<PAGE>
================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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

For the quarterly period ended March 31, 2003      Commission File Number 1-6249

             First Union Real Estate Equity and Mortgage Investments
             -------------------------------------------------------
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                         <C>
               Ohio                                      34-6513657
-------------------------------             ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

     125 Park Avenue, 14th Floor
         New York, New York                                          10017
------------------------------------                               ----------
(Address of principal executive offices)                           (Zip Code)

Registrant's telephone number, including area code:              (212) 949-1373
</TABLE>

--------------------------------------------------------------------------------
              Former name, former address and former fiscal year,
                         if changed since last report.

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                           Yes  [X]          No [ ]

         Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.

     34,814,361 Shares of Beneficial Interest outstanding as of May 1, 2003

================================================================================
               Total number of pages contained in this report: 30

<PAGE>
                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

FIRST UNION REAL ESTATE EQUITY and MORTGAGE INVESTMENTS

Combined Balance Sheets

<TABLE>
<CAPTION>
(In thousands, except share data)                                                            March 31, 2003             December 31,
                                                                                              (Unaudited)                   2002
                                                                                              -----------               -----------
<S>                                                                                          <C>                        <C>
ASSETS
Investments in real estate, at cost
  Land                                                                                             $6,086                    $6,086
  Buildings and improvements                                                                       64,902                    64,867
                                                                                              -----------               -----------
                                                                                                   70,988                    70,953
  Less - Accumulated depreciation                                                                 (12,563)                  (12,057)
                                                                                              -----------               -----------
       Investments in real estate, net                                                             58,425                    58,896

Other assets
  Cash and cash equivalents - unrestricted                                                          3,034                     3,897
                            - restricted                                                            2,196                     1,968
  Accounts receivable and prepayments, net of allowances
      of $608 and $601, respectively                                                                  890                     1,625
  Investments                                                                                     103,993                   103,974
  Inventory, net of reserve                                                                         1,117                     1,033
  Unamortized debt issue costs, net                                                                   259                       278
  Other                                                                                               147                       154
                                                                                              -----------               -----------
    Total assets                                                                                 $170,061                  $171,825
                                                                                              ===========               ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities
  Mortgage loan                                                                                   $41,690                   $41,781
  Note payable                                                                                         76                        80
  Senior notes                                                                                     12,538                    12,538
  Accounts payable and accrued liabilities                                                          8,073                     8,332
  Dividends payable                                                                                   516                       516
  Deferred items                                                                                      609                       471
                                                                                              -----------               -----------
    Total liabilities                                                                              63,502                    63,718
                                                                                              -----------               -----------

Shareholders' equity
  Convertible preferred shares of beneficial interest, $25 per share liquidation
    preference, 2,300,000 shares authorized, 983,082 shares
      outstanding at March 31, 2003 and December 31, 2002                                          23,131                    23,131
  Shares of beneficial interest, $1 par, unlimited authorized, 34,814,361
      outstanding at March 31, 2003 and December 31, 2002                                          34,814                    34,814
  Additional paid-in capital                                                                      207,634                   207,634
  Accumulated distributions in excess of net income                                              (159,020)                 (157,472)
                                                                                              -----------               -----------
    Total shareholders' equity                                                                    106,559                   108,107
                                                                                              -----------               -----------
Total liabilities and shareholders' equity                                                       $170,061                  $171,825
                                                                                              ===========               ===========
</TABLE>

                   See Notes to Combined Financial Statements.

                                        2
<PAGE>
FIRST UNION REAL ESTATE EQUITY and MORTGAGE INVESTMENTS

Combined Statements of Operations

<TABLE>
<CAPTION>
Unaudited (In thousands, except per share data)                           Three Months Ended
                                                                               March 31,
                                                                  -------------------------------------
                                                                      2003                     2002
                                                                  -----------               -----------
<S>                                                               <C>                       <C>
Revenues
  Rents                                                                $3,445                    $3,297
  Sales                                                                   726                       945
  Interest                                                                259                       461
                                                                  -----------               -----------
                                                                        4,430                     4,703
                                                                  -----------               -----------

Expenses
  Property operating                                                    1,181                     1,270
  Cost of goods sold                                                    1,087                     1,373
  Real estate taxes                                                       225                       220
  Depreciation and amortization                                           535                       509
  Interest                                                              1,272                     1,203
  General and administrative                                            1,162                     1,618
                                                                  -----------               -----------
                                                                        5,462                     6,193
                                                                  -----------               -----------
Net loss                                                               (1,032)                   (1,490)
   Preferred dividend                                                    (516)                     (517)
                                                                  -----------               -----------
Net loss applicable to shares of beneficial interest                  $(1,548)                  $(2,007)
                                                                  ===========               ===========

Per share data

Basic:
Net loss applicable to shares of beneficial interest                   $(0.04)                   $(0.06)
                                                                  ===========               ===========

Diluted:
Net loss applicable to shares of beneficial interest                   $(0.04)                   $(0.06)
                                                                  ===========               ===========

Basic weighted average shares                                          34,814                    34,806
                                                                  ===========               ===========
Diluted weighted average shares                                        34,814                    34,806
                                                                  ===========               ===========
</TABLE>

                   See Notes to Combined Financial Statements.

                                        3
<PAGE>
FIRST UNION REAL ESTATE EQUITY and MORTGAGE INVESTMENTS

Combined Statements of Cash Flows

<TABLE>
<CAPTION>
Unaudited (In thousands)                                                                               Three Months
                                                                                                      Ended March 31,
                                                                                           -------------------------------------
                                                                                               2003                      2002
                                                                                           -----------               -----------
<S>                                                                                        <C>                       <C>
Cash provided by (used for) operating activities
  Net loss                                                                                     $(1,032)                  $(1,490)
  Adjustments to reconcile net loss to net cash provided by
    (used for) operating activities
      Depreciation and amortization                                                                535                       509
      Increase (decrease) in deferred items                                                        138                      (313)
      Net changes in other operating assets and liabilities                                        392                       500
                                                                                           -----------               -----------
        Net cash provided by (used for) operating activities                                        33                      (794)
                                                                                           -----------               -----------

Cash (used for) provided by investing activities
  Purchase of investments                                                                     (335,812)                 (342,955)
  Proceeds from maturity of investments                                                        335,793                   344,823
  Investments in building and tenant improvements                                                  (38)                      (61)
                                                                                           -----------               -----------
        Net cash (used for) provided by investing activities                                       (57)                    1,807
                                                                                           -----------               -----------

Cash used for financing activities
  Decrease in note payable                                                                          (4)                       (4)
  Repayment of mortgage loan - principal payments                                                  (91)                      (85)
  Dividends paid on preferred shares of beneficial interest                                       (516)                     (517)
                                                                                           -----------               -----------
        Net cash used for financing activities                                                    (611)                     (606)
                                                                                           -----------               -----------
(Decrease) increase in cash and cash equivalents                                                  (635)                      407
Cash and cash equivalents at beginning of period                                                 5,865                     4,724
                                                                                           -----------               -----------
Cash and cash equivalents at end of period                                                      $5,230                    $5,131
                                                                                           ===========               ===========


Supplemental Disclosure of Cash Flow Information
   Interest paid                                                                                  $994                    $1,481
                                                                                           ===========               ===========

Supplemental Disclosure of Non-Cash Financing Activities
Dividends accrued on shares of beneficial interest and preferred shares
   of beneficial interest                                                                         $516                    $3,998
                                                                                           ===========               ===========
</TABLE>

                   See Notes to Combined Financial Statements.

                                        4
<PAGE>
             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q MARCH 31, 2003
                     NOTES TO COMBINED FINANCIAL STATEMENTS


General

         The accompanying financial statements represent the combined results of
the registrant, First Union Real Estate Equity and Mortgage Investments (the
"Trust") and First Union Management Inc. (the "Company"). Under a trust
agreement, the common shares of the Company are held for the benefit of the
shareholders of the Trust. Accordingly, the financial statements of the Company
and the Trust have been combined.

         The combined financial statements included herein have been prepared by
the Trust, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations, although the Trust
believes that the disclosures contained herein are adequate to make the
information presented not misleading. These combined financial statements should
be read in conjunction with the combined financial statements and the notes
thereto included in the Trust's latest annual report on Form 10-K.

         The combined financial statements reflect, in the opinion of the Trust,
all adjustments (consisting of normal recurring adjustments) necessary to
present fairly the combined financial position and results of operations for the
respective periods in conformity with accounting principles generally accepted
in the United States of America consistently applied.

Accounting Policies

         In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and
Technical Corrections," which updates, clarifies and simplifies existing
accounting pronouncements. In part, this statement rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt." FASB No. 145 is
effective for fiscal years beginning after May 15, 2002. Upon adoption,
enterprises must reclassify prior period items that do not meet the
extraordinary item classification criteria in Accounting Principles Board
("APB") No. 30. The adoption of this statement had no impact on the Trust's
combined financial statements.

