadway--Suite 3550
  Denver, CO 80202
Timothy McBride.........................................................           176,384(4)       3.28%      221,137(4)(5)
  4939 Quebec Street Northwest
  Washington, DC 20016
Jeffrey E. Kelter.......................................................                 0            --       613,636(5)(6)
  40 Duck Pond Road
  Glencove, NY 11542
Robert Branson..........................................................            54,545(7)       1.02%       22,727(5)
  Linden & Branson
  1133 Connecticut Avenue NW
  Suite 902
  Washington, DC 20036
James Mulvihill.........................................................           365,627(8)       6.55%      216,402(8)
  5700 Piedmont
  Cherry Hills Village, CO 80111
David Lesser............................................................         1,764,372(9)      31.10%      181,818(5)(9)
  c/o Hudson Bay Partners II, L.P.
  237 Park Avenue, Suite 900
  New York, NY 10017
David F. McBride........................................................           131,954(10)      2.46%      424,442(5)(10)
  1000 Scioto Drive
</TABLE>

                                       30
<PAGE>
<TABLE>
<CAPTION>
                                                                              AMOUNT AND
                                                                              NATURE OF
                     NAME AND ADDRESS OF BENEFICIAL                           BENEFICIAL      PERCENT OF   OWNERSHIP OF
                      HOLDER OR IDENTITY OF GROUP                              OWNER(1)          CLASS       OP UNITS
------------------------------------------------------------------------  ------------------  -----------  ------------
<S>                                                                       <C>                 <C>          <C>
  Franklin Lakes, NJ 07417
Hudson Bay Partners II, L.P.............................................         1,754,545(9)      30.98%      181,818(5)(9)
  237 Park Avenue, Suite 900
  New York, NY 10017
CRA Real Estate Securities, L.P.........................................           454,545          8.48%            0
  259 Radnor-Chester Road -- Suite 200
  Radnor, PA 19087
All Officers and Directors as a group...................................         2,657,777         46.93%    1,709,553
</TABLE>

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

(1) Includes shares issuable on exercise of the Conversion Right if such right
    is exercisable within 60 days of December 31, 1997.

(2) Includes 29,391 shares of Common Stock issuable on exercise of the
    Conversion Right; which number includes 1,027 of such OP Units held by Mr.
    Zucker's parents and siblings, as to which Mr. Zucker disclaims beneficial
    ownership. Also includes 750 shares held by Mr. Zucker's parents, as to
    which Mr. Zucker disclaims beneficial ownership. Includes 75,687 shares
    owned by Mr. Zucker which are subject to a Lock-up Agreement until December
    12, 1998, including 45,434 shares held by a Rabbi Trust of which Wells
    Fargo, N.A. is the Trustee.

(3) Includes 10,000 shares of Common Stock held by Mr. Burger's father, as to
    which Mr. Burger disclaims beneficial ownership. Includes 26,710 shares
    which are subject to a Lock-up Agreement until December 12, 1998.

(4) Includes 11,364 shares of Common Stock held jointly by Mr. McBride and his
    wife and 1,290 shares of Common Stock owned by a limited liability
    corporation in which Mr. McBride has an ownership interest and 202 shares of
    Common Stock owned by a trust, in the name of Mr. McBride's mother, for
    which Mr. McBride is the sole trustee. OP Unit ownership includes 211,977 OP
    Units beneficially owned through a limited partnership interest in McBride
    and 9,160 OP Units owned by a trust, in the name of Mr. McBride's mother,
    for which Mr. McBride is the sole trustee.

(5) The OP Units are subject to a Lock-up Agreement prohibiting exercise of the
    Conversion Right on such OP Units until December 12, 1998.

(6) Includes a warrant to purchase 250,000 OP Units held by Mr Kelter.

(7) Includes 27,272 shares of Common Stock held by a limited liability company
    in which Mr. Branson is a principal owner. OP Unit ownership includes 22,727
    OP Units beneficially owned through a limited partnership interest in
    McBride.

(8) Includes 76,389 OP Units and 190 shares held by Mr. Mulvihill's wife, as to
    which Mr. Mulvihill disclaims any beneficial interest. Includes 128,456 and
    2,194 OP Units held by Mr. Mulvihill's parents and siblings, respectively,
    and 57,359 shares directly and indirectly owned by Mr. Mulvihill's parents,
    as to which Mr. Mulvihill disclaims any beneficial interest. Also includes
    68,869 shares owned by Mr. Mulvihill which are subject to a Lock-up
    Agreement until December 12, 1998 including 38,616 shares held by a Rabbi
    Trust of which Wells Fargo, N.A. is the Trustee.

(9) Includes 300,000 shares of Common Stock issuable to Hudson Bay Partners II,
    L.P. upon exercise of a stock purchase warrant at an exercise price of
    $11.00 per share, which expires on December 12, 2004. Mr. Lesser is
    President, sole director and sole shareholder of Hudson Bay Partners, Inc.,
    the general partner of Hudson Bay Partners II, L.P., and, as a result of
    such affiliation, may be deemed to have shared voting and dispositive power
    over the 1,754,545 shares of Common Stock owned by Hudson Bay Partners II,
    L.P.; however, Mr. Lesser expressly disclaims beneficial ownership of any
    Common Stock not directly owned by him. OP Unit ownership includes 181,818
    OP Units beneficially owned by Hudson Bay through a limited partnership
    interest in McBride; however Mr. Lesser expressly disclaims beneficial
    ownership of any OP Units not directly owned by him.

(10) Includes 1,031 shares of Common Stock owned by a limited liability
    corporation in which Mr. McBride has an ownership interest and 101 shares of
    Common Stock owned by a trust, in the name of Mr. McBride's deceased father,
    for which Mr. McBride is a trustee. Also includes a warrant to purchase
    125,000 OP Units held by Mr. McBride. OP Unit ownership includes 294,572 OP
    Units beneficially owned through a limited partnership interest in McBride
    and 4,870 OP Units owned by a trust, in the name of Mr. McBride's deceased
    father, for which Mr. McBride is the sole trustee.

                                       31
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

    In connection with the Reorganization, the Company entered into a series of
transactions in which certain individuals who are currently executive officers,
directors and beneficial owners of more than 5% of the Common Stock (each, a "5%
Holder") had a direct or indirect material interest (as described below).

    EMPLOYMENT AGREEMENTS.  As part of the Reorganization, Messrs. David
McBride (Chairman, Secretary and a director of the Company) and Kelter
(President and a director of the Company) entered into employment agreements
with the Company. Messrs. Zucker (a director of the Company), Burger (an
officer of the Company) and Mulvihill (a director of the Company) agreed to
receive $225,000, $85,000 and $150,000, respectively, in consideration for
the termination of employment agreements of Messrs. Zucker and Burger and the
oral consulting arrangement of Mr. Mulvihill. See "Item 10 -- Executive
Compensation --Employment Agreements" hereto.

    SPIN-OFF.  As part of the Reorganization, the Company organized and
agreed to spin-off at a later date a subsidiary of the Company to enable
Messrs. Mulvihill and Zucker to pursue real estate investment opportunities
other than in the office and industrial sectors. The spin-off has not yet
been consummated.

    OP UNITS AND COMMON STOCK.  The Investor Group (which includes McBride (a
5% Holder), Penn Square, Kelter, Hudson Bay (a 5% Holder) and CRA (a 5%
Holder)) received in the Reorganization 3,362,503 OP Units and 7-year
warrants to purchase 300,000 shares of Common Stock at $11 per share and
375,000 OP Units at $11 per OP Unit. Mr. Lesser (a director of the Company)
is the president, sole director and sole shareholder of the general partner
of Hudson Bay. Messrs. Timothy McBride (a director of the Company) and David
McBride, and Hudson Bay, have an interest in McBride. See "Item 5 -- Market
for Common Equity and Stockholder Matters" of this Annual Report for a list
of the shares of Common Stock of the Company issued pursuant to the
Reorganization to such persons as well as certain family members and entities
related to such persons.

    LEASES.  The Company has leases with companies in which David McBride is
an officer, and for certain of these companies, a shareholder. The annual
aggregate base rental revenue under these leases was approximately $236,000,
of which approximately $12,000 is included in rental income in the
accompanying financial statements as these leases relate to properties
acquired in the Reorganization.

    PRORATIONS AND ADJUSTMENTS.  At December 31, 1997, the Company owed
approximately $200,000 to an affiliate of David McBride, related to certain
prorations and adjustments for properties acquired in the Reorganization.

    MANAGEMENT COMPANY.  Through the Operating Partnership's 100% ownership
of the preferred stock of the Management Company, the Operating Partnership
is entitled to receive 95% of the amounts paid as dividends by the Management
Company. The remaining amounts paid as dividends by the Management Company
are paid to the holders of common stock of the Management Company. Mr.
Kelter, Hudson Bay Partners, L.P. and McBride, own 40%, 30% and 30%,
respectively, of the common stock of the Management Company. Mr. Lesser, is
the president, sole director and sole shareholder of the general partner of
Hudson Bay Partners, L.P., and Hudson Bay. Hudson Bay (a 5% Holder) is an
affiliate of Hudson Bay Partners, L.P. Messrs. Timothy McBride and David
McBride and Hudson Bay, have an interest in McBride. The Management Company
currently manages all but 2 of the Company's properties. The Operating
Partnership advanced to the Management Company $150,000 in December 1997 to
fund working capital needs. The Operating Partnership does not currently have
a formal contract with the Management Company for property management.

    The Management Company also manages 2 properties which are owned by
entities in which Mr. Kelter has a general partnership interest.

