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

                                    FORM 10-Q

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

                  For the quarterly period ended June 30, 2005

                         Commission file number 0-16249

             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
             (Exact name of registrant as specified in its charter)

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

     P.O. Box 9507, 7 Bulfinch Place, Suite 500, Boston, Massachusetts 02114
     -----------------------------------------------------------------------
                    (Address of principal executive offices)

                                 (617) 570-4614
                                 --------------
              (Registrant's telephone number, including area code)

Indicate by check 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 |_|

Indicated by check whether registrant is an accelerated filer (as identified in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|

As of August 1, 2005 there were 32,058,913 shares of common stock outstanding.

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<PAGE>

                                      INDEX

                                                                            Page

Part I. Financial Information

      Item 1. Financial Statements (Unaudited):

           Consolidated and Combined Balance Sheets as of June 30, 2005
           and December 31, 2004.............................................. 3

           Consolidated and Combined Statements of Operations and
           Comprehensive Income/(Loss) for the Three and Six Months Ended
           June 30, 2005 and June 30, 2004.................................... 4

           Consolidated and Combined Statements of Cash Flows for the Six
           Months Ended June 30, 2005 and June 30, 2004....................... 5

           Notes to Consolidated and Combined Financial Statements............ 6

      Item 2. Management's Discussion and Analysis of Financial Condition
              and Results of Operations...................................... 23

      Item 3. Quantitative and Qualitative Disclosure about Market Risk...... 31

      Item 4. Controls and Procedures........................................ 31

Part II. Other Information:

      Item 4. Submission of Matters to a Vote of Security Holders............ 32

      Item 5. Other Information.............................................. 32

      Item 6. Exhibits....................................................... 33

Signatures................................................................... 34

Exhibit Index................................................................ 35


                                       2
<PAGE>

             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q - JUNE 30, 2005

                    CONSOLIDATED AND COMBINED BALANCE SHEETS
                      (In thousands, except per-share data)

<TABLE>
<CAPTION>
                                                                              June 30, 2005   December 31, 2004
                                                                               (Unaudited)
                                                                              -------------   -----------------
<S>                                                                            <C>               <C>
ASSETS

  Investments in real estate, at cost
    Land                                                                       $      3,929      $      3,929
    Buildings and improvements                                                      106,194            87,599
                                                                               ------------      ------------
                                                                                    110,123            91,528
    Less - Accumulated depreciation                                                  (6,036)           (4,750)
                                                                               ------------      ------------
           Investments in real estate, net                                          104,087            86,778

  Cash and cash equivalents                                                          91,307            82,559
  Restricted cash                                                                     1,068                --
  Mortgage-backed securities available for sale pledged
      under repurchase agreements                                                   122,310                --
  Loans receivable                                                                    6,645             8,390
  Accounts receivable and prepayments, net of allowance
      of $12 and $57, respectively                                                    4,459             3,391
  Real estate securities available for sale                                          29,095            14,734
  Preferred equity investment                                                        78,332                --
  Equity investment in limited partnership                                              616                --
  Lease intangibles, net                                                             10,469             7,205
  Unamortized debt issue costs, net                                                   1,243             1,157
  Real estate held for sale                                                           1,382             1,379
  Real estate held for syndication                                                       --            84,375
                                                                               ------------      ------------
       TOTAL ASSETS                                                            $    451,013      $    289,968
                                                                               ============      ============

LIABILITIES

  Repurchase agreements                                                        $    118,243      $         --
  Mortgage loans payable                                                            103,007            84,206
  Liabilities of real estate held for syndication                                        --            76,762
  Accounts payable and accrued liabilities                                            4,999             5,615
  Dividends payable                                                                   1,535               516
  Deferred items                                                                         40                68
  Loan payable                                                                           34                44
  Liabilities of real estate held for sale and discontinued operations                1,766             2,615
                                                                               ------------      ------------
       TOTAL LIABILITIES                                                            229,624           169,826
                                                                               ------------      ------------

SHAREHOLDERS' EQUITY

  Series A Cumulative Convertible Redeemable Preferred Shares of
    Beneficial Interest, $25 per share liquidating preference, 2,300,000
    shares authorized, 983,082 outstanding in 2005 and 2004                          23,131            23,131
  Series B-1 Cumulative Convertible Redeemable Preferred Shares of
    Beneficial Interest, $25 per share liquidating preference, 4,000,000
    shares authorized and outstanding in 2005                                        94,316                --
  Common Shares of Beneficial Interest, $1 par, unlimited authorized,
    32,058,913 and 31,058,913 outstanding in 2005 and in 2004, respectively          32,059            31,059

  Additional paid-in capital                                                        210,945           207,968

  Accumulated other comprehensive income                                              5,481             3,034

  Accumulated distributions in excess of net income                                (144,543)         (145,050)
                                                                               ------------      ------------
                  Total Shareholders' Equity                                        221,389           120,142
                                                                               ------------      ------------

       TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                              $    451,013      $    289,968
                                                                               ============      ============
</TABLE>

          See Notes to Consolidated and Combined Financial Statements.