         In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing or other exit or disposal activity. SFAS
No. 146 is effective prospectively for exit and disposal activities initiated
after December 31, 2002, with earlier adoption encouraged.

         In November 2002, the FASB issued Interpretation No. 45, "Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The Interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a

                                       5
<PAGE>
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. This Interpretation does not prescribe a specific
approach for subsequently measuring the guarantor's recognized liability over
the term of the related guarantee. The disclosure provisions of this
Interpretation were effective for the Trust's December 31, 2002 combined
financial statements. The initial recognition and initial measurement provisions
of this Interpretation are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. This Interpretation had no effect on
the Trust's combined financial statements. The Trust's guarantees are disclosed
in the combined financial statements.

         In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities." This Interpretation clarifies the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The provisions of
the Interpretation are immediately effective for all variable interests in
variable interest entities created after January 31, 2003, and the Trust will
need to apply its provisions to any existing variable interests in variable
interest entities by no later than December 31, 2004. The Trust does not
anticipate that this Interpretation will have an impact on its combined
financial statements.

Earnings Per Share

The computation of basic and diluted earnings per share is as follows (in
thousands, except per share data):

<TABLE>
<CAPTION>
                                                                            Three Months Ended
                                                                                 March  31,
                                                                  ---------------------------------------
                                                                      2003                       2002
                                                                  ------------               ------------
<S>                                                               <C>                        <C>
Basic
Net loss                                                          $     (1,032)              $     (1,490)
Preferred dividend                                                        (516)                      (517)
                                                                  ------------               ------------
Net loss applicable to shares of beneficial interest              $     (1,548)              $     (2,007)
                                                                  ============               ============

Basic weighted average shares                                           34,814                     34,806
                                                                  ============               ============
Net loss per share                                                $      (0.04)              $      (0.06)
                                                                  ============               ============

Diluted
Net loss                                                          $     (1,032)              $     (1,490)
Preferred dividend                                                        (516)                      (517)
                                                                  ------------               ------------
Net loss applicable to shares of beneficial interest              $     (1,548)              $     (2,007)
                                                                  ============               ============

Basic weighted average shares                                           34,814                     34,806
Convertible preferred shares                                                --                         --
                                                                  ------------               ------------

Diluted weighted average shares                                         34,814                     34,806
                                                                  ============               ============
Net loss per share                                                $      (0.04)              $      (0.06)
                                                                  ============               ============
</TABLE>

The preferred shares are not included in the diluted earnings per share
calculation for the three months ended March 31, 2003 and 2002 because they are
anti-dilutive.


                                       6
<PAGE>
Share Options

         The Trust accounts for stock option awards in accordance with APB No.
25, "Accounting for Stock Issued to Employees" and has adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Consequently, compensation cost has not been recognized for the
share option plans except for the options granted in 1999 which had an exercise
price that was less than the grant date per share market price. Had the Trust
applied the expense recognition provisions of SFAS No. 123, there would have
been no impact on the results of operations for the periods ended March 31,
2003 and 2002.

Dividends

         The Trust declared a dividend of $0.5 million ($0.525 per share) to
Series A Cumulative Preferred Shareholders in the first quarter of 2003. The
first quarter dividend was paid April 30, 2003 to shareholders of record at the
close of business on March 31, 2003.

Legal Proceedings

Preferred Shareholders Lawsuit

         Kimeldorf v. First Union, et al. On April 15, 2002, the Trust was
served with a complaint filed in the Supreme Court of New York in New York
County on behalf of a purported holder of the Trust's convertible preferred
shares. Among the allegations made by the plaintiff is that the proposed
transaction with Gotham Golf Corp. ("Gotham Golf") was approved by the Trust's
Board of Trustees in violation of fiduciary duties owed to the holders of the
Trust's convertible preferred shares. The suit seeks, among other things,
unspecified damages, an injunction of the proposed transaction and the court's
certification of the lawsuit as a class action. Named as defendants in the
lawsuit were the Trust, its five then trustees and Gotham Partners, L.P.
("Gotham Partners"). On November 21, 2002 the New York Supreme Court of New York
County issued an order granting motions for preliminary injunction. On December
6, 2002, the New York Supreme Court for New York County issued an order
reaffirming its preliminary injunction barring the proposed merger of the Trust
with and into Gotham Golf. The court's order also extended indefinitely the
preliminary injunction previously granted with respect to the proposed merger
transaction and directed the parties of the lawsuit to attend a preliminary
conference for the purpose of scheduling discovery.

         The Trust filed a notice of appeal of the preliminary injunction with
the Appellate Division of the New York Supreme Court. Oral argument with respect
to the appeal was held before a judicial panel of the Appellate Division - First
Department of the New York Supreme Court on March 11, 2003. There is no specific
timetable for the appellate court to render its decision.

         It is not possible to predict the outcome of the appellate process with
respect to lifting the injunction. In the event that the Appellate Division
rules that the injunction should not be lifted, the case will proceed to trial
on the merits. In the event that the injunction imposed by the trial court were
lifted and dissolved, it is the intention of the Trust and, to the best of the
Trust's knowledge, Gotham Partners and the other Gotham Partners-affiliated
parties to the proposed merger transaction, to take the steps necessary to
consummate the proposed transaction. However, any party to the Kimeldorf
litigation may seek leave of the Appellate Division to appeal to the Court of
Appeals of the State of New York an adverse ruling by the Appellate Division
regarding the injunction granted by the trial court.


                                        7
<PAGE>
         On or about November 8, 2002, First Carolina Investors, Inc. ("First
Carolina") a holder of preferred shares, filed a separate lawsuit in New York
Supreme Court for New York County, naming the same defendants as in the
Kimeldorf case. On or about December 20, 2002, plaintiffs Kimeldorf and First
Carolina filed a consolidated amended complaint alleging, among others, breach
of contract; aiding and abetting breach of contract; tortuous interference with
the contract; breach of fiduciary duties; aiding and abetting of breach of
fiduciary duties; and unconscionability against the defendants, styled Kimeldorf
et al. v. First Union, et al. This consolidated amended complaint essentially
consolidated the separate First Carolina complaint, filed on or about November
8, 2002 with the complaint of Mr. Kimeldorf filed in April 2002.

         On April 30, 2003, the trial court granted the plaintiff's motion to
certify the litigation as a class action.

         The Trust regards the lawsuit as being without merit and will
vigorously defend against the asserted claims.

Common Shareholders Lawsuits

         Fink v. First Union. On or about January 24, 2003, the Trust was served
with a complaint filed in the Supreme Court of New York, New York County on
behalf of a purported holder of the Trust's common shares, on behalf of himself
and the common shareholders as a class. The lawsuit seeks a declaration that the
lawsuit is maintainable as a class action and a certification that the
plaintiff, Robert Fink, is the representative of the class. Named as defendants
in the lawsuit are the Trust, Gotham Partners, the companies affiliated with
Gotham Partners and the Trust that are parties to the Merger Agreement, William
Ackman and the four current Trustees of the Trust. Among the allegations
asserted are breach of fiduciary duty and aiding and abetting thereof in
connection with the transactions contemplated by the Merger Agreement. The
relief requested by the plaintiff includes an injunction preventing the
defendants from proceeding with consummation of the merger, rescission of the
merger if it occurs, an accounting for any profits realized by the defendants as
a result of the actions complained of, an order permitting the creation of a
shareholders' committee composed of the Trust common shareholders and their
representatives to manage the affairs of the Trust, compensatory damages and the
costs and disbursements of plaintiff's counsel.

         On or about February 14, 2003, the parties to this lawsuit stipulated
that the defendants need not answer or otherwise respond to the complaint for an
indefinite period of time. The stipulation is revocable by the plaintiff at any
time. The Trust believes that the purpose of the stipulation was to delay court
proceedings in this lawsuit until the outcome of the appeal of the injunction
entered in the Kimeldorf, et al. v. First Union, et al. case (see above) is
decided by the Appellate Division.

         The Trust regards the lawsuit as without merit and plans to vigorously
defend against the allegations. The Trust will oppose any attempt by the
plaintiff to interfere with the transactions contemplated by the Merger
Agreement, which was approved by more than 64% of the outstanding common shares
of the Trust and by approximately 98% of the common shares voted at a special
meeting of shareholders held on November 27, 2002.