                                       32
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

<TABLE>
<CAPTION>
(A)                                                                EXHIBITS:
             ---------------------------------------------------------------------------------------------------------------------
<C>          <S>
         3(a) Certificate of Incorporation (1)
          (b) Certificate of Amendment filed October 6, 1993 (1)
          (c) Amended and Restated Certificate of Incorporation filed November 9, 1993 (1)
          (d) Amended and Restated Certificate of Incorporation filed December 12, 1997 (1)
          (e) By-laws of Registrant (1)
         4(a) Specimen Certificate for Common Stock (1)
        10(a) Amended and Restated Agreement of Limited Partnership of American Real Estate Investment, L.P.
          (b) 1993 Omnibus Incentive Plan (1)
          (c) Registration Rights Agreement (1)
          (d) Employment Agreement between American Real Estate Investment, L.P. and Evan Zucker (1)
          (e) Warrant Agreement between Dickinson & Co. and Registrant (1)
          (f) Employment Agreement between American Real Estate Investment, L.P. and Rick A. Burger (1)
          (g) Sub-Tenant Agreement dated December 1, 1993 between First Meridian Group, Inc. and Registrant (1)
          (h) Loan Agreement dated as of May 1, 1993 between The Industrial Development Authority of the City of Tempe, Arizona and
             Quadrangles I Limited Partnership (1)
             (i) Modification of Deed of Trust, Note and Deed of Trust dated May 14, 1993 (1)
             (ii) Modification Agreement dated December 1, 1994 (1)
             (iii) Assignment of the Loan Agreement, the Arbitrage Regulation Agreement and the Amended and Restated Regulatory
             Agreement as to Tax Exemption dated December 2, 1994 (1)
          (i) Loan Agreement dated December 2, 1994 between American Quadrangles Partners, L.P., Virginia Street Associates Limited
             Partnership, American Timberleaf Partners, L.P., American Real Estate Investment Corporation and D.H. Blair Holdings,
             Inc. (1)
          (j) Promissory Note dated December 2, 1994 in the principal amount of $3,500,000 issued to D.H. Blair Holdings, Inc. (1)
          (k) Stock Purchase Warrant dated December 27, 1994 issued, on transfer, to Rosalind Davidowitz (1)
          (l) Loan Agreement dated May 31, 1994 between the Operating Partnership and First Interstate Bank of Denver, N.A. (1)
             (i) Promissory Note dated June 1, 1994 (1)
             (ii) First Amendment dated August 31, 1995 to Loan dated May 31, 1994 between the Operating Partnership and First
             Interstate Bank of Denver, N.A. (1)
             (iii) Amended and Restated Promissory Note dated August 31, 1995 in the principal amount of $5,904,143 (1)
             (iv) Promissory Note dated August 31, 1995 in the principal amount of $500,000 (1)
          (m) Contract for Purchase and Sale of International Apartment Project (1)
          (n) Adjustable Rate Note in the principal amount of $5,700,000 dated January 31, 1997 payable to GMAC Commercial Mortgage
             Corporation (1)
          (o) Promissory Note dated January 8, 1998 between American Sedona Partners, L.P., American Real Estate Investment
             Corporation and Column Financial, Inc. in the principal amount of $17,000,000 (2)
          (p) Dana Perfumes Mortgage Note dated September 11, 1997 by Fair Lawn Industrial Park, Inc. and First Union National Bank
             in the principal amount of $1,155,000 (2)
          (q) L&W Promissory Note dated August 4, 1995 between L&W Associates and USG Annuity & Life Company in the principal sum
             of $3,525,000 (2)
          (r) Northfield Business Center Promissory Note dated December 24, 1997 between McBride Properties, Inc. and Column
             Financial, Inc. in the principal amount of $3,500,000 (2)
          (s) One Tabas Promissory Note dated August 9, 1995 between Hough-Loew Associates, Inc. and USG Annuity & Life Company in
             the principal amount of $3,025,000 (2)
          (t) Phillips Promissory Note dated January 5, 1998 between McBride Properties, Inc. and Column Financial, Inc. in the
             principal amount of $7,500,000 (2)
          (u) Two Tabas Promissory Note dated August 9, 1995 between Hough-Loew Associates, Inc. and USG Annuity & Life Company in
             the principal amount of $4,600,000 (2)
          (v) Loan Agreement dated September 23, 1997 by and between FLOP/BRE, Inc., OIP/BRE, L.L.C., MBP/BRE, L.L.C., and NJA/BRE,
             L.L.C., and Nomura Asset Capital Corporation (2)
          (w) Master Investment Agreement dated as of August 20, 1997 by and between American Real Estate Investment Corporation
             and The Parties Listed on the Signature Pages Thereto (1)
          (x) Stock Purchase Agreement dated as of August 20, 1997 by and between American Real Estate Investment Corporation and
             Hudson Bay Partners, L.P. (1)
          (y) Management Contribution Agreement dated as of August 20, 1997 among American Real Estate Investment, L.P., American
             Real Estate Investment Corporation, Jeffrey Kelter, and Penn Square Properties, Inc. (1)
</TABLE>

                                       33
<PAGE>
<TABLE>
<C>          <S>
          (z) McBride Contribution Agreement between American Real Estate Investment Corporation, American Real Estate Investment,
             L.P., and The Other Parties Listed on the Signature Pages of the Agreement (1)
          (aa) Agreement and Plan of Merger among American Real Estate Investment Corporation and Fair Lawn Industrial Park, Inc.,
             and The Other Parties Listed on the Signature Pages Thereto (1)
          (ab) Agreement of Sale and Purchase and Assignment of Agreement of Sale and Purchase--101 Commerce Drive (2)
          (ac) Agreement of Sale and Purchase--One and Two Tabas Lane with First, Second, Third and Fourth Amendments (2)
          (ad) Agreement of Sale and Purchase--Northfield Business Center (1057 and 1091 Arnold Road) with First, Second, Third,
             Fourth and Fifth Amendments (2)
          (ae) Agreement of Sale and Purchase--1305 Goshen Parkway with First, Second, Third and Fourth Amendments (2)
          (af) Agreement of Sale Americana Lakewood I & II and addendum (2)
          (ag) Employment Agreement, dated December 12, 1997, by and between American Real Estate Investment Corporation and Jeffrey
             Kelter (2)
          (ah) Employment Agreement, dated December 12, 1997, by and between American Real Estate Investment Corporation and David
             McBride (2)
          (ai) Agreement of Sale and Purchase dated July 17, 1997, with John D. Moran Sr. with Amendment One and Assignment (2)
          (aj) Warrant Agreement between American Real Estate Investment, L.P. and Jeffrey Kelter (2)
          (ak) Warrant Agreement between American Real Estate Investment, L.P. and David McBride (2)
</TABLE>

21. Subsidiaries of the Registrant: The Registrant has subsidiaries carrying on
    the same line of business as the Registrant as follows:

<TABLE>
<CAPTION>
                                                                                                     STATE OF
                                                                                                  INCORPORATION/
NAME                                                                                               ORGANIZATION
---------------------------------------------------------------------------------------------  ---------------------
<S>                                                                                            <C>
American Real Estate Investment, L.P.                                                                Delaware
Virginia Street Associates Limited Partnership                                                       Colorado
American Emerald Partners, L.P.                                                                      Delaware
American Timberleaf Partners, L.P.                                                                   Delaware
American Quadrangles Partners, L.P.                                                                  Delaware
American Sedona Partners, L.P.                                                                       Colorado
American Emerald Corp.                                                                               Delaware
American Timberleaf Corp.                                                                            Delaware
American Quadrangles Corp.                                                                            Delaware
American Sedona Corp.                                                                                Colorado
RROP, L.L.C.                                                                                        New Jersey
McBride Properties                                                                                  New Jersey
New Jersey Associates                                                                               New Jersey
UFSC, L.L.C.                                                                                        New Jersey
OIP/BRE, L.L.C.                                                                                     New Jersey
MBP/BRE, L.L.C.                                                                                     New Jersey
NJA/BRE, L.L.C.                                                                                     New Jersey
FLIP/BRE II, L.L.C.                                                                                 New Jersey
REA/SPC II, Inc.                                                                                    New Jersey
American Real Estate Management Inc.                                                               Pennsylvania
Avalanche Investment Corporation                                                                     Maryland
</TABLE>

27. FINANCIAL DATA SCHEDULE

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

(1) Previously filed.

(2) Filed herewith.

    (B) REPORTS ON FORM 8-K: A Current Report on Form 8-K dated November 12,
1997 was filed in response to Item 7 during the last quarter of the year ended
December 31, 1997.

    A Current Report on Form 8-K dated December 12, 1997 was filed in response
to Items 2, 5 and 7 during the last quarter of the year ended December 31, 1997.

    A Current Report on Form 8-K dated January 9, 1998 was filed on January 23,
1998 in response to Items 2 and 7 related to acquisitions which were consummated
in December 1997 and January 1998 and the closing of the

                                       34
<PAGE>
sale of Americana Lakewood Apartments.

    A Current Report on Form 8-K/A (Amendment #1) dated December 12, 1997 was
filed on February 25, 1998 related to Items 5 and 7.

    (C) S-1 Report of Independent Public Accountants on Schedule

    S-2 FINANCIAL STATEMENT SCHEDULE: Schedule III--Real Estate and Accumulated
Depreciation

                                       35
<PAGE>
              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE

To the Shareholders of
American Real Estate Investment Corporation:

We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of American Real Estate Investment Corporation
and subsidiaries included in the Form 10-K, and have issued our report thereon
dated March 10, 1998, except with respect to the matters discussed in Note 12 to
the consolidated financial statements, as to which the date is March 27, 1998.
Our audit was made for the purpose of forming an opinion on those statements
taken as a whole. The financial statement schedule referred to in Item 13 is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rule and is not part of
the basic financial statements. The financial statement schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in al material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.

                                      /s/ ARTHUR ANDERSEN LLP

Philadelphia, Pennsylvania
March 10, 1998

                                       S-1
<PAGE>
                  AMERICAN REAL ESTATE INVESTMENT CORPORATION
            SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
                                   (IN 000S)
<TABLE>
<CAPTION>
                                                                                                      GROSS AMOUNT CARRIED
                                                                              COSTS CAPITALIZED   AT CLOSE OF PERIOD 12/31/97
                                                         INITIAL COSTS          SUBSEQUENT TO     ----------------------------
                         LOCATION          (C)       ----------------------    ACQUISITION OR                  BUILDING AND
BUILDING ADDRESS       (CITY/STATE)   ENCUMBRANCES     LAND      BUILDINGS       COMPLETION         LAND       IMPROVEMENTS
---------------------  -------------  -------------  ---------  -----------  -------------------  ---------  -----------------
<S>                    <C>            <C>            <C>        <C>          <C>                  <C>        <C>
Office Properties:
40 Potash Road.......  Oakland, NJ         (a)       $   2,312   $   9,742           --           $   2,312      $   9,742
1655 Valley Road.....  Wayne, NJ           (a)           4,580      19,299           --               4,580         19,299
16-00 Route 208......  Fairlawn, NJ        (a)             646       2,722           --                 646          2,722
128 Bauer Drive......  Oakland, NJ                         420       1,770           --                 420          1,770
22-08 Route 208......  Fairlawn, NJ                        990       4,172           --                 990          4,172
15-00 Pollitt          Fairlawn, NJ
  Drive..............                      (a)             308       1,296           --                 308          1,296
19-00 Pollitt          Fairlawn, NJ
  Drive..............                      (a)           1,450       6,102           --               1,450          6,102
95 Bauer Drive.......  Oakland, NJ         (a)             160         674           --                 160            674
99 Bauer Drive.......  Oakland, NJ         (a)             276       1,163           --                 276          1,163
                       -------------  -------------  ---------  -----------          ------       ---------       --------
Subtotal Office
  Properties.........                                   11,142      46,940           11,142          46,940         58,082
                       -------------  -------------  ---------  -----------          ------       ---------       --------
Industrial
  Properties:
5 Thornton Road......  Oakland, NJ         (a)           1,844       7,770           --               1,844          7,770
2 Volvo Drive........  Rockleigh, NJ                       994       4,189           --                 994          4,189
17-01 Pollitt          Oakland, NJ
  Drive..............                      (a)           1,200       5,050           --               1,200          5,050
19-05 Nevins Road....  Oakland, NJ         (a)           1,200       5,050           --               1,200          5,050
                       Mountaintop,
100 Oak Hill Road....  PA                  (b)             546       2,271              546           2,271          2,817
1057 Arnold Road.....  Reading, PA         (b)           1,152       4,742           --               1,152          4,742
1091 Arnold Road.....  Reading, PA                         768       3,197           --                 768          3,197
1305 Goshen            Westchester,
  Parkway............  PA                  (b)             900       3,818              900           3,818          4,718
One Tabas Lane.......  Exton, PA           (b)             840       3,470           --                 840          3,470
Two Tabas Lane.......  Exton, PA           (b)           1,210       4,994           --               1,210          4,994
                       -------------  -------------  ---------  -----------          ------       ---------       --------
Subtotal
  Industrial.........                                   10,654      44,551           10,654          44,551         55,205
                       -------------  -------------  ---------  -----------          ------       ---------       --------
Non-Core Properties:
Urban Farms Shopping   Franklin
  Center.............  Lakes, NJ                         1,540       6,611                            1,540           6,611
Americana Lakewood...  Lakewood, CO        (b)           2,297       6,020              707           2,297           6,727
Quadrangles            Tempe, AZ
  Village............                      (b)           4,220      17,836              625           4,220         18,461
                       -------------  -------------  ---------  -----------          ------       ---------       --------
Subtotal Non-Core
  Properties:........                                    8.057      30,467            1,332           8,057         31,799
                       -------------  -------------  ---------  -----------          ------       ---------       --------
Total All
  Properties:........                                $  29,853   $ 121,958        $   1,332       $  29,853      $ 123,290
                       -------------  -------------  ---------  -----------          ------       ---------       --------
                       -------------  -------------  ---------  -----------          ------       ---------       --------