                                       3
<PAGE>

             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q - JUNE 30, 2005

             CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS AND
                              COMPREHENSIVE INCOME
                                   (Unaudited)

                      (In thousands, except per-share data)

<TABLE>
<CAPTION>
                                                               For the Three Months Ended   For the Six Months Ended
                                                                        June 30,                   June 30,
                                                               --------------------------   ------------------------
                                                                   2005         2004            2005         2004
                                                                 --------     --------        --------     --------
<S>                                                              <C>          <C>             <C>          <C>
Revenues
    Rents                                                        $  4,045     $    372        $  7,907     $    743
    Interest and dividends                                          1,118          689           2,155          944
                                                                 --------     --------        --------     --------
                                                                    5,163        1,061          10,062        1,687
                                                                 --------     --------        --------     --------
Expenses
    Property operating                                                181          151             366          348
    Real estate taxes                                                  20            8              41           25
    Depreciation and amortization                                     983           60           1,825          121
    Interest                                                        1,838          (20)          3,538           11
    General and administrative                                      1,686          851           2,686        2,159
                                                                 --------     --------        --------     --------
                                                                    4,708        1,050           8,456        2,664
                                                                 --------     --------        --------     --------
Other income
    Equity in earnings of preferred equity investment               1,131           --           1,131           --
    Equity in loss from investment in limited partnership              (2)          --             (26)          --
    Gain on sale of real estate securities available for sale          --          276             142          276
    Gain on sale of real estate held for syndication                   --           --             169           --
                                                                 --------     --------        --------     --------
                                                                    1,129          276           1,416          276
                                                                 --------     --------        --------     --------

Income (loss) from continuing operations                            1,584          287           3,022         (701)

Income from discontinued operations                                   487       20,159             522       20,942
                                                                 --------     --------        --------     --------

Net income                                                          2,071       20,446           3,544       20,241
    Preferred dividend                                             (2,011)        (516)         (3,037)      (1,032)
                                                                 --------     --------        --------     --------
Net income applicable to Common Shares of Beneficial Interest    $     60     $ 19,930        $    507     $ 19,209
                                                                 ========     ========        ========     ========

Other comprehensive income
Net income                                                       $  2,071     $ 20,446        $  3,544     $ 20,241
Unrealized gain on available for sale securities                    2,222          376           2,197          772
Unrealized (loss) gain on interest rate derivative                   (756)          --             250           --
                                                                 --------     --------        --------     --------
Comprehensive income                                             $  3,537     $ 20,822        $  5,991     $ 21,013
                                                                 ========     ========        ========     ========

Per share data - Basic and Diluted:
Loss from continuing operations, net of preferred dividend       $  (0.01)    $  (0.01)       $   0.00     $  (0.05)
Income from discontinued operations                                  0.01         0.65            0.02         0.67
                                                                 --------     --------        --------     --------
Net income applicable to Common Shares of Beneficial Interest    $   0.00     $   0.64        $   0.02     $   0.62
                                                                 ========     ========        ========     ========

Basic Weighted-Average Common Shares of Beneficial Interest        32,059       31,059          31,799       31,059
                                                                 ========     ========        ========     ========
Diluted Weighted Average Common Shares of Beneficial Interest      32,102       31,084          31,843       31,082
                                                                 ========     ========        ========     ========
</TABLE>

          See Notes to Consolidated and Combined Financial Statements.


                                       4
<PAGE>

             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q - JUNE 30, 2005

               CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
                      (In thousands, except per-share data)

<TABLE>
<CAPTION>
                                                                                      For the Six Months Ended
                                                                                              June 30,
                                                                                      --------------------------
                                                                                          2005          2004
                                                                                      ------------  ------------
<S>                                                                                   <C>           <C>
Cash flows from operating activities
    Net income                                                                        $      3,544  $     20,241
    Adjustments to reconcile net income
       to net cash provided by (used in) operating activities
          Depreciation and amortization                                                      1,398         1,163
          Amortization of lease intangibles                                                    691            --
          Straight-lining of rental income                                                   2,020            --
          Equity in earnings of preferred equity investment                                 (1,131)           --
          Equity in loss of limited partnership                                                 26            --
          Distribution of income from preferred equity investment                              646            --
          Gain on disposal of real estate                                                       --       (19,651)
          Decrease in deferred items                                                           (28)         (277)
          Impairment charge                                                                     --            65
          Net changes in other operating assets and liabilities                             (4,320)          436
                                                                                      ------------  ------------
                Net cash provided by operating activities                                    2,846         1,977
                                                                                      ------------  ------------