         K-A & Company, LTD. v. First Union. On or about February 12, 2003,
certain of the Trust Trustees and, later, the Trust, were served with a
complaint filed in the Court of Common Pleas, Cuyahoga County, Ohio, by a
purported holder of the Trust's common shares, on behalf of itself and the Trust
common shareholders as a class. Named as defendants in the lawsuit are the
Trust, Gotham Partners, William Ackman and the four current Trustees of the
Trust. The allegations made and the relief requested in the K-A suit are
substantially identical to those of the Fink v. First Union suit referenced
above. The lawsuit seeks a declaration that the lawsuit is

                                        8
<PAGE>
maintainable as a class action and certification that the plaintiff, K-A &
Company, Ltd., is the representative of the class. Among the allegations
asserted are breach of fiduciary duty and aiding and abetting thereof in
connection with the transactions contemplated by the Merger Agreement. This
lawsuit was removed by notice filed by defendants to the United States District
Court, Northern District of Ohio, Eastern Division (Case No. 1:03 CV 0460).

         The relief requested by the plaintiff includes an injunction preventing
the defendants from proceeding with consummation of the merger, rescission of
the merger if it occurs, an accounting for any profits realized by the
defendants as a result of the actions complained of, an order permitting the
creation of a shareholders' committee composed of the Trust common shareholders
and their representatives to manage the affairs of the Trust, compensatory
damages and the costs and disbursements of plaintiff's counsel.

         On April 10, 2003, the plaintiff filed a motion for a preliminary
injunction seeking an order preventing the defendants from consummation of the
merger. The defendants have filed a motion requesting the court to stay
consideration of the plaintiff's motion pending a decision on the appeal of the
preliminary injunction entered by the New York Supreme Court for New York County
in Kimeldorf v. First Union, described above. The court has not ruled on either
motion and there is no timetable for a ruling.

         As with the Fink v. First Union lawsuit, the Trust regards the lawsuit
as without merit and plans to vigorously defend against the allegations.

Peach Tree Mall Litigation

         The Trust, as one Plaintiff in a class action composed of numerous
businesses and individuals, has pursued legal action against the State of
California associated with the 1986 flood of Sutter Buttes Center, formerly
Peach Tree Mall. In September 1991, the court ruled in favor of the plaintiffs
on the liability portion of the inverse condemnation suit, which the State of
California appealed. In the third quarter of 1999, the 1991 ruling in favor of
the Trust and the other plaintiffs was reversed by the State of California
Appeals Court, which remanded the case to the trial court for further
proceedings. After the remand to the trial court, the Trust and the other
plaintiffs determined to pursue a retrial before the court. The retrial of the
litigation commenced February 2001 and was completed July 2001. In November
2001, the trial court issued a decision that generally holds in favor of the
State of California. In February 2002, the Plaintiffs in the case filed a notice
of appeal of the ruling of the trial court. Both the Plaintiffs and the State
have filed their opening briefs in the California Court of Appeals, and the
Plaintiffs are to submit a reply brief in May 2003. The Trust is unable to
predict at this time whether or not it will recover any amount of its damage
claims in this legal proceeding.

Indemnity to Imperial Parking Corporation

         In 1999, Newcourt Financial Ltd. ("Newcourt") brought a claim in
Ontario against an affiliate of the Trust and Imperial Parking Limited alleging
a breach of a contract between the Trust affiliate and Newcourt's
predecessor-in-interest, Oracle Credit Corporation and Oracle Corporation
Canada, Inc. The Trust affiliate and Imperial Parking Limited brought a separate
action in British Columbia against Newcourt, Oracle Credit Corporation and
Oracle Corporation Canada claiming, among other things, that the contract at
issue was not properly authorized by the Trust's board of trustees and the
Imperial Parking Limited board of directors. On March 27, 2000, in connection
with the spinoff of Imperial Parking Corporation (the successor in interest to
Imperial Parking Limited) to the Trust's shareholders, the Trust granted a full
indemnity to Imperial Parking Corporation in respect of all damages arising from
the outstanding actions.


                                       9
<PAGE>
         Numerous attempts to settle this matter have not been successful. The
Trust has reserved $575,000 in its combined financial statements for this claim.
The reserved amount consists of the face amount of the contract of $425,000 and
estimated costs of $150,000. The amount of the claim, $825,000, includes
Newcourt's calculation of interest on the amount due at the default rate under
the contract. The Trust believes that, due to the failure of attempted
settlement negotiations, discovery will commence, and the matter will become
more actively litigated. The Trust intends to defend vigorously against the
claims brought against the parties that it has indemnified and to pursue their
separate claims with respect to this matter.

Mountaineer Mall Claim

         The Trust was named as a defendant in a lawsuit filed in connection
with a contractor's claim relative to the construction of a portion of the
Mountaineer Mall, located in Morgantown, West Virginia. The construction of the
mall commenced in 1993 and was completed in 1995. The mall was sold in July
1999. A trial on the merits of the lawsuit was held in 1997.

         In October 2002, the court issued findings of fact and conclusions of
law providing that the claimant was entitled to recover from the Trust the
principal amount of $266,076 in damages plus various interest amounts, which,
when added to the principal amount, would result in an aggregate damage award of
$494,382 against the Trust. The court's order provided, however, that the amount
of the damage award is subject to offset by the amount of legal fees and
expenses reasonably and necessarily incurred by the Trust in defending a certain
mechanic's lien claim asserted by the plaintiff in the lawsuit. The court
further directed that the plaintiff and the Trust negotiate in good faith as to
the amount of such expense and that, if the parties are unable to agree as to
the appropriate offset, the court would schedule an evidentiary hearing for the
purpose of resolving the issue.

         In response to the October 2002 order, the Trust's counsel in the
litigation has been attempting to determine the amount of allowable offset to
reduce the damages assessed against the Trust. As this matter is subject to
further negotiation and possible further court proceedings to reach a final
resolution, the Trust is not able to predict the final outcome of this claim.
The Trust does not expect that the outcome will have a significant impact on the
combined financial position of the Trust.

Proposed Transaction

         On February 13, 2002, the Trust entered into a definitive agreement of
merger and contribution with, among others, Gotham Partners, a shareholder of
the Trust that is controlled by affiliates of William A. Ackman, who was at the
time Chairman of the Board of Trustees of the Trust, and Gotham Golf, a Delaware
corporation controlled by Gotham Partners, pursuant to which the Trust agreed to
merge with and into Gotham Golf. The parties subsequently adopted Amendment No.
1 to the merger agreement on April 24, 2002, Amendment No. 2 to the merger
agreement on September 24, 2002 and Amendment No. 3 to the merger agreement on
October 24, 2002. If consummated, the proposed transaction will result in the
Trust's common shareholders receiving as merger consideration for each common
share:

-     $1.98 in cash;

-     a choice of (a) an additional $0.35 in cash or (b) approximately 1/174th
      (0.0057461) of a debt instrument to be issued by Southwest Shopping
      Centers, Co. II, L.L.C. ("Southwest Shopping Centers"), with a face value
      of $100 (which is an effective price of $60.91 per face value of $100),
      indirectly secured by the Trust's principal real estate assets; and


                                       10
<PAGE>
-     three-fiftieths (0.06) of a non-transferable uncertificated subscription
      right, with each whole right exercisable to purchase one Gotham Golf
      common share at $20.00 per share and, subject to availability and
      proration, additional Gotham Golf common shares at $20.00 per share, for
      up to an aggregate of approximately $41 million of Gotham Golf common
      shares.

         The proposed transaction is subject to several conditions, including
the approval of the Trust's shareholders and the obtaining of certain third
party consents. The proposed transaction was approved by the Trust's common
shareholders at a special meeting held on November 27, 2002. There can be no
assurance that the proposed transaction approved by the Trust's common
shareholders will be consummated.

         In November 2002, the plaintiff in the preferred shareholder litigation
(see "Legal Proceedings") filed with the New York Supreme Court for New York
County an Order to Show Cause why the transaction should not be enjoined. The
court held a hearing on that issue on November 20. On November 21, 2002, the
court issued an order denying the defendant's motion to dismiss the complaint
and granting motions for preliminary injunction and expedited discovery in
connection with the proposed merger. The court also set a hearing for November
26, 2002 to determine whether to grant further relief to plaintiff with respect
to the proposed transaction. An evidentiary hearing was held on November 26, 27
and December 2, 2002 with respect to this matter. Thereafter, the court issued
an order dated December 6, 2002, reaffirming its preliminary injunction barring
the proposed merger of the Trust with and into Gotham Golf. The court's order
extended indefinitely the preliminary injunction previously granted with respect
to the proposed merger transaction and directed the parties to the lawsuit to
attend a preliminary conference for the purpose of scheduling discovery. The
Trust filed a notice of appeal and began pursuit of its appeal of the court's
order barring the transaction in the Appellate Division of the New York Supreme
Court. The issue of the lifting of the injunction was briefed by the parties to
the litigation and oral argument on the appeal was heard by the Appellate
Division of the New York Supreme Court on March 11, 2003. No assurance can be
given that the injunction will be lifted, that all required third party consents
will be obtained and that the transaction will be consummated.