<CAPTION>

                                    ACCUMULATED       YEAR     DEPRECIABLE
                                   DEPRECIATION      BUILT/       LIVES
BUILDING ADDRESS         TOTAL       12/31/97      RENOVATED     (YEARS)
---------------------  ---------  ---------------  ----------  ------------
<S>                    <C>        <C>              <C>         <C>
Office Properties:
40 Potash Road.......  $  12,054     $      12        1992         (d)
1655 Valley Road.....     23,879            23        1989         (d)
16-00 Route 208......      3,368             3        1983         (d)
128 Bauer Drive......      2,190             2        1981         (d)
22-08 Route 208......      5,162             5      1960/68        (d)
15-00 Pollitt
  Drive..............      1,604             2      1970/92        (d)
19-00 Pollitt
  Drive..............      7,552             7     1970/84,95      (d)
95 Bauer Drive.......        834             1      1974/91        (d)
99 Bauer Drive.......      1,439             1        1971         (d)
                       ---------        ------     ----------  ------------
Subtotal Office
  Properties.........     58,082            56
                       ---------        ------     ----------  ------------
Industrial
  Properties:
5 Thornton Road......      9,614             9      1973/81        (d)
2 Volvo Drive........      5,183             5      1966/93        (d)
17-01 Pollitt
  Drive..............      6,250             6        1968         (d)
19-05 Nevins Road....      6,250             6        1955         (d)

100 Oak Hill Road....      2,817             3        1996         (d)
1057 Arnold Road.....      5,894             6        1995         (d)
1091 Arnold Road.....      3,965             4        1996         (d)
1305 Goshen
  Parkway............      4,718             5        1991         (d)
One Tabas Lane.......      4,310             4        1970         (d)
Two Tabas Lane.......      6,204             6      1970/91        (d)
                       ---------        ------     ----------  ------------
Subtotal
  Industrial.........     55,205            53
                       ---------        ------     ----------  ------------
Non-Core Properties:
Urban Farms Shopping
  Center.............      8,151             8      1965/82        (d)
Americana Lakewood...      9,024         1,249        1985         (d)
Quadrangles
  Village............     22,681         1,589        1987         (d)
                       ---------        ------     ----------  ------------
Subtotal Non-Core
  Properties:........     39,856         2,846
                       ---------        ------     ----------  ------------
Total All
  Properties:........  $ 153,143     $   2,955
                       ---------        ------     ----------  ------------
                       ---------        ------     ----------  ------------
</TABLE>

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

(a) Collateralizes the Normura mortgage notes payable.

(b) Collateralizes various mortgage notes payable.

(c) See description of encumbrances in Note 5 to Notes to Consolidated Financial
    Statements.

(d) Depreciation is computed based on the following estimated lives: Buildings
    and Improvements--35 years Tenant/Leasehold Improvements--Life of lease

(e) At December 31, 1997, the aggregate cost of land, buildings and equipment
    for federal income tax reporting was $87,000,000.

                                       S-2

<PAGE>
                  AMERICAN REAL ESTATE INVESTMENT CORPORATION

    SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION (IN 000s)

Summary of Real Estate and Accumulated Depreciation Activity:

<TABLE>
<CAPTION>
                                                                           1997                       1996
                                                                 -------------------------  ------------------------
                                                                              ACCUMULATED               ACCUMULATED
                                                                    COST     DEPRECIATION     COST     DEPRECIATION
                                                                 ----------  -------------  ---------  -------------
<S>                                                              <C>         <C>            <C>        <C>
Balance at beginning of year...................................  $   46,193    $   3,827    $  47,286    $   3,004
Property acquisitions..........................................     121,438            0            0            0
Capital improvements...........................................       1,152            0          424            0
Properties sold................................................     (15,640)      (1,781)      (1,517)        (543)
Depreciation...................................................           0          909            0        1,366
Balance at end of year.........................................  $  153,143    $   2,955    $  46,193    $   3,827
</TABLE>

                                      S-3



<PAGE>

                   AMERICAN REAL ESTATE INVESTMENT CORPORATION

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

<S>                                                                  <C>
Report of Independent Public Accountants...........................  F-2

Consolidated Balance Sheet as of December 31, 1997.................  F-3

Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996.........................................  F-4

Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997 and 1996...................................  F-5

Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996.........................................  F-6

Notes to Consolidated Financial Statements.........................  F-8

</TABLE>
                                      F-1

<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of American Real Estate Investment Corporation:

We have audited the accompanying consolidated balance sheet of American Real
Estate Investment Corporation (a Maryland Corporation) and subsidiaries as of
December 31, 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years ending December 31,1997 and
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Real Estate Investment Corporation as of December 31, 1997, and the
consolidated results of their operations and their cash flows for the years
ending December 31, 1997 and 1996 in conformity with generally accepted
accounting principles.


                                          /s/ Arthur Andersen LLP

Philadelphia,Pa.
  March 10, 1998, (except with respect
  to the matters discussed in Note 12, as to which
  the date is March 27, 1998)


                                      F-2
<PAGE>

                   AMERICAN REAL ESTATE INVESTMENT CORPORATION

                           CONSOLIDATED BALANCE SHEET

                                DECEMBER 31, 1997

                                     ASSETS

<TABLE>
<CAPTION>

<S>                                                          <C>
INVESTMENT IN REAL ESTATE
   Land and land improvements                               $   23,336,000
   Buildings and improvements                                   98,102,000
   Assets held for sale                                         31,705,000
                                                             --------------
                                                                153,143,000
   Less- Accumulated depreciation                                (2,955,000)
                                                             --------------
                                                                150,188,000
   Investment in direct financing lease                           1,920,000
                                                             --------------
       Total investment in real estate, net                     152,108,000

CASH AND CASH EQUIVALENTS                                        17,672,000
RESTRICTED CASH                                                   1,243,000
CASH ESCROWS                                                      3,764,000
ACCOUNTS RECEIVABLE                                                 132,000
DEFERRED FINANCING COSTS ,net of accumulated
   amortization of $6,000                                           688,000
DEFERRED LEASING COSTS                                              782,000
INVESTMENT IN AMERICAN REAL ESTATE MANAGEMENT  INC., at
   equity                                                         4,377,000
OTHER ASSETS, net of accumulated amortization of $112,000           189,000
                                                             --------------
       Total assets                                          $  180,955,000
                                                             --------------
                                                             --------------

                  LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
   Mortgage notes payable                                    $   86,501,000
   Accounts payable                                                 378,000
   Accrued interest payable                                         540,000
   Accrued expenses and other liabilities                         1,593,000
   Security deposits                                                650,000
                                                             --------------
       Total liabilities                                         89,662,000
                                                             --------------
MINORITY INTEREST                                                39,364,000
                                                             --------------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY:
   Common stock, $.001 par value; 65,000,000 shares
      authorized; 5,363,281 shares issued
      and outstanding                                                 5,000
   Warrants                                                         685,000
   Additional paid-in capital                                    51,726,000
   Cumulative net income                                          3,118,000
   Cumulative dividends                                          (3,606,000)
                                                             --------------
       Total shareholders' equity                                51,929,000
                                                             --------------
       Total liabilities and shareholders' equity            $  180,955,000
                                                             --------------
                                                             --------------
</TABLE>

                 The accompanying notes are an integral part of
                     this consolidated financial statement.