Cash flows from investing activities
    Investments in real estate                                                             (18,598)     (430,210)
    Investments in lease intangibles                                                        (3,955)           --
    Purchase of mortgage-backed securities available for sale                             (122,310)           --
    Investment in preferred equity investment                                              (77,847)           --
    Investment in limited partnership                                                         (642)           --
    Proceeds from disposition of real estate held for syndication                            7,613            --
    Purchase of real estate securities available for sale                                  (12,583)      (12,184)
    Proceeds from maturity of investments held to maturity                                      --       435,659
    Proceeds from sale of real estate securities available for sale                            419         3,614
    Proceed from sale of real estate                                                            --        34,023
    Increase in restricted cash                                                             (1,068)      (31,842)
    Issuance of loans receivable                                                            (1,311)      (18,677)
    Interest receivable on loans                                                                --           (24)
    Collection of loans receivable                                                           3,073         8,021
                                                                                      ------------  ------------
                Net cash used in investing activities                                     (227,208)      (11,620)
                                                                                      ------------  ------------

Cash flows from financing activities
    Increase in borrowings under repurchase agreement                                      118,243            --
    Proceeds from mortgage loans payable                                                    22,600            --
    Decrease in loans payable                                                                  (10)          (11)
    Debt issuance costs                                                                       (198)           --
    Principal payments of mortgage loans                                                    (3,799)         (144)
    Issuance of Common Shares of Beneficial Interest, net                                    3,977            --
    Issuance of Series B-1 Cumulative Convertible Redeemable Preferred Shares, net          94,316            --
    Dividends paid on Preferred Shares of Beneficial Interest                               (2,018)       (1,032)
                                                                                      ------------  ------------
                Net cash provided by (used in) financing activities                        233,111        (1,187)
                                                                                      ------------  ------------

    Net increase (decrease) in cash and cash equivalents                                     8,749       (10,830)
    Cash and cash equivalents at beginning of period                                        82,559        14,924
                                                                                      ------------  ------------
    Cash and cash equivalents at end of period                                        $     91,307  $      4,094
                                                                                      ============  ============

  Supplemental Disclosure of Cash Flow Information
  Interest paid                                                                       $      3,541  $      1,743
                                                                                      ============  ============

  Supplemental Disclosure on Non-Cash Investing and Financing Activities

  Dividends accrued on Preferred Shares of Beneficial Interest                        $      1,535  $        516
  Mortgage loan assumed by purchaser of property                                                --        41,300
  Loans to limited partners of 5400 Westheimer                                              (1,338)           --
  Liabilities of real estate held for syndication satisfied in disposition                 (76,762)           --
                                                                                      ------------  ------------
                                                                                      $    (76,565) $     41,816
                                                                                      ============  ============
</TABLE>

          See Notes to Consolidated and Combined Financial Statements.


                                       5
<PAGE>

             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q - JUNE 30, 2005
                          NOTES TO FINANCIAL STATEMENTS

1. General

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

Effective January 1, 2005, the Trust conducts its business through First Union
REIT L.P., a Delaware limited partnership (the "Operating Partnership"). The
Trust is the sole general partner of, and owns directly and indirectly, 100% of
the limited partnership interest in the Operating Partnership. The transfer of
interest of the Trust's assets and liabilities to the Operating Partnership had
no effect on the Trust's financial statements.

The consolidated and 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 consolidated and combined
financial statements should be read in conjunction with the consolidated and
combined financial statements and the notes thereto included in the Trust's most
recent annual report on Form 10-K.

The consolidated and combined financial statements reflect, in the opinion of
the Trust, all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the consolidated and combined financial position,
results of operations and cash flows for the respective periods in conformity
with accounting principles generally accepted in the United States of America
consistently applied. The results of operations for the six months ended June
30, 2005 and 2004 are not necessarily indicative of results expected for the
full year.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and the disclosure of contingent assets and liabilities.
Such estimates that are particularly susceptible to change relate to
management's estimate of the impairment of real estate. In addition, estimates
are used when accounting for the allowance for doubtful accounts and
contingencies, among others. Actual results could differ from these estimates.

Investments in Real Estate

Real estate assets are stated at cost. Expenditures for repairs and maintenance
are expensed as incurred. Significant renovations that extend the useful life of
the properties are capitalized. Depreciation for financial reporting purposes is
computed using the straight-line method. Buildings and building improvements are
depreciated over their estimated useful lives of 10 to 40 years, based on the
property's age, overall physical condition, type of construction materials and
intended use. Improvements to the buildings are depreciated over the remaining
useful life of the building at the time the improvement is completed. Tenant
alterations are depreciated over the life of the lease of the tenant. The Trust
annually reviews each of its properties for any impairment losses. The Trust
records impairment losses 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 market value of
the asset to its carrying amount.