Contingencies

VenTek

         The Trust has provided performance guarantees entered into with respect
to contracts of the Company's manufacturing subsidiary, VenTek International,
Inc. ("VenTek"), with two transit authorities, which contracts are in the
amounts of $5.3 million and $6.2 million for the manufacturing, installation and
maintenance of transit ticket vending equipment manufactured by VenTek. The
guarantees expire within the next two years based upon the projected completion
dates anticipated by VenTek and the transit agencies. No amounts have been drawn
against these guarantees. Since these projects are entering their final stages,
management does not anticipate that payment will have to be made under the
guarantees; however, if VenTek is unable to perform in accordance with these
contracts, and subsequent change orders the Trust may be responsible for partial
payment under these guarantees. In connection with one of the contracts, VenTek
settled a claim for liquidated damages for approximately $0.1 million during the
three months ended March 31, 2003.

Park Plaza Mall

         The Trust is aware of the proposed construction of a new mall in the
vicinity of Park Plaza Mall (the "Mall") by a partnership of a mall developer
and the owner and operator of the anchor department stores at the Mall who would
be the anchor department store at the proposed new mall. Legal actions have been
taken by local citizens of Little Rock, Arkansas to reverse the decision of the
Little Rock board of directors with respect to the zoning for the development of
the proposed new mall. On June 5, 2002, the court issued an opinion

                                       11
<PAGE>
invalidating the decision of the Little Rock board of directors with respect to
zoning of the proposed new mall. Furthermore, the court permanently enjoined the
City of Little Rock from issuing any building permits or taking any other action
pursuant to the invalid ordinances with respect to the proposed new mall. The
proponents of the new mall have appealed the decision to the Supreme Court of
Arkansas with no decision expected before June 2003. It is also possible that
proponents of the new mall will file a new application to rezone the proposed
area for the new mall for commercial use and, specifically for large-scale
retail use. The administrative expenses, principally legal fees related to this
contingency have been paid by the Trust.

         Regardless of whether the proposed new mall is built at the site in
question, under the terms of an operating covenant with Dillard's Department
Stores, Inc. ("Dillard's"), which has two department stores that are the anchor
stores at the Mall, Dillard's has no obligation to maintain its operations at
the Mall beyond July 2003. Dillard's has been approached to extend the operating
covenant at the Mall. To date, it has declined to do so, however, under the
terms of the operating covenant, Dillard's is permitted to continue operations
at the Mall through 2031. If Dillard's does not maintain its presence as an
anchor store at the Mall, the Mall would experience a loss of revenue and likely
an event of default under the mortgage, thereby causing the value of the Mall to
be materially and adversely affected. In such circumstances, there would be an
impairment of the value of the property and a loss could be recognized. There
can be no assurance that Dillard's will maintain its presence as an anchor store
at the Mall.

Proposed Transaction

         The Trust is contractually obligated under the merger agreement to
pursue the proposed transaction with Gotham Partners unless a superior proposal,
as defined in the agreement, is made. The pending preferred shareholder
litigation opposing the transaction does not give the Trust the contractual
right under the merger agreement to terminate its obligations to complete the
transaction. If the Trust were to seek to terminate its obligations solely for
that reason, the Trust could incur liability to Gotham Partners that may include
responsibility for the payment of Gotham Partners' expenses for the transaction,
which the Trust believes may exceed $8 million.

Business Segments

         The Trust's and Company's business segments include ownership of a
shopping center, an office building, and a parking and transit ticket equipment
manufacturing company. Management evaluates performance based upon net operating
income. With respect to property assets, net operating income is property rent
less property operating expense, and real estate taxes. With respect to VenTek,
a manufacturer of transit ticketing and parking equipment, net operating income
is sales revenue less cost of goods sold. Corporate assets consist primarily of
cash and cash equivalents, investments and deferred issue costs for senior
notes. All intercompany transactions between segments have been eliminated (see
table of business segments).


                                       12
<PAGE>
Business Segments

<TABLE>
<CAPTION>
                                              Three Months Ended March 31,
                                           ---------------------------------
                                              2003                    2002
                                           ---------               ---------
<S>                                        <C>                     <C>
Rents and Sales
       Shopping Center                     $   3,105               $   2,927
       Office Building                           340                     337
       Ventek                                    726                     945
       Corporate                                  --                      33
                                           ---------               ---------
                                               4,171                   4,242

Less - Operating Expenses and
  Costs of Goods Sold
       Shopping Center                           968                   1,077
       Office Building                           200                     193
       Ventek                                  1,087                   1,373
       Corporate                                  13                      --
                                           ---------               ---------
                                               2,268                   2,643

Less - Real Estate Taxes
       Shopping Center                           202                     199
       Office Building                            23                      21
                                           ---------               ---------
                                                 225                     220

Net Operating Income (Loss)
       Shopping Center                         1,935                   1,651
       Office Building                           117                     123
       Ventek                                   (361)                   (428)
       Corporate                                 (13)                     33
                                           ---------               ---------
                                               1,678                   1,379
</TABLE>


                                       13
<PAGE>
Business Segments (Continued)

<TABLE>
<CAPTION>
                                                   Three Months Ended March 31,
                                                  -----------------------------
                                                    2003                  2002
                                                  -------               -------
<S>                                               <C>                   <C>
Less - Depreciation and Amortization              $   535               $   509

Less - Interest Expense                             1,272                 1,203

Corporate Income (Expense)
       Interest                                       259                   461
       General and administrative                  (1,162)               (1,618)
                                                  -------               -------

Net Loss before Preferred Dividend                $(1,032)              $(1,490)
                                                  =======               =======



Capital Expenditures
       Shopping Center                            $     4               $     9
       Office Building                                 32                    50
       Ventek                                           2                     2
                                                  -------               -------
                                                  $    38               $    61
                                                  =======               =======
</TABLE>

<TABLE>
<CAPTION>
                                                  March 31,
                                    ----------------------------------
                                       2003                    2002
                                    ----------              ----------
<S>                                 <C>                     <C>
Identifiable Assets
       Shopping Center              $   58,400              $   59,529
       Office Building                   2,390                   2,351
       Ventek                            1,774                   3,330
       Corporate                       107,497                 118,176
                                    ----------              ----------
Total Assets                        $  170,061              $  183,386
                                    ==========              ==========
</TABLE>


                                       14
<PAGE>
ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS.

2002 TRANSACTION

THE PROPOSED TRANSACTION

         In April 2001, the Board of Trustees of the Trust established a Special
Committee for the purpose of evaluating and advising the Board with respect to
proposed transactions and other possible business alternatives that the Trust
may pursue. The Special Committee, which is composed of Daniel J. Altobello and
Bruce R. Berkowitz, independent Trustees of the Trust, retained Libra
Securities, LLC and Duff & Phelps LLC as its financial advisors and Shaw Pittman
LLP as its independent legal counsel.

         On February 13, 2002, the Trust entered into a definitive agreement of
merger and contribution with, among others, Gotham Partners, L.P., ("Gotham
Partners") a shareholder of the Trust that is controlled by affiliates of
William A. Ackman, who was at the time Chairman of the Board of Trustees of the
Trust, and Gotham Golf Corp. ("Gotham Golf"), a Delaware corporation controlled
by Gotham Partners, pursuant to which the Trust agreed to merge with and into
Gotham Golf. The merger agreement provided that the Trust's common shareholders
would receive as merger consideration for each common share $2.20 in cash,
subject to possible deductions on account of dividends paid to the Trust's
common shareholders prior to completion of the transaction, breaches of certain
representations, warranties and covenants contained in the merger agreement and
costs, fees and expenses associated with obtaining certain third-party consents
for the proposed transaction, a choice of an additional $0.35 in cash or a debt
instrument and a subscription right to purchase common shares of Gotham Golf.
The merger agreement also provided that Gotham Golf would exchange the
outstanding shares of the Trust's convertible preferred shares for shares of
Gotham Golf Series A Cumulative Convertible Redeemable Preferred Stock, par
value $25.00 per share, having terms and conditions substantially identical to
those as the Trust's convertible preferred shares had with respect to the Trust.

         On April 24, 2002, the parties adopted Amendment No. 1 to the merger
agreement to change the formula in which the conversion price of Gotham Golf
convertible preferred shares is determined and to extend the time during which
Gotham Partners can elect not to include the note option as part of the merger
consideration to any time prior to the effective time of the merger.

         On September 24, 2002, the parties adopted Amendment No. 2 to the
merger agreement to reduce the cash merger consideration by $0.20 to reflect the
amount that would have been deducted from the merger consideration at closing on
account of dividends paid to the Trust's common shareholders prior to completion
of the transaction and by an additional $0.02 to reflect the Trust's and Gotham
Partners's agreement, based on the good faith estimate of the parties, of the
amount that may result from possible breaches of certain representations,
warranties and covenants contained in the merger agreement and costs, fees and
expenses associated with obtaining certain third-party consents for the proposed
transaction. The parties also agreed to eliminate from the merger agreement all
provisions relating to any reduction in the cash merger consideration.