                                      F-3
<PAGE>

                   AMERICAN REAL ESTATE INVESTMENT CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                           Year Ended
                                                          December 31
                                                    -------------------------
                                                        1997         1996
                                                    -------------------------
<S>                                                 <C>         <C>
REVENUE:
   Rents and fees                                   $7,732,000   $9,943,000
   Other income                                        465,000      297,000
                                                    ----------   ----------
                 Total revenue                       8,197,000   10,240,000
                                                    ----------   ----------
OPERATING EXPENSES:
   Repairs and maintenance                             427,000      708,000
   Property taxes                                      376,000      417,000
   Property management fees                            252,000      353,000
   Utilities                                           637,000    1,034,000
   Payroll                                             551,000      894,000
   Other property operations                           869,000      944,000
   General and administrative                          732,000      515,000
   Depreciation and amortization                       909,000    1,366,000
   Buyout of employment agreements, options and
     warrants                                        3,203,000         ---
   Interest expense                                  3,134,000    3,897,000
                                                    ----------   ----------
                 Total operating expenses           11,090,000   10,128,000
                                                    ----------   ----------
                 Operating (loss) income            (2,893,000)     112,000

MINORITY INTEREST                                      876,000    1,364,000

EQUITY IN EARNINGS FROM INVESTMENTS                    404,000      570,000
                                                    ----------   ----------

LOSS BEFORE GAIN ON SALES OF
   PROPERTY                                         (3,365,000)    (682,000)

GAIN ON SALES OF PROPERTY                            4,608,000    1,786,000
                                                    ----------   ----------
                 Net income                         $1,243,000   $1,104,000
                                                    ==========   ==========
BASIC EARNINGS PER SHARE                            $      .92   $     1.00
                                                    ==========   ==========
DILUTED EARNINGS PER SHARE                          $      .88   $     1.00
                                                    ==========   ==========
</TABLE>

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


                                      F-4

<PAGE>

                   AMERICAN REAL ESTATE INVESTMENT CORPORATION

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                               Retained
                                               Common Stock                       Additional   Earnings/      Total
                                          -----------------------                  Paid-in   (Accumulated  Shareholders
                                            Shares       Amount      Warrants      Capital     Deficit)       Equity
                                          ----------   ----------   ----------   -----------  -----------  ------------
<S>                                        <C>         <C>          <C>          <C>          <C>          <C>
BALANCES, JANUARY 1, 1996                  1,096,004   $    1,000           --   $ 5,159,000  $ (906,000)  $ 4,254,000
   Net income                                     --           --           --            --   1,104,000     1,104,000
   Dividends paid ($.85 per share)                --           --           --            --    (943,000)     (943,000)
   Common stock issued for
      services provided                        6,176           --           --        53,000          --        53,000
   Common stock issued to
      officers and directors                  19,450           --           --       162,000          --       162,000
                                          ----------   ----------   ----------   -----------  ----------   -----------

BALANCES, DECEMBER 31, 1996                1,121,630   $    1,000           --   $ 5,374,000  $ (745,000)  $ 4,630,000
   Net income                                     --           --                         --   1,243,000     1,243,000
   Common stock issued for cash, net of
      $870,000 of issuance costs           1,963,635        2,000           --    20,728,000          __    20,730,000
   Common stock issued for
      FLIP net assets                      2,001,132        2,000           --    22,010,000          --    22,012,000
   Common stock  issued to
      terminate employment
      agreements and options                 171,266           --           --     2,536,000          --     2,536,000
   Warrants issued                                --           --      685,000            --          --       685,000
   Dividends paid ($.87 per share)                --           --           --            --    (985,000)     (985,000)
   Common stock issued to
      officers and directors                   9,378           --           --        99,000          --        99,000
   Common stock issued for OP
      Unit conversions                        96,240           --           --       979,000          --       979,000
                                          ----------   ----------   ----------   -----------  ----------   -----------

BALANCES, DECEMBER 31, 1997                5,363,281   $    5,000   $  685,000   $51,726,000  $ (487,000)  $51,929,000
                                          ==========   ==========   ==========   ===========  ==========   ===========
</TABLE>

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


                                      F-5
<PAGE>

                   AMERICAN REAL ESTATE INVESTMENT CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                             Year Ended
                                                             December 31,
                                                           1997         1996
                                                      -------------------------
<S>                                                   <C>           <C>
OPERATING ACTIVITIES:
   Net income                                         $  1,243,000  $ 1,104,000
   Adjustments to reconcile net income to net cash
      Provided by operating activities-
         Depreciation and amortization                     909,000    1,366,000
         Gain on sales of property                      (4,608,000)  (1,786,000)
         Buyout of employment agreements                 2,536,000           --
         Equity in earnings from investment
            In partnership                                (404,000)    (570,000)
         Amortization of investment in partnership in
            Excess of underlying equity                    356,000      530,000
         Common stock compensation                          41,000      162,000
         Minority interest allocation                      876,000    1,364,000
         Cash provided by (used in) --
            Restricted cash                                (11,000)      50,000
            Accounts receivable                            (11,000)      17,000
            Other assets                                   314,000       45,000
            Accrued interest                               283,000       69,000
            Accrued property taxes                              --      (43,000)
            Accrued expenses and other liabilities         652,000      (33,000)
            Security deposits                              (89,000)     (21,000)
                                                      ------------  -----------
               Net cash provided by
                  operating activities                   2,087,000    2,254,000
                                                      ------------  -----------

INVESTING ACTIVITIES:
   Properties acquired, net of cash acquired           (17,933,000)          --
   Advances to American Real Estate Management, Inc.      (150,000)          --
   Capital expenditures                                 (1,152,000)    (566,000)
   Increase in cash escrows                             (3,764,000)          --
   Proceeds from sales of property, net                 19,840,000    2,907,000
   Partnership cash distributions received                  25,000      230,000
                                                      ------------  -----------
               Net cash provided by
                  investing activities                  (3,134,000)   2,571,000
                                                      ------------  -----------

</TABLE>

                                      F-6
<PAGE>

                   AMERICAN REAL ESTATE INVESTMENT CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (continued)

<TABLE>
<CAPTION>
                                                            Year Ended
                                                            December 31,
                                                         1997          1996
                                                     --------------------------
<S>                                                  <C>              <C>
FINANCING ACTIVITIES:
   Issuances of common stock, net of issuance costs  $ 20,780,000            --
   Dividends paid                                        (985,000)     (943,000)
   Minority interest distributions                       (688,000)     (675,000)
   Proceeds from mortgage notes payable                 9,200,000            --
   Increase in deferred financing costs                  (694,000)
   Repayment of mortgage notes payable                (10,236,000)     (322,000)
   Repayment of other notes payable                            --       (83,000)
   Repayment of other note payable from sale                   --    (2,096,000)
                                                     ------------   -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES    17,377,000    (4,119,000)
                                                     ------------   -----------

NET INCREASE IN CASH AND CASH EQUIVALENTS              16,330,000       706,000

CASH AND CASH EQUIVALENTS, beginning of year            1,342,000       636,000
                                                     ------------   -----------

CASH AND CASH EQUIVALENTS, end of year               $ 17,672,000   $ 1,342,000
                                                     ============   ===========

SUPPLEMENTAL DISCLOSURE OF CASH
   FLOW INFORMATION:

      Cash paid for interest                         $  3,188,000   $ 3,084,000
                                                     ============   ===========

SUPPLEMENTAL DISCLOSURE OF NON-CASH
   INVESTING AND FINANCING ACTIVITIES:

</TABLE>

See Notes 3 and 5 for disclosure of non-cash investing and financing activities
in 1997.

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


                                      F-7
<PAGE>

                   AMERICAN REAL ESTATE INVESTMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 1997 AND 1996

1. Organization and Operations:

      American Real Estate Investment Corporation (the "Company") is a
self-administered and self managed equity real estate investment trust
("REIT") which was organized in the state of Maryland in 1994. The Company
was previously engaged in the ownership and operation of multifamily
residential properties located in certain markets within the Southwestern
United States, including the Denver, Phoenix and San Diego metropolitan
areas. In connection with the transactions that were consummated on December
12, 1997 and discussed further in Note 3, the Company has modified it's
strategy to focus on the acquisition of industrial and office properties
located in the mid-Atlantic and Northeastern United States and has
implemented a plan of disposition of the multi-family properties.

      As of December 31, 1997, as a result of the transactions discussed in Note
3, the Company owns 19 office and industrial properties located in Eastern
Pennsylvania and Northern New Jersey containing an aggregate of approximately
1,800,000 square feet which have an overall occupancy of 95 %, two multi-family
properties located in Denver and Phoenix, a community shopping center located in
Northern New Jersey and an investment in a direct financing lease related to a
property located in Northern New Jersey. The sales of various multi-family
properties in 1996, 1997 and 1998 are discussed in Note 3. Of the 22 properties
owned by the Company, 17 are indirectly or directly owned by American Real
Estate Investment, L.P. (the "Operating Partnership") and 5 are owned directly
by the Company. The Company conducts all of it's service operations, including
leasing, property management and other services through an equity investee of
the Operating Partnership, American Real Estate Management, Inc., formerly Penn
Square Properties, Inc. (the "Management Company") which was acquired as a
result of the transactions consummated on December 12, 1997.

2. Summary of Significant Accounting Policies:

   Principles of Consolidation

      The Company is the sole general partner of the Operating Partnership with
an ownership interest of approximately 57% at December 31, 1997. The Company is
also the sole stockholder of several other subsidiary entities. The accompanying
consolidated financial statements include the account balances of the Company,
the Operating Partnership and the Company's wholly- owned subsidiaries as of
December 31, 1997 and their operations for the years ended December 31, 1997 and
December 31, 1996 on a consolidated basis. All significant intercompany accounts
and transactions have been eliminated in consolidation.


                                      F-8
<PAGE>

   Use of Estimates

      The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.

   Investment in Real Estate

      Investment in real estate is recorded at cost and depreciated over the
estimated useful lives of the related assets. Expenditures for additions,
renewals and betterments which extend the useful life of the properties are
capitalized. Routine maintenance and repairs are charged to expense as incurred.
Furnishings and equipment are included in buildings and improvements in the
accompanying consolidated balance sheet. The estimated useful lives of the
assets are as follows:

<TABLE>
<CAPTION>

                                                         Years
                                                       ----------
           <S>                                         <C>
           Buildings and improvements                    10-35
           Land improvements                                15
           Furnishings and equipment                      3-10
</TABLE>

      The Company accounts for properties as assets held for sale when they have
committed to a formal plan of disposition. The Company reports its assets to be
disposed of at the lower of carrying value or fair value less the cost to sell
the related asset. The two remaining multi-family assets of the Company have
been shown in the accompanying balance sheet as assets held for sale. In
accordance with Financial Accounting Standard No. 121, " Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of",("SFAS No. 121") the Company has suspended depreciation charges on these
assets since August 20, 1997, the date the agreements with McBride and Hudson
Bay were executed and the disposition plans were adopted.

      In accordance with SFAS No. 121, the Company assesses its assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of a respective asset that the Company expects to hold and use
may not be recoverable. In performing the review for recoverability, the Company
estimates the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, the Company will recognize an impairment loss. The impairment loss is
measured as the amount that the carrying value of the asset exceeds the fair
value of the asset. Estimates of fair value are based on quoted market prices in
active markets or, if quoted market prices are not available, the best
information available in the circumstances, such as the present value of
estimated expected future cash flows. Based upon Management's review, no such
provision is necessary at December 31, 1997.


                                      F-9
<PAGE>

The Company has a $1,920,000 net investment in a lease, acquired as part of
the McBride Portfolio acquisition (Note 3), which has been accounted for as a
direct financing lease as a result of the tenant's purchase option at the end
of the lease term in 2004. At December 31, 1997, the net investment in this
lease consists of the gross investment of $3,150,000, net of unearned income
of $1,230,000. The unearned income is amortized over the lease term as annual
rent payments of $525,000 are collected in order to produce a constant
periodic rate of return on the net investment in this lease.

   Equity Method Investments

      The equity method of accounting is used to account for the Company's
non-controlling interest in 100% of the preferred stock of the Management
Company. The Company sold its non-controlling general partner interest in
Emerald Vista Associates, L.P. in September 1997 as discussed in Note 3.
Summarized financial information for Emerald Vista Associates, L.P. is shown in
Note 11.