         Finally, on October 24, 2002, in order to facilitate the listing of the
Gotham Golf convertible preferred shares on the American Stock Exchange, the
parties adopted Amendment No. 3 to the merger agreement to provide a right to
holders of Gotham Golf convertible preferred shares to approve of, by a majority
vote, the creation of, or increase in the authorized amount of, any additional
class of preferred stock with a liquidation preference equal to that of the
Gotham Golf convertible preferred shares.


                                       15
<PAGE>
         If consummated, the proposed transaction as contemplated by the amended
merger agreement will result in the Trust's common shareholders receiving as
merger consideration for each common share:

-     $1.98 in cash;

-     a choice of (a) an additional $0.35 in cash or (b) approximately 1/174th
      (0.0057461) of a debt instrument to be issued by Southwest Shopping
      Centers, Co. II, L.L.C., with a face value of $100 (which is an effective
      price of $60.91 per face value of $100), indirectly secured by the Trust's
      principal real estate assets (such debt instrument referred to in this
      document as a note); and

-     three-fiftieths (0.06) of a non-transferable uncertificated subscription
      right, with each whole right exercisable to purchase one Gotham Golf
      common share at $20.00 per share and, subject to availability and
      proration, additional Gotham Golf common shares at $20.00 per share, for
      up to an aggregate of approximately $41 million of Gotham Golf common
      shares.

      The proposed transaction was approved by the Trust's common shareholders
at a special meeting held on November 27, 2002. There can be no assurance that
the proposed transaction approved by the Trust's common shareholders will be
consummated.

Under the proposed transaction

-     The Trust will merge with and into Gotham Golf a new corporation formed by
      Gotham Golf Partners, L.P. ("Gotham Golf Partners"), which is a golf
      course acquirer, owner and operator. As part of the transaction, Gotham
      Partners and certain other Gotham Golf Partners equity holders will
      contribute their respective limited partnership interests in Gotham Golf
      Partners to Gotham Golf and their respective general partnership interests
      in Gotham Golf Partners to a wholly owned limited liability company of
      Gotham Golf, in exchange for common stock of Gotham Golf. As a result,
      after the proposed transaction, Gotham Golf will directly and indirectly
      own approximately 92.5% of the equity interests in Gotham Golf Partners,
      and Gotham Partners and the other equity holders that contributed their
      equity interests in Gotham Golf Partners in the proposed transaction will
      own approximately 52.55% of the shares of Gotham Golf stock, assuming that
      (i) all of the subscription rights to receive Gotham Golf common shares
      are exercised and (ii) no other equity of Gotham Golf will be issued on or
      prior to the effective time of the proposed transaction.

-     Each note will have a face amount of $100, which is equivalent to
      approximately $0.575 per share, and will bear interest at 11% per annum on
      its face amount. The notes will be secured by a pledge of two underlying
      loans: (1) an approximate $3.5 million first leasehold mortgage on the
      Circle Tower office building in Indianapolis, Indiana and (2) an
      approximate $16.5 million mezzanine loan on the Park Plaza Mall in Little
      Rock, Arkansas. Holders of notes will receive a pass-through of the
      economic attributes of the two underlying loans.

-     Shareholders who receive their proportionate share of the notes in the
      transaction will have the right to require the issuer of the notes to
      redeem them on the 90th day after the effective time of the merger for
      $0.35 in cash for every approximately 1/174th of a note received as merger
      consideration. Gotham Partners has agreed to purchase from the issuer any
      redeemed notes for the same redemption price paid by the issuer to the
      shareholders.


                                       16
<PAGE>
-     The notes will not be issued unless certain consents are obtained from the
      mortgage lender on the Park Plaza Mall and the rating agencies that
      originally rated the certificates backed by the first Park Plaza Mall
      mortgage. If any required consents, approvals or similar clearances with
      respect to the notes cannot be timely obtained, the merger consideration
      will be adjusted to eliminate the ability for common shareholders to elect
      to receive the notes in lieu of part of the cash consideration, and all
      shareholders will receive cash consideration of $2.33 per common share.

-     Convertible preferred shareholders of the Trust will receive convertible
      preferred shares of Gotham Golf, as provided for in the Certificate of
      Designations for the convertible preferred shares of the Trust. The
      existing 8.875% unsecured notes will remain outstanding according to their
      terms and will become obligations of Gotham Golf after the closing of the
      transaction.

-     The Trust, Gotham Partners and each of the members of the Board of
      Trustees have entered into a Voting Agreement, pursuant to which the
      parties thereto have agreed to vote a collective 7,424,943 common shares,
      or approximately 21.3% of the total outstanding common shares, for the
      approval of the proposed transaction.

-     The merger is subject to certain customary closing conditions, including
      approval by the Trust's common shareholders and receipt of certain
      third-party consents. There can be no assurance that the proposed
      transaction will be consummated.

      The Trust's approval of the merger agreement was based on the
recommendation of the Special Committee. The Special Committee concluded that
the transaction was in the best interests of the Trust and the Trust's common
shareholders (other than Gotham Partners and its affiliates), where such
shareholders elect to receive the full cash consideration in the merger. The
Board of Trustees of the Trust, with Mr. Ackman not participating, unanimously
voted in favor of the transaction. The Special Committee was advised by Libra
Securities, LLC and Duff & Phelps, LLC, and Gotham Partners and its affiliates
were advised by Mercury Partners.

      In November 2002, the plaintiff in the preferred shareholder litigation
(see "Part II, Item 1. Legal Proceedings") filed with the New York Supreme Court
for New York County an Order to Show Cause why the transaction should not be
enjoined. The court held a hearing on that issue on November 20. On November 21,
2002, the court issued an order denying the defendant's motion to dismiss the
complaint and granting motions for preliminary injunction and expedited
discovery in connection with the proposed merger. The court also set a hearing
for November 26, 2002 to determine whether to grant further relief to plaintiff
with respect to the proposed transaction. An evidentiary hearing was held on
November 26, 27 and December 2, 2002 with respect to this matter. Thereafter,
the court issued an order dated December 6, 2002, reaffirming its preliminary
injunction barring the proposed merger of the Trust with and into Gotham Golf.
The court's order extended indefinitely the preliminary injunction previously
granted with respect to the proposed merger transaction and directed the parties
to the lawsuit to attend a preliminary conference for the purpose of scheduling
discovery. The Trust filed a notice of appeal and began pursuit of its appeal of
the court's order barring the transaction in the Appellate Division of the New
York Supreme Court. The issue of the lifting of the injunction was briefed by
the parties to the litigation and oral argument on the appeal was heard by the
Appellate Division of the New York Supreme Court on March 11, 2003. No assurance
can be given that the injunction will be lifted, that all required third party
consents will be obtained and that the transaction will be consummated.


                                       17
<PAGE>
         The Trust is contractually obligated under the merger agreement to
pursue the proposed transaction with Gotham Partners unless a superior proposal
is made; that is, an offer consisting of cash or publicly traded securities for
more than 90% of the Trust's common shares or all or substantially all of the
Trust's assets that would be more favorable to the holders of the common shares
than the proposed transactions under the merger agreement with Gotham Partners.
The pending preferred shareholder litigation opposing the transaction does not
give the Trust the contractual right under the merger agreement to terminate its
obligations to complete the transaction. If the Trust were to seek to terminate
its obligations solely for that reason, the Trust could incur liability to
Gotham Partners that may include responsibility for the payment of Gotham
Partners' expenses for the transaction, which the Trust believes may exceed $8
million.

OTHER MATTERS

         The Trust could be affected by declining economic conditions as a
result of various factors that affect the real estate business including the
financial condition of tenants, competition, and increased operating costs. The
Trust's property insurance was renewed in November 2002. The rates increased 73%
upon renewal. The Trust's Directors' and Officers' insurance will expire on May
30, 2003. The rates are expected to increase substantially upon renewal.

         The Trust's most critical accounting policy relates to the evaluation
of the carrying value of real estate. The Trust evaluates the need for an
impairment loss on its real estate assets when indicators of impairment are
present and the undiscounted cash flows are not sufficient to recover the
asset's carrying amount. The impairment loss is measured by comparing the fair
value of the asset to its carrying amount. In addition, estimates are used when
accounting for the allowance for doubtful accounts, potentially excess and
obsolete inventory, product warranty reserves, the percentage of completion
method of recognizing revenue and contingent liabilities, among others. These
estimates are susceptible to change and actual results could differ from these
estimates. The effects of changes in these estimates are recognized in the
period they are determined.