   Cash and Cash Equivalents and Restricted Cash

      For purposes of reporting cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents. Restricted cash represents security deposits from
tenants and amounts in escrow for payment of property taxes, insurance or
capital improvements, as required by the Company's lenders and amounts held by
qualified intermediaries for future deferred exchanges in accordance with
Section 1031 of the Internal Revenue Code.

   Deferred Financing and Leasing Costs

      Deferred financing costs are amortized on a straight-line basis over the
life of the related mortgage loans. Amortization is included in interest expense
in the accompanying statements of operations. Deferred leasing costs are
amortized on a straight-line basis over the life of the related leases.

   Fair Value of Financial Instruments

      Fair values of current assets and payables approximate their carrying
amount due to their short-term nature. The carrying amounts of the mortgage
notes payable at December 31, 1997 approximated their respective fair values, as
determined by using yearend interest rates and market conditions.


                                      F-10
<PAGE>

   Allocations of Income and Distributions of Cash

      Effective with the December 12, 1997 amendment to the Operating
Partnership agreement, net income and losses of the Operating Partnership are
allocated to the Company and limited partners in accordance with their
respective ownership interests which were 57% and 43%, respectively, at December
31, 1997. For the periods prior to this amendment, the net income of the
Operating Partnership for each year was allocated as follows: an amount
representing 80% of the number of common shares outstanding at the end of each
calendar year (equivalent to approximately $904,000 and $897,000, respectively,
for 1997 and 1996) was allocated to the Company. Any remaining net income for
each such year was then allocated to the limited partners until the cumulative
net income allocated to the limited partners for the current and all prior years
is equal to approximately 42% of total cumulative net income since inception. In
1996, approximately $605,000 of net income, was allocated to the limited
partners in accordance with this provision. As a result of the additional
amounts allocated to minority interest during 1996, no additional amounts of
cumulative net income were allocated to the minority interest in 1997.
Thereafter, all net income was allocated to the Company and the limited partners
in accordance with their percentage interests.

      Net losses of the Operating Partnership are allocated to all the partners
in proportion to their percentage interests in accordance with the terms of the
partnership agreement.

      In the event of liquidation of the Operating Partnership, its assets will
be distributed in accordance with all the partners' capital accounts.
Liquidating distributions to the limited partners will be adversely affected to
the extent profits were allocated to the Company rather than the limited
partners. In certain instances in which cash distributions by the Operating
Partnership exceed its net income, distributions to holders of Common Stock may
be taxed as dividends whereas distributions to limited partners may constitute a
return of capital.

   Revenue Recognition

      Revenue is recognized on the accrual basis of accounting. Rental income
under leases in excess of one year in length is recognized using the straight
line method under which contractual rent increases are recognized evenly over
the lease term. Tenant reimbursements are accrued as revenue in the same period
the related expenses are incurred by the Company.

   Income Taxes and Other

      The Company elected to be taxed as a REIT under Sections 856 through 860
of the Internal Revenue Code and applicable Treasury Regulations, commencing
with its taxable year ended December 31, 1993. The Company believes that it is
organized and will continue to operate in such a manner as to qualify for
taxation as a REIT under the Internal Revenue Code.


                                      F-11
<PAGE>

      A REIT is generally not subject to Federal income taxes on that portion of
its ordinary income or capital gain that is currently distributed to
shareholders as the REIT provisions of the Internal Revenue Code generally allow
a REIT to deduct dividends paid to its shareholders to the extent it distributes
annually at least 95% of its taxable income and satisfies certain other
requirements.Accordingly, no provision has been made for Federal income taxes in
the accompanying consolidated financial statements. If the Company fails to
qualify as a REIT in any taxable year, the Company will be subject to Federal
income tax at regular corporate rates on its taxable income. The Company's
dividends of approximately $0.87 and $0.85 per share paid in 1997 and 1996,
respectively, were allocated to the shareholders on the following basis for 1997
and 1996, approximately $0.06 and $0.52 per share represented ordinary income
and approximately $0.81 and $0.33 per share represented return of capital and
long-term capital gain, respectively.

      The Company and certain of its subsidiaries are subject to certain state
and local taxes. The provision for these taxes has been reflected in general and
administrative expense in the accompanying financial statements. The Management
Company is subject to Federal, state and local taxes on it's income as it is
organized as a "C" corporation.

      There are differences in the Company's bases of assets and liabilities,
specifically relating to minority interest, between financial reporting and the
tax basis used for completion of annual Federal and state income tax returns.
The Federal tax basis of the Company's real estate at December 31, 1997 was
approximately $87,000,000.

   Earnings per Share

      In 1997, The Company adopted Statement of Financial Accounting Standard
No. 128, "Earnings per Share" ("SFAS No. 128"), which is effective for periods
after December 15, 1997 and requires the restatement of all prior period
earnings per share ("EPS") data presented. SFAS No. 128 established simplified
standards for computing and presenting EPS and supercedes the standards in APB
Opinion No.15, making them more comparable to international EPS standards. It
requires the dual presentation of basic and diluted EPS on the income statement
and requires a reconciliation of the numerator and denominator of basic EPS to
diluted EPS.

   Reclassifications

      Certain amounts in the 1996 consolidated financial statements have been
reclassified in order to present these amounts on a basis consistent with the
presentation in the 1997 consolidated financial statements.


                                      F-12
<PAGE>

3. Significant 1997 and 1996 Transactions:

   December 12, 1997 Transactions

      On December 12, 1997, the Company consummated the acquisition of the
McBride Portfolio which was effected through the contribution by McBride Hudson
Bay, L.P. and various entities affiliated with it (collectively, "McBride") of
interests in certain entities owning 15 office and industrial properties located
in Northern New Jersey, the merger of Fairlawn Industrial Park, Inc. ("FLIP")
with and into the Company and $8,400,000 in cash in return for the issuance of
2,001,132 shares of Common Stock, 2,998,867 units of limited partnership
interests of the Operating Partnership ("OP Units"), representing aggregate
consideration valued at approximately $55,000,000, a seven year warrant to
acquire 125,000 OP Units at an exercise price of $11 per OP Unit and the
assumption of $45,000,000 of mortgage debt. These transactions were accounted
for in accordance with purchase accounting. In connection with these
transactions, the Company also acquired McBride's rights to acquire seven
industrial properties totaling approximately 1,200,000 square feet, which are
discussed further below. These acquisitions were consummated in December 1997
and January 1998.

      The Company also acquired all of the outstanding preferred stock of the
Management Company, a full service real estate management, leasing, construction
and brokerage company located in Plymouth Meeting, Pennsylvania in consideration
for the issuance of 363,636 OP Units valued at $4,000,000, and seven year
warrants to acquire 250,000 OP Units at an exercise price of $11 per OP Unit.
This transaction was accounted for in accordance with purchase accounting.
Simultaneous with these transactions, Hudson Bay Partners II, L.P. ("Hudson
Bay"), CRA Real Estate Securities and Robert Branson, a new director of the
Company, invested an aggregate of $21,600,000 in the Company in return for the
issuance of an aggregate of 1,963,635 shares of Common Stock. Hudson Bay was
issued a seven year warrant to purchase 300,000 shares of Common Stock at an
exercise price of $11 per share. Hudson Bay is a discretionary investment fund
formed to make strategic investments in real estate and real estate related
securities.

      As a result of these transactions, David F. McBride became Chairman of the
Board and a director of the Company, Jeffery E. Kelter became President and a
director of the Company, and three other individuals were elected directors of
the Company. James Mulvihill and Evan Zucker, the former Chairman and President,
respectively, will remain as directors of the Company however; their respective
consulting and employment agreements and outstanding options, along with the
employment agreement and outstanding options of Rick Burger, an officer of the
Company, were terminated on December 12, 1997. Pursuant to the terms of their
agreements with the Company, these executives elected to receive the termination
payments in the form of 171,266 shares of Common Stock. The cost of terminating
these agreements and canceling 388,700 of outstanding options to these
executives was $2,536,000, and was recorded as compensation expense upon the
consummation of the transactions.

      In addition, 107,500 warrants issued to Dickenson & Co. and 175,000
warrants issued to D.H. Blair Holdings, Inc., an affiliate of a limited partner
of the Operating Partnership, in conjunction with the acquisition of Quadrangles
Village Apartments, were terminated for cash payments, which were expensed upon
the consummation of the transactions, aggregating $667,000.


                                      F-13
<PAGE>

   Other Industrial Property Acquisitions

      In December 1997, the Company, through it's Operating Partnership,
acquired the following industrial properties, which were accounted for in
accordance with purchase accounting, all of which are located in Eastern
Pennsylvania:

<TABLE>
<CAPTION>
                                                                         Net
                                       Acquisition     Debt Assumed   Leasable
    Property            Location          Price         or Funded    Square Feet
------------------  ----------------- --------------   ------------  -----------
<S>                 <C>                <C>             <C>             <C>
One Tabas Lane      Exton, PA          $4,310,000      $2,878,000      150,000
Two Tabas Lane      Exton, PA           6,200,000       4,382,000      150,000
1305 Goshen Road    West Chester, PA    4,718,000       3,358,000       90,000
100 Oak Hill Drive  Mountain Top, PA    2,816,000       1,155,000      105,000
1057 Arnold Road    Reading, PA         5,894,000       3,500,000      219,000
1091 Arnold Road    Reading, PA         3,965,000        ---           133,000
                                      -----------      -----------     -------
                                      $27,903,000      $15,273,000     847,000
                                      ===========      ===========     =======
</TABLE>
   Sales of MultiFamily Residential Properties and Interest in Limited
Partnership

      The Company sold the following during 1997:


<TABLE>
<CAPTION>

Property/Partnership
Interest               Timberleaf       Sedona     Emerald Vista
(Transaction date)   (February 28)    (August 29)  (September 26)   Totals
------------------   -------------    -----------  --------------   ------
<S>                  <C>              <C>          <C>              <C>
Sales price            $ 9,115,000    $ 9,150,000    $  2,000,000   $ 20,265,000
Less:
Transaction costs           16,000        406,000           3,000        425,000
Net book value of
property at sale
date                     8,696,000      5,291,000       1,245,000     15,232,000
                       -----------    -----------    ------------   ------------

Gain on sales          $   403,000    $ 3,453,000    $    752,000   $  4,608,000
                       ===========    ===========    ============   ============

</TABLE>

      The $3,080,000 of proceeds from the Sedona sale were reinvested as part of
a deferred exchange in accordance with Section 1031 of the Internal Revenue
Code. This deferred exchange was consummated on January 9, 1998 as part of the
acquisition of 101 Commerce (Note 12). Accordingly, no taxable gain was
generated in 1997 from the Sedona sale.

      On December 20, 1996, the Company sold a 150 unit multi-family residental
property known as the International Apartments located in Denver, Colorado area
for a gross selling price of $3,050,000 and recorded a gain of $1,786,000 on
this sale.

      See Note 12 for the Company's pro forma of the property acquisitions and
dispositions discussed above and the for the transactions which occurred
subsequent to December 31, 1997.


                                      F-14
<PAGE>

4. Investment in Real Estate:

At December 31, 1997, the Company owned and operated multi-family
residential, industrial, office and other properties as follows:


<TABLE>
<CAPTION>

                  Land and Land  Buildings and                Accumulated
Asset Type        Improvements   Improvements      Total      Depreciation
----------        ------------   -------------  ----------    ------------
<S>              <C>            <C>            <C>            <C>
Multi-family     $  6,517,000   $ 25,188,000   $ 31,705,000   $  2,838,000
Industrial         10,654,000     44,551,000     55,205,000         53,000
Office             11,142,000     46,940,000     58,082,000         56,000
Other               1,540,000      6,611,000      8,151,000          8,000
                 ------------   ------------   ------------   ------------
Total            $ 29,853,000   $123,290,000   $153,143,000   $  2,955,000
                 ============   ============   ============   ============
</TABLE>

       A 300 unit apartment complex known as Americana Lakewood was sold by the
Company on January 9, 1998 (Note 12 ). The Company owned a general partner
interest in Emerald Vista Associates, L.P. ("Emerald Vista") through American
Emerald Partners, L.P. Emerald Vista owned the 456 unit Emerald Pointe
multifamily residential property. In accordance with the terms of the amended
partnership agreement of Emerald Vista, American Emerald Partners, L.P. was
entitled to receive 50% of the excess cash flow available for distribution after
the payment of a 15% cumulative preferential return on its net equity
investment. The Company sold it's general partnership interest in this property
on September 26, 1997 for a gross selling price of approximately $2,000,000.

      The Company owned a 450 unit multifamily residential property known as
Timberleaf apartments. This property was sold for $9,115,000 on February 28,
1997. The Company owns a 510 unit multifamily residential property known as
Quadrangles Village apartments. On February 26, 1998, an agreement of sale was
signed for this property for a selling price of approximately $27,000,000 . The
consummation of this transaction is subject to the completion of the buyer's due
diligence and approvals from HUD and the lender under the bond indenture.

      The multifamily assets owned at December 31, 1997 are shown in the
accompanying balance sheet as assets held for sale in accordance with the
Company's policy discussed in Note 2.


                                      F-15
<PAGE>

5. Mortgage Notes Payable:

The following table presents outstanding mortgage notes payable as of December
31, 1997:

<TABLE>
<CAPTION>

                                                                       Balloon
                                              Periodic                 Payment
                       Interest   Maturity    Payment    Principal      Due At
                         Rate       Date       Date       Balance      Maturity
                       --------  -----------  --------  -----------   ----------
<S>                   <C>        <C>          <C>      <C>           <C>
Office / Industrial

Nomura (various
properties)            7.71%     10/01/2022     (1)    $44,910,000   $ 2,919,000
One Tabas Lane         8.25%     09/01/2000     (1)      2,872,000     2,657,000
Two Tabas Lane         8.50%     09/01/2005     (1)      4,374,000     3,220,000
1305 Goshen Parkway    8.50%     09/01/2005     (1)      3,351,000     2,467,000
100 Oak Hill Drive     7.50%     09/01/2000     (3)      1,155,000     1,155,000
1057 Arnold            7.75%     04/02/1998     (2)      3,500,000     3,500,000
                                                       -----------
                                 Weighted              $60,162,000
                       7.84%    average rate           ===========

Multifamily

Americana Lakewood
Apartments             8.24%     04/30/2000     (4)     $10,088,000  $10,088,000
Quadrangles Village
Apartments             6.35%     05/01/2026     (5)     16,251,000
                                                       -----------
                                                        26,339,000
                                                       -----------
     Total all properties                              $86,501,000
                                                       ===========
</TABLE>

(1)   Amortizing monthly with a balloon payment at maturity.
(2)   Non-amortizing. Interest is payable at a variable rate equal to 1 month
      LIBOR plus 2%
(3)   Non-amortizing.
(4)   Non-amortizing. Interest is payable at a variable rate equal to GECC
      Commercial Paper Rate plus 2.45%.
(5)   Fully amortizing through maturity.

Office/Industrial Properties

      As a result of the McBride transactions (Note 3), the Company assumed
an aggregate of approximately $45,000,000 for four separate mortgage notes
payable with Nomura Asset Capital Corporation which originated on September
22, 1997. These mortgage notes payable consist of four separate notes which
bear interest at a fixed rate of 7.71%. Aggregate monthly principal and
interest payments of $338,717 are due until the notes mature in October 2022.
The notes are not prepayable until after October 24, 1999, the second
anniversary of the effective date of the securitization of these notes, and
are prepayable from that time through July 11, 2007, with the payment of a
prepayment penalty. On or after July 11, 2007, the notes can be prepaid
without a prepayment penalty.

      Commencing on October 11, 2007, the interest rate on these notes will
change to the greater of 12.71% or the Treasury Rate, as defined, plus 6.5% (the
"Additional Interest Rate"). To the extent Excess Cash Flow, as defined,
generated from ten of the properties acquired from McBride ("the Mortgaged


                                      F-16
<PAGE>

Properties"), is insufficient to pay interest at the Additional Interest Rate,
the remaining interest will be deferred and accrued to the principal balance of
the notes. Beginning November 11, 2007, 100% of the Excess Cash Flow, as
defined, attributable to the Mortgaged Properties shall be paid monthly to
reduce the then outstanding principal and accrued interest, if any. These notes
are secured by a first lien on the Mortgaged Properties and contain
cross-default and cross-collateralization provisions among the three borrowing
entities which are indirectly owned by the Operating Partnership and another
entity which is owned by the Company. In addition, certain individuals
affiliated with McBride who are stockholders in the Company and limited partners
in the Operating Partnership have guaranteed $20,000,000 of the outstanding
principal at December 31, 1997.

As a condition of the mortgage notes payable, initial cash reserves of
approximately $330,000 were required to be established to fund real estate
taxes, insurance, tenant rollover costs and capital reserves. The Company is
required to continue to fund these reserves on a monthly basis. The aggregate
amount funded on a monthly basis is approximately $33,000. Funds in the tenant
rollover and capital reserves accounts are to be utilized by the Company to fund
certain capital improvements, repairs, tenant improvements and leasing
commissions related to the properties. The aggregate balance in these reserve
accounts at December 31, 1997 was approximately $330,000.

The Company has five additional mortgages outstanding which aggregate
$15,252,000 as of December 31, 1997 which were assumed or originated to fund the
acquisition of certain properties during 1997 (Note 3). These mortgages have
maturity dates ranging from 1998 through 2005. Four of the five mortgages have
fixed interest rates ranging from 7.50% to 8.50%. The other mortgage, which has
a balance of $3,500,000 at December 31, 1997, has an interest rate equal to one-
month LIBOR plus 2.0% ( 7.50 % at December 31, 1997). The fixed rate mortgages,
excluding the mortgage note related to 100 Oak Hill Drive, require prepayment
penalties upon prepayment which are equal to 1% of the balance prepaid for each
year remaining on the mortgage note until its maturity. The One Tabas, Two Tabas
and 1305 Goshen Parkway mortgages are cross-collaterlized and cross-defaulted.

Multi-family Properties

      In April 1995, the Company refinanced the mortgage note payable
collateralized by Americana Lakewood Apartments with a $10,500,000 mortgage loan
from General Electric Capital Corporation ("GECC"). On March 31, 1997, the GECC
mortgage note payable was modified and the interest rate was reduced to GECC's
composite commercial paper rate plus 2.45% from the composite commercial paper
rate plus 3.75%. The mortgage note payable requires monthly interest payments
through April 2000. In addition, quarterly principal payments are required based
on a stipulated percentage of the Excess Cash Flow, as defined, from Americana
Lakewood Apartments. The note requires a balloon payment in the amount of the
outstanding principal balance on April 30, 2000 and is prepayable prior to March
1, 1998 only in the event the prepayment results from a sale of the property.
This mortgage note was prepaid without penalty on January 9, 1998 as a result of
the sale of the property.

      The mortgage note payable collateralized by the Timberleaf apartments
property had a principal balance of $6,372,130 as of December 31, 1996 and bore
interest at 9.0%. The note payable required monthly principal and interest
payments of $52,300 through March 2004. The $6,363,000 outstanding balance of
this note was assumed by the buyer as a result of the sale of this property on
February 28, 1997.


                                      F-17
<PAGE>

      The mortgage note payable collateralized by the Quadrangles Village
apartments property had a principal balance of approximately $16,251,000 and
16,448,000 as of December 31, 1997 and 1996, respectively and bears interest at
6.35% under financing provided by the United States Department of Housing and
Urban Development. . The note payable requires monthly principal and interest
payments of $103,031 through May 1, 2026. The note cannot be prepaid prior to
June 2003, and thereafter contains a prepayment penalty as follows: 2% from June
2003 to May 2004; 1% from June 2004 to May 2005; 0% thereafter. Under the terms
of the existing agreement of sale for this property this debt will be assumed by
the buyer.

      The installment loan collateralized by Sedona apartments had a principal
balance of approximately $4,212,000 as of December 31, 1996. This loan which
bore interest at the bank's prime rate plus 0.5% (8.75% at December 31, 1996)
was due on August 31, 1998. On January 31, 1997, this loan was refinanced by a
$5,700,000 mortgage note from GMAC Commercial Mortgage Corporation. This note
bore interest at one-month LIBOR plus 2.5%, required principal and interest
payments based on a 25 year amortization schedule and was scheduled to mature
August 1, 1998. This loan was repaid from the proceeeds of the sale of Sedona on
August 29, 1997.

      Maturities of mortgage notes payable as of December 31, 1997 are as
follows:

<TABLE>

                     Office/Industrial       Multifamily             Total
                    -------------------  -------------------   -----------------
<S>                  <C>                   <C>                   <C>
        1998           $ 4,345,000          $   210,000          $ 4,555,000
        1999               915,000              224,000            1,139,000
        2000             2,146,000           10,324,000           12,470,000
        2001             1,073,000              255,000            1,328,000
        2002             1,163,000              271,000            1,434,000
2003 and thereafter     50,520,000           15,055,000           65,575,000
                       -----------          -----------          -----------

                       $60,162,000          $26,339,000          $86,501,000
                       ===========          ===========          ===========
</TABLE>

6. Related Party Transactions:

      The Company subleases office space in Denver, Colorado from Black Creek
Capital, LLC . The lease agreement contains provisions for a monthly lease
payment of $1,346 and expires December 31, 1999. A former officer and current
director and another director of the Company are principal officers and
members of Black Creek Capital, LLC. In connection with the December 12, 1997
transactions, the Company will close this office in the second quarter of
1998 and  is obligated to continue these payments through December 31,1999.
The cost of the termination of approximately $40,000 has been accrued at
December 31, 1997.