SHAREHOLDER LITIGATION

Three separate lawsuits have been filed seeking to block the proposed
transaction between the Trust and Gotham Partners relative to the Merger
Agreement of February 13, 2002 (See "Part II, Item 1. Legal Proceedings"). With
respect to one of these legal proceedings, the New York Supreme Court of New
York County has issued an order granting an injunction preventing the
transaction from going forward. That injunction is currently under appeal. No
assurance can be given that the injunction will be lifted or that the proposed
transaction will be consummated.

PARK PLAZA MALL

         Two Dillard's department stores are the anchor stores at Park Plaza
Mall. Dillard's owns its facilities in Park Plaza Mall and has a Construction,
Operation and Reciprocal Easement Agreement with a subsidiary of the Trust that
contains an operating covenant requiring Dillard's to operate these facilities
continuously as retail department stores until July 2003. Dillard's and its
partner, Simon Property Group, own a parcel of land of nearly 100 acres in the
western part of Little Rock, Arkansas and have announced, at various times over
the last several years, their intention to build in this new location. During
the first quarter of 2001, the Little Rock board of directors approved a change
in zoning that would allow the construction of an approximately 1.3 million
square foot regional enclosed mall on this site. The zoning on this site
reverted to its prior status as a residential use property pursuant to a court
order in 2002; however, the proponents of the regional enclosed mall have filed
a notice of appeal of this ruling in the Supreme Court of Arkansas, with no
decision expected before

                                       18
<PAGE>
June 2003. In the event that a large-scale retail facility is built on this
site, Dillard's may cease operating its stores at Park Plaza Mall. In the event
Dillard's closes one or both of its stores at Park Plaza Mall, it is unlikely
that it would sell or lease its two stores to comparable anchor tenants.
Accordingly, the value of Park Plaza Mall would be materially and adversely
affected due to the decline in traffic and sales volume at Park Plaza Mall, and
the rights of many of the tenants to terminate their leases or to pay less rent
triggered by the closure of one or both of the anchor stores. The Park Plaza
Mall property is financed by a mortgage loan. The loss of an anchor tenant or a
significant number of other mall tenants could result in an event of default
under this mortgage.

         Regardless of whether the proposed new mall is built at the site in
question, under the terms of the operating covenant, Dillard's has no obligation
to maintain its operations at Park Plaza Mall beyond July 2003. Dillard's has
been approached to extend the operating covenant at the Park Plaza Mall.To date,
it has declined to do so, however, under the terms of the operating covenant,
Dillard's is permitted to continue operations at Park Plaza Mall through 2031.
If Dillard's does not maintain its presence as an anchor store at Park Plaza
Mall, the Park Plaza Mall would experience a loss of revenue and likely an event
of default under the mortgage, thereby causing the value of the Park Plaza Mall
to be materially and adversely affected. In such circumstances, there would be
an impairment of the value of the property and a loss could be recognized. There
can be no assurance that Dillard's will maintain its presence as an anchor store
at Park Plaza Mall.

         With respect to capital improvements, the Trust has recently completed
the repair of Park Plaza Mall's roof at a cost of approximately $0.6 million.

VENTEK

         The Company's subsidiary, VenTek, a manufacturer of transit ticketing
and parking equipment, continues to incur significant operating losses. The
Trust has provided performance bond guarantees entered into with respect to two
contracts of VenTek with transit authorities, which contracts are in the amounts
of $6.2 million and $5.3 million. These contracts are for the manufacture,
installation and maintenance of transit ticket vending equipment by VenTek. The
guarantees are expected to expire within the next two years based on the
commencement of contractual warranty and maintenance periods now in effect under
both contracts. As of May 1, 2003, no amounts have been drawn against these
guarantees. If VenTek is unable to perform in accordance with these contracts,
the Trust may be responsible for payment under these guarantees. In connection
with one of the contracts, VenTek settled a claim for liquidated damages for
approximately $0.1 million during the three months ended March 31, 2003.

LIQUIDITY AND CAPITAL RESOURCES

GENERAL

         Unrestricted and restricted cash and cash equivalents decreased by
approximately $0.6 million (to $5.2 million from $5.8 million) when comparing
the balance at March 31, 2003 to the balance at December 31, 2002.

         The Trust's decrease in cash and cash equivalents was mainly
attributable to net cash used for financing activities of $0.6 million, which
primarily consisted of $0.5 million of dividends paid on preferred shares of
beneficial interest. Net cash provided by operating activities and net cash used
for investing activities were not significant.


                                       19
<PAGE>
         The Trust declared a dividend of $0.5 million ($0.525 per share) to
Series A Cumulative Preferred Shareholders in the first quarter of 2003. The
dividend was paid April 30, 2003 to shareholders of record at the close of
business on March 31, 2003. No cash dividend for the first quarter was declared
with respect to the Common Shares.

         At March 31, 2003, the Trust owned $104.0 million in face value of U.S.
Treasury Bills. The U.S. Treasury Bills are of maturities of less than 90 days
and classified as held to maturity. The average yield for the three months ended
March 31, 2003 and 2002 was 1.17% and 1.66%, respectively.

         A summary of the Trust's borrowings and repayment timing is as follows
(in millions):

<TABLE>
<CAPTION>
                                                            Payments Due by Period
                                                            ----------------------
                                                     Less than             1-3                 4-5               After 5
Contractual Obligations           Total               1 Year              Years               Years               Years
-----------------------          --------            --------            --------            --------            --------
<S>                              <C>                 <C>                 <C>                 <C>                 <C>
Mortgage loan payable            $   41.7            $    0.3            $    0.8            $    0.9            $   39.7
Senior notes                     $   12.5            $   12.5            $     --            $     --            $     --
                                 --------            --------            --------            --------            --------
    Total                        $   54.2            $   12.8            $    0.8            $    0.9            $   39.7
                                 ========            ========            ========            ========            ========
</TABLE>

         The only lease with respect to which the Trust has an obligation for
payment of rent for is for VenTek, which is month to month.

RESULTS OF OPERATIONS

         Net loss applicable to shares of beneficial interest for the three
months ended March 31, 2003 was $1.5 million as compared to net loss of $2.0
million for the three months ended March 31, 2002.

         Interest income decreased by $0.2 million during the three months ended
March 31, 2003, as compared to 2002. The decrease is a result of lower amounts
invested and lower interest rates between the periods.

         Property net operating income, which is rent less property operating
expenses and real estate taxes, increased for the three months ended March 31,
2003 to $2.0 million from $1.8 million in 2002. The increase was attributable
primarily to an increase in revenues of $0.1 million and a decrease in operating
expenses of $0.1 million. Revenues increased by $0.1 million for the three
months ended March 31, 2003, primarily due to a lease termination fee received
of $0.1 million at Park Plaza. A decrease in occupancy at Park Plaza was offset
by an increase in rental rates when comparing the three months ended March 31,
2003 to March 31, 2002. Occupancy and rental rates remained relatively constant
at Circle Tower when comparing the periods. Included in operating expenses are
$0.2 million in 2002 of costs incurred in connection with the matters described
above in the Park Plaza Mall section.

         Depreciation and amortization, and interest expense remained relatively
constant from 2002 to 2003.

         General and administrative expenses decreased by approximately $0.5
million when comparing the three months ended March 31, 2003 to the comparable
period in 2002. Included in general and administrative expenses for the three
months ended March 31, 2003 and 2002 are approximately $0.2 million and $0.9
million, respectively, of the Trust's transaction costs related to the Gotham
proposal. During the three months ended March 31, 2003, $0.2 million of costs
related to the preferred shareholder lawsuit were included in general and
administrative expense. Also included in general and administrative expenses are
$0.2 million in 2003 and

                                       20
<PAGE>
2002, to a firm providing management services to VenTek. Otherwise, general and
administrative expenses remained relatively constant when comparing the three
months ended March 31, 2003 to the comparable period in 2002. The Trust cannot
predict what the professional fees may be in 2003 due to the ongoing litigation.

         The Company's manufacturing facility, VenTek, incurred a net loss of
$0.4 million for the quarter ended March 31, 2003, as compared to a net loss of
approximately $0.5 million for the quarter ended March 31, 2002. Revenue
decreased for the three months ended March 31, 2003 to $0.7 million from $0.9
million in 2002 and cost of goods sold decreased to $1.1 million from $1.4
million for the same period. The decrease in both revenues and cost of goods
sold is due to the winding down of current contracts and having nominal new
business. The backlog for VenTek is approximately $0.2 million at March 31,
2003. Backlog represents products or services that VenTek's customers have
committed by contract to purchase. VenTek's backlog is subject to fluctuations
and is not necessarily indicative of future sales. A failure to replace backlog
has resulted in and will continue to result in lower revenues.