      The former President and Chief Executive Officer and Treasurer of the
Company each earned a bonus of $25,000 during 1997 and 1996 for achieving the
funds from operations benchmark which was stipulated in the Company's
original prospectus dated November 3, 1993.

                                      F-18
<PAGE>

      The former President and Chief Executive Officer, and former Chairman of
the Company each received compensation on a quarterly basis in the form of
Common Stock issued by the Company. Members of the Board of Directors who are
not officers of the Company received a portion of their compensation on a
quarterly basis in the form of Common Stock issued by the Company. Total Common
Stock compensation was approximately $41,000 and $162,000 to officers and
directors of the Company for the years ended December 31, 1997 and December 31,
1996, respectively.

      The Company issued Common Stock during 1996 in the amount of $52,500 at
its then current market price to an entity, of which a limited partner of the
Operating Partnership is Chief Executive Manager, in settlement of the balance
of its fee earned for securing the Company's mortgage loan with GECC which was
accrued as of December 31, 1995.

      The Company has leases with companies in which the Chairman of the Board
is an officer, and for certain of these companies, a shareholder. The annual
aggregate base rental revenue under these leases is approximately $236,000., of
which approximately $12,000 is included in rental income in the accompanying
financial statements as these leases relate to properties acquired in the
December 12, 1997 transactions.

      At December 31, 1997, the Company has a payable of approximately $200,000
to an affiliate of the Chairman of the Board related to certain prorated amounts
for the December 12, 1997 transactions.

      Through the Operating Partnership's 100% ownership of the preferred
stock of the Management Company, the Operating Partnership is entitled to
receive 95% of the amounts paid as dividends by the Management Company. The
remaining amounts paid as dividends by the Management Company are paid to the
holders of common stock of the Management Company. Jeffery E. Kelter, Hudson
Bay Partners, L.P. and McBride own 40%, 30% and 30%, respectively, of the
common stock of the Management Company. The Management Company manages all
but two of the Company's properties. No management fees were paid to the
Management Company in 1997. The Management Company manages two properties
which are owned by entities, other than the Company, in which Mr. Keller has
a general partnership interest. In 1997, the Company advanced $150,000 to the
Management Company to fund working capital requirements.

7. Operating Leases:

   The Company's properties are leased to tenants generally under operating
leases with expiration dates extending through 2015. Future minimum rentals
under noncancellable operating leases, excluding tenant reimbursements of
operating expenses and tenants with month-to-month leases aggregating
approximately $150,000 of annual rent, as of December 31, 1997 are as follows:

<TABLE>
<CAPTION>

                       <S>                   <C>
                           1998              12,660,000
                           1999              12,256,000
                           2000              11,301,000
                           2001              10,193,000
                           2002               9,192,000
                        Thereafter           34,428,000
</TABLE>

No tenant represented more than 10% of the minimum rental revenues for the year
ended December 31, 1997.

8. Stock Options, Stock Warrants and Conversion Rights:

   Stock Options

      The Company's 1993 Omnibus Incentive Plan (the "Plan") has authorized the
grant of compensatory awards representing 250,000 shares of Common Stock
consisting of stock options, stock awards, stock appreciation rights and other
stock-based awards to certain officers and employees. Incentive stock options,
are to be granted at not less than the fair market value of the


                                      F-19
<PAGE>

Company's stock on the date of the grant and the term cannot exceed ten years.
The vesting period of each grant varies and is determined at the date of grant.
In 1997, the stockholders approved an increase in the amount of shares available
for issuance under this Plan to 500,000. All awards granted in 1997 and 1996,
which were cancelled in December 1997 as discussed below, vested over the year
in which they were granted. Incentive options granted to shareholders owning 10%
or more of the Common Stock cannot be at less than 110% of the fair market value
of the Company's stock on the date of the grant and the term cannot exceed ten
years.

      On August 31, 1994, the Company adopted and authorized the 1994
Non-Employee Stock Option Plan (the "Non-Employee Plan") and 150,000 shares were
authorized thereunder in the form of non-qualified stock options for issuance to
certain directors or consultants. In 1997, the stockholders approved an increase
in the amount of shares available for issuance under the Non-Employee Plan to
300,000. The exercise price for each option granted under the Non-Employee Plan
cannot be less than the fair market value of the Company's Common Stock
underlying the option at the date of grant. The term of each option is ten years
and each option is exercisable upon the date of grant, provided that the option
holder remains a director, employee or consultant to the Company during the
exercise period.

      In conjunction with the 1993 initial public offering, certain officers and
directors received 186,700 10-year options at an exercise price of $10.00 per
share, all of which remained outstanding as of December 31, 1996. These options
vested immediately for the former Chairman of the Board and the President and
over a two year period for the other former officer. As discussed below, these
options were cancelled as a result of the December 12, 1997 transactions.

The following tables show the activity and balances for each plan for 1997 and
1996:

<TABLE>
<CAPTION>

                                         1997                   1996
                                             Exercise                Exercise
 1993 Omnibus Incentive Plan     Options      Price      Options      Price
 ---------------------------   ----------------------  ----------------------
<S>                            <C>         <C>          <C>        <C>
Outstanding, beginning of year    82,000                  47,000
Granted                           45,000      $10.00      35,000      $10.00
Exercised                          -----                   -----
Forfeited                       (127,000)     $10.00       -----
                               ----------  ----------  ----------  ----------
Outstanding, end of year           -----       -----      82,000      $10.00
                               ----------  ----------  ----------  ----------

      Non-Employee Plan
      -----------------
Outstanding, beginning of year   104,000                  64,000
Granted                           55,000      $10.00      40,000      $10.00
Exercised                         (5,000)     $10.00       -----
Forfeited                        (97,500)     $10.00       -----
                               ==========  ==========  ==========  ==========
Outstanding, end of year          56,500      $10.00     104,000      $10.00
                               ==========  ==========  ==========  ==========

</TABLE>

                                      F-20
<PAGE>

      Any award issued under the plans which is forfeited, expires or terminates
prior to vesting or exercise is available for future award under the plans. In
connection with the December 12, 1997 transactions, 388,700 options (including
the 186,700 of options issued in connection with the 1993 Initial Public
Offering ("IPO") in 1993) held by certain executives were cancelled, in
consideration for payments aggregating $1,423,924 which the executives elected
to receive in the form of 129,449 shares of Common Stock which were issued on
December 12, 1997 and 22,500 options awarded to certain directors in 1997 were
cancelled at no cost to the Company.

      The Company accounts for its stock-based options under Accounting
Principles Board Opinion No. 25, under which no compensation expense related to
options has been recognized, as all options have been granted with an exercise
price equal to or greater than the fair value of the Company's Common Stock on
the date of grant. The Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.123") for
disclosure purposes in 1996. In accordance with SFAS No. 123, the fair value of
each option grant has been estimated as of the date of grant using an option
pricing model with the following assumptions for 1997 and 1996, respectively:
7.00% dividend yield; an expected life of 10 years; expected volatility of 27%
and 20%; and a risk free interest rate of 5.74% and 6.42%. The weighted average
fair value of those shares granted in 1997 and 1996 was $1.08 and $.59 ,
respectively, per share. The weighted average remaining contractual life for the
options granted in 1997 and 1996 that were outstanding at December 31, 1997 was
7.5 years.

      Using these assumptions, the fair value of the stock options granted in
1997 and 1996, which were not cancelled as a result of the December 12, 1997
transactions, was approximately $8,000 and $44,000 , respectively. Had
compensation cost been determined consistent with SFAS 123, utilizing the
assumptions detailed above, the Company's net income would have been reduced to
the following pro forma amounts:

<TABLE>
<CAPTION>
                                           Year Ended          Year Ended
                                          December 31,        December 31,
                                              1997                1996
                                        ----------------    ----------------
      <S>                               <C>                 <C>
      Net income:
               As reported                 $1,243,000          $1,104,000
               Pro forma                   $1,238,000          $1,078,000

      Basic earnings per share:
               As reported                    $.92                $1.00
               Pro forma                      $.92                $ .97

      Diluted earnings per share:
               As reported                    $.88                $1.00
               Pro forma                      $.88                $ .97

</TABLE>

   Warrants



      In conjunction with the IPO, Dickinson & Co. received a warrant to
purchase up to 107,500 shares of Common Stock at an exercise price of $16.50 per
share at any time during the period from November 3, 1993 to November 2, 1998,
at which time the warrant expires. In conjunction with the acquisition of
Quadrangles Village apartments, D.H. Blair Holdings, Inc. received a warrant to


                                      F-21
<PAGE>

purchase 175,000 shares of Common Stock at a price of $10.00 per share at any
time during the period from December 2, 1994 to December 2, 1999, at which time
the warrant expires. The warrant was transferred to a limited partner of the
Operating Partnership at the time the note was purchased. Both of these warrants
were terminated in connection with the December 12, 1997 transactions for cash
payments of $25,000 and $641,000, respectively.

      In connection with the transactions which occurred on December 12, 1997,
300,000 Common Stock warrants were issued to Hudson Bay and 250,000 and 125,000
OP Unit warrants were issued to Jeffery Kelter and David McBride, respectively,
at an exercise price of $11 per share or OP Unit. The Common Stock and OP Unit
warrants expire on December 12, 2004 and may not be sold, transferred or
assigned before December 12, 1998. The Common Stock warrants issued to Hudson
Bay and the OP Unit warrants issued to Jeffery Kelter and David McBride were
valued as of December 12, 1997 at $685,000 and are shown in the accompanying
balance sheet as a separate component of shareholders' equity.

   Conversion Rights

      Pursuant to the partnership agreement, which was amended and restated on
December 12, 1997, the limited partners of the Operating Partnership received a
conversion right, which enables each limited partner to convert their interests
in the Operating Partnership into shares of Common Stock or cash, as selected by
the Company at any time on a one for one basis. Limited partners may exercise
their conversion right only once during each calendar quarter. The number of
shares relating to the conversion right remains stable irrespective of the
market price of the Company's Common Stock. The limited partners, in the
aggregate, could convert their partnership interests in the Operating
Partnership into 4,058,270 shares of Common Stock as of December 31, 1997 and
725,064 shares of Common Stock as of December 31, 1996. OP Units totaling 96,240
were converted to Common Stock in 1997 and no OP Units were converted during
1996.

9. Earnings Per Share:

      In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" (SFAS No.128). SFAS No. 128 establishes
standards for computing and presenting earnings per share (EPS) and applies to
entities with publicly held Common Stock or potential Common Stock. This
statement simplifies the standards for computing EPS previously found in APB
Opinion No. 15, "Earnings per Share", and makes them comparable to international
EPS standards.


                                      F-22
<PAGE>

The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations.

<TABLE>
<CAPTION>

                                                        BASIC           DILUTED
                                                      ----------      ----------
<S>                                                   <C>             <C>
Year Ended December 31, 1997
Net Income                                            $1,243,000      $1,243,000
                                                      ==========
Add: Minority interest allocation                             --         876,000
                                                                      ----------
                                                                      $2,119,000
                                                                      ==========
Weighted average number of shares outstanding          1,347,297       1,347,297
Stock equivalents                                             --       1,056,707
                                                      ----------      ----------
                                                       1,347,297       2,404,004
                                                      ==========      ==========

Earnings per Share                                    $      .92      $      .88
                                                      ==========      ==========

Year Ended December 31, 1996
Net Income                                            $1,104,000
                                                      ==========

Add: Minority interest allocation

Weighted average number of shares outstanding          1,106,379
Stock equivalents                                             --
                                                      ----------
                                                       1,106,379
                                                      ==========

Earnings per Share                                    $     1.00
                                                      ==========

      The diluted EPS calculation for 1996 was not included above as the
effect of the convertible OP Units of 680,746 was anti-dilutive for 1996.


      In 1997 and 1996, the Company's stock equivalents consisted of the
following:

                                                         1997            1996
                                                      ----------      ----------
Options and warrants                                      92,973              --
Convertible OP Units                                     963,734         680,746
                                                      ----------      ----------
                                                       1,056,707         680,746
                                                      ==========      ==========
</TABLE>

10. Commitments and Contingencies:

      The Company and an affiliated entity were defendants in a lawsuit which
commenced in December 1995 in the Superior Court of the State of California,
County of San Diego, by Emerald Vista, Inc., Emerald Vista Associates, L.P. (the
"Partnership") and Schickler Meringoff Properties. The Partnership owned the
Emerald Pointe apartments. The plaintiffs alleged that the defendants, in
connection with an inspection of the partnership's apartment property in June
1995, breached their fiduciary duties to the plaintiffs and both negligently and
intentionally interfered with contracts of employment between the manager of the
property and certain of its employees. Plaintiffs were seeking damages,
declaratory and injunctive relief among other remedies. This litigation was
settled in 1997, as a result of the settlement the plaintiffs were given the
option to acquire the Company's interest in the


                                      F-23
<PAGE>

Partnership for $2,000,000. This option was exercised and the partnership
interest was sold on September 26, 1997.

      Beginning in November 1997, the Company is a sub-lessor under a lease for
it's Plymouth Meeting, Pennsylvania corporate offices which require monthly
rental payments of $9,300, plus its share of operating expenses, until
expiration in March 2000.

      The Company entered into employment agreements with two former officers of
the Company and a consulting agreement with the former Chairman of the Board.
The employment agreements were for an initial term of three years ending in
November 1996. Employment agreements for these two officers of the Company were
extended through December 31, 1999 at specified compensation levels, including
stipulated severance packages upon termination of either agreement prior to
December 31, 1999. As discussed in Note 3, these agreements were terminated
effective December 12, 1997. Pursuant to the terms of these agreements, these
former officers elected to receive these payments in 41,817 shares of Common
Stock. Accordingly, the cost of terminating these agreements of approximately
$620,000 , based upon the December 12, 1997 market price of the Common Stock,
was expensed upon the closing of the December 12, 1997 transactions.

      As a result of the December 12, 1997 transactions, two officers of the
Company were given three-year employment agreements which provide for aggregate
initial base compensation of $400,000 subject to increases as approved by the
Compensation Committee, among other incentive compensation.

11. Investment in Partnership:

      During 1994, the Company acquired a 50% general partnership interest in
Emerald Vista. This general partnership interest was sold September 26, 1997
(Note 3). In accordance with the partnership agreement, the Company was entitled
to receive 50% of the excess cash flow available for distribution, as defined,
after the payment of a 15% cumulative preferential return on its net equity
investment. The Company was a co-general partner and, based on the partnership
agreement which states that the other general partner is the managing general
partner, did not control Emerald Vista. Accordingly, the Company recorded its
investment in Emerald Vista under the equity method and recorded its equity in
earnings based on its allocable share of the net income or loss from Emerald
Vista.

      The Company's investment in Emerald Vista ($1,190,611 at December 31,
1996) was in excess of its share in the existing equity as of the date of its
acquisition. The Company amortized the amount of its investment in excess of its
share in the underlying equity using the straight-line method. The amortization
is recorded on a pro rata basis to interest expense and depreciation expense in
the accompanying financial statements. In 1997 and 1996, $356,000 and $530,000,
respectively, was amortized related to this excess investment.


                                      F-24
<PAGE>

   Summarized Financial Data

      The following is a summary of Emerald Vista's statement of operations for
the nine-month period ended September 26,1997, the date the partnership interest
was sold, and the year ended December 31, 1996:

<TABLE>
<CAPTION>
                                         For Nine Month
                                            Period
            Statements of Operations         1997               1996
            ------------------------      -----------       ------------
            <S>                           <S>               <S>
             Revenues                     $ 2,172,000       $  2,886,000
             Operating expenses            (1,368,000)        (1,837,000)
             Interest Expense                 (79,000)          (111,000)
                                          -----------       ------------
             Net Income                   $   725,000       $    938,000
                                          ===========       ============

</TABLE>

12. Subsequent Events:

      In January 1998, the Company consummated the acquisitions of 101 Commerce
Drive, a 597,000 square foot refrigerated warehouse/distribution center located
in Mechanicsburg, PA which is net leased to Hershey Foods Corporation through
2012 for a purchase price, including closing costs, of approximately $
26,300,000 and One Philips Drive, a 400,000 square foot warehouse distribution
center located in Mountain Top, PA which is net leased to Philips Electronics
Corporation through 2007, for a purchase price, including closing costs, of
approximately $11,100,000.

      On January 9, 1998, the Company consummated the sale of the Americana
Lakewood Apartments for a selling price of approximately $15,000,000. The cash
proceeds from the sale were utilized to repay the $10,000,000 mortgage note
outstanding. On February 26, 1998, the Company signed an agreement to sell
Quadrangles Village Apartments for a gross selling price of approximately
$27,000,000. The consummation of this sale is subject to the buyer's due
diligence and related approvals from HUD and the lender under the bond
indenture.

      On February 4, 1998, the Company announced the signing of definitive
agreements to acquire a ten building portfolio totaling approximately 790,000
square feet located in suburban Albany, New York for a purchase price of
approximately $58,000,000 from the Galesi Group ("Galesi"). The portfolio is to
be contributed to the Operating Partnership in exchange for the issuance of
approximately 1,363,000 LP Units in the Operating Partnership and the assumption
of related indebtedness. As part of this transaction, the Company will also
enter into an operating agreement with the Galesi and Columbia Development
("Columbia") that will grant additional rights and options to the Company
related to other properties and land controlled by Galesi and Columbia. These
transactions are anticipated to be consummated in the second quarter of 1998.

      On February 24, 1998, the Company announced the signing of definitive
agreements to acquire two industrial distribution complexes located in
Liverpool, New York and Harrisburg, Pennsylvania totaling approximately
1,100,000 square feet for an aggregate purchase price of approximately
$27,400,000. These transactions were consummated on March 27, 1998.

      The Company announced on February 18, 1998 that it had declared a cash
dividend of $0.22 per share for the quarter ended December 31, 1997 payable on
March 16, 1998 to shareholders of record on March 2, 1998.


                                      F-25
<PAGE>

Pro Forma Operating Results

      Assuming the completion of acquisitions and dispositions discussed in Note
3 which occurred in 1997, the sale of Americana Lakewood on January 9, 1998 and
the 1998 acquisitions of 101 Commerce Drive, One Philips Drive and the
Liverpool, New York and Harrisburg, PA industrial distribution complexes,
discussed above, as of as of January 1, 1997 and 1996, pro forma operating
results are presented as follows:

<TABLE>
<CAPTION>

                                                          For Year Ended
                                                           December 31,
                                                  ------------------------------
<S>                                              <C>               <C>
                                                      1997             1996
                                                   (unaudited)      (unaudited)

Total revenue                                     $ 26,327,000     $ 25,491,000
Operating income (1)                                 7,121,000        5,634,000
Minority interest                                   (3,062,000)      (2,479,000)
                                                  ------------     ------------
+Net income                                          4,059,000        3,155,000
                                                  ============     ============
Earnings per share
      Basic                                                .76              .60
                                                  ============     ============
      Diluted                                              .75              .60
                                                  ============     ============
Pro forma average number of shares
outstanding
      Basic                                          5,363,281        5,242,297
                                                  ============     ============
      Diluted                                        9,461,426        9,285,546
                                                  ============     ============

</TABLE>

(1)   Net of $4,763,000 and $4,740,000 in depreciation expense in 1997 and 1996,
      respectively.

      The pro forma operating results combine the Company's historical operating
results with the incremental rental income and operating expenses of the
properties acquired in 1997 and subsequent to December 31, 1997, including
adjustments for depreciation, based upon the acquisition price associated with
the property acquisitions, and interest costs assuming the borrowings to finance
the property acquisitions had occurred at the beginning of the year. The above
pro forma amounts are also adjusted to reflect the impact of the multi-family
property dispositions in 1997 and 1996 as if they were disposed of as of January
1, 1996.

      These pro forma amounts are not necessarily indicative of what the actual
results of the Company would have been assuming the above property acquisitions
had been consummated at the beginning of 1997 or 1996, nor do they purport to
represent the future results of the Company.


                                      F-26
<PAGE>
                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                AMERICAN REAL ESTATE INVESTMENT CORPORATION

                                BY:            /S/ JEFFREY E. KELTER
                                     -----------------------------------------
                                            Jeffrey E. Kelter, President

    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                        TITLE                    DATE
------------------------------  ---------------------------  -------------------


     /s/ DAVID F. MCBRIDE       Chairman of the
------------------------------    Board/Secretary and          March 30, 1998
       David F. McBride           Director

    /s/ JEFFREY E. KELTER       President and Director
------------------------------                                 March 30, 1998
      Jeffrey E. Kelter

    /s/ TIMOTHY E. MCKENNA      Treasurer (Principal
------------------------------    Financial and Accounting     March 30, 1998
      Timothy E. McKenna          Officer)

     /s/ TIMOTHY MCBRIDE        Director
------------------------------                                 March 30, 1998
       Timothy McBride

      /s/ ROBERT BRANSON        Director
------------------------------                                 March 30, 1998
        Robert Branson

     /s/ JAMES MULVIHILL        Director
------------------------------                                 March 30, 1998
       James Mulvihill

       /s/ EVAN ZUCKER          Director
------------------------------                                 March 30, 1998
         Evan Zucker

       /s/ DAVID LESSER         Director
------------------------------                                 March 30, 1998
         David Lesser