         Certain statements contained in this Form 10-Q that are forward-looking
are based on current expectations that are subject to a number of uncertainties
and risks, and actual results may differ materially. The uncertainties and risks
include, but are not limited to, the risk that material adverse events will
prelude consummation of the proposed transaction with Gotham Golf, changes in
market activity, changes in local real estate conditions and markets, actions by
competitors, interest rate movements and general economic conditions. Further
information about these matters can be found in the Trust's Annual Report filed
with the SEC on Form 10-K.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK

INTEREST RATE RISK

         All of the Trust's loans outstanding at March 31, 2003 have fixed
interest rates. The Trust's investments in U.S. Treasury Bills mature in less
than 90 days and therefore are not subject to significant interest rate risk.

ITEM 4.  CONTROLS AND PROCEDURES

         The registrant's principal executive and financial officer has, within
90 days of the filing date of this quarterly report, evaluated the effectiveness
of the registrant's disclosure controls and procedures (as defined in Exchange
Act Rules 13a - 14(c)) and has determined that such disclosure controls and
procedures are adequate to ensure that information required to be disclosed by
the registrant in the reports filed or submitted under the Exchange Act is
recorded, processed and summarized and reported within the time periods
specified by the Securities and Exchange Commission. There have been no
significant changes in the registrant's internal controls or in other factors
that could significantly affect such internal controls since the date of
evaluation. Accordingly, no corrective actions have been taken with regard to
significant deficiencies or material weaknesses.


                                       21
<PAGE>
                           PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

PREFERRED SHAREHOLDER LAWSUITS

KIMELDORF V. FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS, ET AL.,
SUPREME COURT OF THE STATE OF NEW YORK, COUNTY OF NEW YORK (INDEX NO.
107176/02).

On April 15, 2002, the Trust was served with a complaint filed in the Supreme
Court of New York in New York County on behalf of a purported holder of the
Trust's convertible preferred shares. Among the allegations made by the
plaintiff is that the proposed transaction with Gotham Golf Corp. ("Gotham
Golf") was approved by the Trust's Board of Trustees in violation of fiduciary
duties owed to the holders of the Trust's convertible preferred shares. The suit
seeks, among other things, unspecified damages, an injunction of the proposed
transaction and the court's certification of the lawsuit as a class action.
Named as defendants in the lawsuit were the Trust, its five then trustees and
Gotham Partners, L.P. ("Gotham Partners"). The Trust and the other defendants
filed a motion to dismiss the lawsuit. An oral argument on the motion to dismiss
was held on July 15, 2002. Discovery on the case was stayed pending the ruling
of the court on the motion to dismiss.

On November 1, 2002, the Trust issued a press release announcing that a special
shareholders meeting was to be held November 25, 2002, for the purpose of
shareholder approval of the Merger Agreement. Shortly thereafter, the plaintiff
preferred shareholder in Kimeldorf filed a motion to show cause why a
preliminary injunction should not be issued to enjoin the November 25, 2002
shareholder vote to consider the Merger Agreement. A hearing on the motion was
held on November 20, 2002. On November 21, the New York Supreme Court of New
York County issued an order granting motions for preliminary injunction and
expedited discovery, denying defendant's motion to dismiss, and scheduling a
hearing for November 26 to determine whether to grant further relief to
plaintiff with respect to the transactions contemplated under the Merger
Agreement. The special meeting of shareholders was convened as scheduled on
November 25, with the vote on the proposed merger transaction tabled and the
meeting adjourned until November 27, at which time the vote was held and the
Trust's common shareholders approved the proposed transaction by the requisite
majority vote.

The New York Supreme Court of New York County held a three-day hearing on
November 26, 27 and December 3, 2002. On December 6, 2002, the New York Supreme
Court for New York County issued an order reaffirming its preliminary injunction
barring the proposed merger of the Trust with and into Gotham Golf. The court's
order also extended indefinitely the preliminary injunction previously granted
with respect to the proposed merger transaction and directed the parties to the
lawsuit to attend a preliminary conference for the purpose of scheduling
discovery.

The Trust filed a notice of appeal of the preliminary injunction with the
Appellate Division of the New York Supreme Court. In addition, the Trust filed
an auxiliary motion for expedited appeal regarding this matter with the
Appellate Division, which motion was denied. The Trust, Gotham Partners and the
other defendants in the Kimeldorf litigation filed joint appellate briefs in
support of the reversal of the injunction. Plaintiffs filed a reply brief in
support of the injunction. Oral argument with respect to the appeal was held
before a judicial panel of the Appellate Division - First Department of the New
York Supreme Court on March 11, 2003. There is no specific timetable for the
appellate court to render its decision.


                                       22
<PAGE>
It is not possible to predict the outcome of the appellate process with respect
to lifting the injunction. In the event that the Appellate Division rules that
the injunction should not be lifted, the case will proceed to trial on the
merits. In the event that the injunction imposed by the trial court were lifted
and dissolved, it is the intention of the Trust and, to the best of the Trust's
knowledge, Gotham Partners and the other Gotham Partners-affiliated parties to
the proposed merger transaction, to take the steps necessary to consummate the
proposed transaction. However, any party to the Kimeldorf litigation may seek
leave of the Appellate Division to appeal to the Court of Appeals of the State
of New York an adverse ruling by the Appellate Division regarding the injunction
granted by the trial court.

On or about November 8, 2002, First Carolina Investors, Inc. ("First Carolina")
a holder of preferred shares, filed a separate lawsuit in New York Supreme Court
for New York County, naming the same defendants as in the Kimeldorf case. On or
about December 20, 2002, plaintiffs Kimeldorf and First Carolina filed a
consolidated amended complaint alleging, among others, breach of contract;
aiding and abetting breach of contract; tortious interference with the contract;
breach of fiduciary duties; aiding and abetting of breach of fiduciary duties;
and unconscionability against the defendants, styled Kimeldorf et al. v. First
Union, et al. This consolidated amended complaint essentially consolidated the
separate First Carolina complaint, filed on or about November 8, 2002 with the
complaint of Mr. Kimeldorf filed in April 2002.

On April 30, 2003, the trial court granted the plaintiff's motion to certify the
litigation as a class action.

The Trust regards the lawsuit as being without merit and will vigorously defend
against the asserted claims.

COMMON SHAREHOLDER LAWSUITS

FINK V. FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS, ET AL., SUPREME
COURT OF THE STATE OF NEW YORK, COUNTY OF NEW YORK (INDEX NO. 03600265)

On or about January 24, 2003, the Trust was served with a complaint filed in the
Supreme Court of New York, New York County on behalf of a purported holder of
the Trust's common shares, on behalf of himself and the common shareholders as a
class. The lawsuit seeks a declaration that the lawsuit is maintainable as a
class action and a certification that the plaintiff, Robert Fink, is the
representative of the class. Named as defendants in the lawsuit are the Trust,
Gotham Partners, the companies affiliated with Gotham Partners and the Trust
that are parties to the Merger Agreement, William Ackman and the four current
Trustees of the Trust. Among the allegations asserted are breach of fiduciary
duty and aiding and abetting thereof in connection with the transactions
contemplated by the Merger Agreement. The relief requested by the plaintiff
includes an injunction preventing the defendants from proceeding with
consummation of the merger, rescission of the merger if it occurs, an accounting
for any profits realized by the defendants as a result of the actions complained
of, an order permitting the creation of a shareholders' committee composed of
the Trust common shareholders and their representatives to manage the affairs of
the Trust, compensatory damages and the costs and disbursements of plaintiff's
counsel.

On or about February 14, 2003, the parties to this lawsuit stipulated that the
defendants need not answer or otherwise respond to the complaint for an
indefinite period of time. The stipulation is revocable by the plaintiff at any
time. The Trust believes that the purpose of the stipulation was to delay court
proceedings in this lawsuit until the outcome of the appeal of the injunction
entered in the Kimeldorf, et al. v. First Union Real Estate Equity and Mortgage
Investments, et al. case is decided by the Appellate Division.


                                       23
<PAGE>
The Trust regards the lawsuit as without merit and plans to vigorously defend
against the allegations. The Trust will oppose any attempt by the plaintiff to
interfere with the transactions contemplated by the Merger Agreement, which was
approved by more than 64% of the outstanding common shares of the Trust and by
approximately 98% of the common shares voted at a special meeting of
shareholders held on November 27, 2002.

K-A & COMPANY, LTD. V. FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS,
ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT OF OHIO, EASTERN
DIVISION (CASE NO. 1:03 CV 0460)

On or about February 12, 2003, certain Trustees of the Trust and, later, the
Trust, were served with a complaint filed in the Court of Common Pleas, Cuyahoga
County, Ohio, by a purported holder of the Trust's common shares, on behalf of
itself and the Trust common shareholders as a class. Named as defendants in the
lawsuit are the Trust, Gotham, William Ackman and the four current Trustees of
the Trust. The allegations made and the relief requested in the K-A suit are
substantially identical to those of the Fink v. First Union suit referenced
above. The lawsuit seeks a declaration that the lawsuit is maintainable as a
class action and certification that the plaintiff, K-A & Company, Ltd., is the
representative of the class. Among the allegations asserted are breach of
fiduciary duty and aiding and abetting thereof in connection with the
transactions contemplated by the Merger Agreement. This lawsuit was removed by
notice filed by defendants to the United States District Court, Northern
District of Ohio, Eastern Division (Case No. 1:03 CV 0460).

The relief requested by the plaintiff includes an injunction preventing the
defendants from proceeding with consummation of the merger, rescission of the
merger if it occurs, an accounting for any profits realized by the defendants as
a result of the actions complained of, an order permitting the creation of a
shareholders' committee composed of the Trust common shareholders and their
representatives to manage the affairs of the Trust, compensatory damages and the
costs and disbursements of plaintiff's counsel.

On April 10, 2003, the plaintiff filed a motion for a preliminary injunction
seeking an order preventing the defendants from consummation of the merger. The
defendants have filed a motion requesting the court to stay consideration of the
plaintiff's motion pending a decision on the appeal of the preliminary
injunction entered by the New York Supreme Court for New York County in
Kimeldorf v. First Union, described above. The court has not ruled on either
motion and there is no timetable for a ruling.

As with the Fink v. The Trust lawsuit, the Trust regards the lawsuit as without
merit and plans to vigorously defend against the allegations.

OTHER LITIGATION

PEACH TREE MALL LITIGATION

The Trust, as one Plaintiff in a class action composed of numerous businesses
and individuals, has pursued legal action against the State of California
associated with the 1986 flood of Sutter Buttes Center, formerly Peach Tree
Mall. In September 1991, the court ruled in favor of the plaintiffs on the
liability portion of the inverse condemnation suit, which the State of
California appealed. In the third quarter of 1999, the 1991 ruling in favor of
the Trust and the other plaintiffs was reversed by the State of California
Appeals Court, which remanded the case to the trial court for further
proceedings. After the remand to the trial court, the Trust and the other
plaintiffs determined to pursue a retrial before the court. The retrial of the
litigation commenced February 2001 and was completed July 2001. In November
2001, the trial court issued a decision that generally holds in favor of the
State of California. In February 2002, the Plaintiffs in the case filed a notice
of appeal of the ruling of the

                                       24
<PAGE>
trial court. Both the Plaintiffs and the State have filed their opening briefs
in the California Court of Appeals. The Plaintiffs are scheduled to submit a
reply brief in May 2003. The Trust is unable to predict at this time whether or
not it will recover any amount of its damage claims in this legal proceeding.

INDEMNITY TO IMPERIAL PARKING CORPORATION

In 1999, Newcourt Financial Ltd. ("Newcourt") brought a claim in Ontario against
an affiliate of the Trust and Imperial Parking Limited alleging a breach of a
contract between the Trust affiliate and Newcourt's predecessor-in-interest,
Oracle Credit Corporation and Oracle Corporation Canada, Inc. The Trust
affiliate and Imperial Parking Limited brought a separate action in British
Columbia against Newcourt, Oracle Credit Corporation and Oracle Corporation
Canada claiming, among other things, that the contract at issue was not properly
authorized by the Trust's board of trustees and the Imperial Parking Limited
board of directors. On March 27, 2000, in connection with the spinoff of
Imperial Parking Corporation (the successor in interest to Imperial Parking
Limited) to the Trust's shareholders, the Trust granted a full indemnity to
Imperial Parking Corporation in respect of all damages arising from the
outstanding actions.

Numerous attempts to settle this matter have not been successful. The Trust has
reserved $575,000 in its combined financial statements for this claim. The
reserved amount consists of the face amount of the contract of $425,000 and
estimated costs of $150,000. The amount of the claim, $825,000, includes
Newcourt's calculation of interest on the amount due at the default rate under
the contract. The Trust believes that, due to the failure of attempted
settlement negotiations, discovery will commence, and the matter will become
more actively litigated. The Trust intends to defend vigorously against the
claims brought against the parties that it has indemnified and to pursue their
separate claims with respect to this matter.

MOUNTAINEER MALL CLAIM

The Trust was named as a defendant in a lawsuit filed in connection with a
contractor's claim relative to the construction of a portion of the Mountaineer
Mall, located in Morgantown, West Virginia. The construction of the mall
commenced in 1993 and was completed in 1995. The mall was sold in July 1999. A
trial on the merits of the lawsuit was held in 1997.

In October 2002, the court issued findings of fact and conclusions of law
providing that the claimant was entitled to recover from the Trust the principal
amount of $266,076 in damages plus various interest amounts, which, when added
to the principal amount, would result in an aggregate damage award of $494,382
against the Trust. The court's order provided, however, that the amount of the
damage award is subject to offset by the amount of legal fees and expenses
reasonably and necessarily incurred by the Trust in defending a certain
mechanic's lien claim asserted by the plaintiff in the lawsuit. The court
further directed that the plaintiff and the Trust negotiate in good faith as to
the amount of such expense and that, if the parties are unable to agree as to
the appropriate offset, the court would schedule an evidentiary hearing for the
purpose of resolving the issue.

In response to the October 2002 order, the Trust's counsel in the litigation has
been attempting to determine the amount of allowable offset to reduce the
damages assessed against the Trust. As this matter is subject to further
negotiation and possible further court proceedings to reach a final resolution,
the Trust is not able to predict the final outcome of this claim. The Trust does
not expect that the outcome will have a significant impact on the combined
financial position of the Trust.


                                       25
<PAGE>
ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K.



              (a)   Exhibits:


                    99.1                    Certification Pursuant to Section
                                            906 of the Sarbanes-Oxley Act.



              (b)   Reports on Form 8-K:





                    February 24, 2003

                           Item 5         - On February 24, 2003, the Trust
                                            announced that it reconfirmed to
                                            Gotham Partners that it was not
                                            pursuing an alternative transaction
                                            to its merger with Gotham Golf.

                           Item 7         - Exhibits

                                            99.1 Press release dated February
                                                 24, 2003, issued by the Trust.


                    March 24, 2003

                           Item 5         - On March 18, 2003, the Trust
                                            announced that it reconfirmed to
                                            Gotham Partners that it has not been
                                            pursuing, and has no present
                                            intention of pursuing, an
                                            alternative transaction to its
                                            merger with Gotham Golf.

                           Item 7         - Exhibits

                                            99.1 Press release dated March 18,
                                                 2003, issued by the Trust.


                    May 6, 2003

                           Item 5         - In addition on May 6, 2003, the
                                            Trust issued a letter in response to
                                            Gotham Partners' letter of April 28,
                                            2003.

                           Item 7         - Exhibits

                                            99.1 Letter by the Trust to Gotham
                                                 Partners dated May 6, 2003.


                                       26
<PAGE>
                                   SIGNATURES

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

                                             First Union Real Estate Equity and
                                                    Mortgage Investments
                                             -----------------------------------
                                                          (Trust)



Date:  May 15, 2003                          By: /s/ Neil H. Koenig
                                                 Neil H. Koenig
                                                 Principal Executive Officer and
                                                 Interim Chief Financial Officer


                                       27
<PAGE>
             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
              FORM 10-Q FOR THE FISCAL QUARTER ENDED MARCH 31, 2003

                                 CERTIFICATIONS

      I, Neil H. Koenig, in the capacities indicated below, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of First Union Real
      Estate Equity and Mortgage Investments;

2.    Based on my knowledge, this quarterly report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this quarterly report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this quarterly report, fairly present in all
      material respects the financial condition, results of operations and cash
      flows of the registrant as of, and for, the periods presented in this
      quarterly report;

4.    I am responsible for establishing and maintaining disclosure controls and
      procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
      registrant and have:

      a)    designed such disclosure controls and procedures to ensure that
            material information relating to the registrant is made known to me,
            particularly during the period in which this quarterly report is
            being prepared;

      b)    evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date
            of this quarterly report (the "Evaluation Date"); and

      c)    presented in this quarterly report my conclusions about the
            effectiveness of the disclosure controls and procedures on my
            evaluation as of the Evaluation Date;

5.    I have disclosed, based on my most recent evaluation, to the registrant's
      auditors and the audit committee of registrant's board of directors:

      a)    all significant deficiencies in the design or operation of internal
            controls which could adversely affect the registrant's ability to
            record, process, summarize and report financial data and have
            identified for the registrant's auditors any material weaknesses in
            internal controls; and

      b)    any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal controls; and


                                       28
<PAGE>
             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q MARCH 31, 2003

6.    I have indicated in this quarterly report whether there were significant
      changes in internal controls or in other factors that could significantly
      affect internal controls subsequent to the date of my most recent
      evaluation, including any corrective actions with regard to significant
      deficiencies and material weaknesses.

      Date:    May 15, 2003                      /s/ Neil H. Koenig
                                                 -------------------------------
                                                 Neil H. Koenig
                                                 Principal Executive Officer and
                                                 Interim Chief Financial Officer


                                       29