The fair value of the real estate acquired, which includes the impact of
mark-to-market adjustments for assumed mortgage debt related to property
acquisitions, is allocated to the acquired tangible assets, consisting of land,
building and improvements, fixtures and equipment and identified intangible
assets and liabilities, consisting of the value of above-market and below-market
leases, other value of in-place leases and value of tenant relationships, based
in each case on their fair values.


                                       6
<PAGE>

             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q - JUNE 30, 2005
                          NOTES TO FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies (Continued)

Investments in Real Estate (Continued)

The fair value of the tangible assets of an acquired property (which includes
land, building and improvements and fixtures and equipment) is determined by
valuing the property as if it were vacant, and the "as-if-vacant" value is then
allocated to land, building and improvements and fixtures and equipment based on
management's determination of relative fair values of these assets. Factors
considered by management in performing these analyses include an estimate of
carrying costs during the expected lease-up periods considering current market
conditions and costs to execute similar leases. In estimating carrying costs,
management includes real estate taxes, insurance and other operating expenses
and estimates of lost rental revenue during the expected lease-up periods based
on current market demand. Management also estimates costs to execute similar
leases including leasing commissions.

In allocating the fair value of the identified intangible assets and liabilities
of an acquired property, above-market and below-market in-place lease values are
recorded based on the difference between the current in-place lease rent and a
management estimate of current market rents. Below-market lease intangibles are
recorded as part of deferred revenue and amortized into rental revenue over the
non-cancelable periods of the respective leases. Above-market leases are
recorded as part of intangible assets and amortized as a direct charge against
rental revenue over the non-cancelable portion of the respective leases.

The aggregate value of other acquired intangible assets, consisting of in-place
leases and tenant relationships, is measured by the excess of (i) the purchase
price paid for a property over (ii) the estimated fair value of the property as
if vacant, determined as set forth above. This aggregate value is allocated
between in-place lease values and tenant relationships based on management's
evaluation of the specific characteristics of each tenant's lease. The value of
in-place leases and customer relationships are amortized to expense over the
remaining non-cancelable periods of the respective leases.

Real Estate Held for Syndication

Real estate acquired for the purpose of selling limited partnership interests
sponsored by the Trust is classified as real estate held for syndication.

Cash and Cash Equivalents

Cash and cash equivalents include checking and money market accounts and highly
liquid investments purchased with maturities of three months or less.

Restricted Cash

Restricted cash represents cash in escrow accounts and deposits securing a
mortgage loan payable.

Loans Receivable

The Trust's policy is to record loans receivable at cost. The Trust evaluates
the collectibility of both interest and principal of each of its loans, if
circumstances warrant, to determine whether it is impaired. A loan is considered
to be impaired when, based on current information and events, it is probable
that the Trust will be unable to collect all amounts due according to the
existing contractual terms. When a loan is considered to be impaired, the amount
of the loss accrual is calculated by comparing the recorded investment to either
the value determined by discounting the expected future cash flows at the loan's
effective interest rate or to the value of the collateral if the loan is
collateral dependent. The interest rate on the loans receivable ranges from 10%
to 12.25%. Interest income is recognized on an accrual basis.


                                       7
<PAGE>

             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q - JUNE 30, 2005
                          NOTES TO FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies (Continued)

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts is the Trust's best estimate of
the amount of probable credit losses in the Trust's existing accounts
receivable. The Trust reviews its allowance for doubtful accounts monthly. Past
due balances over 90 days or over a specified amount are reviewed individually
for collectibility. Account balances are charged off against the allowance after
all means of collection have been exhausted and the potential for recovery is
considered remote. The Trust does not have any off-balance-sheet credit exposure
related to its tenants. Accounts receivable also includes amounts related to
insurance recoveries.

Real Estate Securities Available for Sale

The Trust classifies investments in real estate equity securities with readily
determinable fair market values on the balance sheet as available-for-sale,
based on the Trust's intent with respect to those securities. Specifically, the
Trust's investments in equity securities with readily determinable fair market
values are accounted for as available-for-sale because these securities are held
principally for investment purposes and not for sale in the short term.
Accordingly, the Trust records these investments at fair market value, and
unrealized gains and losses are recognized through shareholders' equity, as a
component of other comprehensive income. Realized gains and losses and changes
for other-than-temporary impairments are included in net income. Sales of
securities are recorded on the trade date and gains and losses are determined on
the specific identification method.

Mortgage-Backed Securities

All of the Trust's mortgage-backed securities are designated as
available-for-sale and are carried at their estimated fair value with unrealized
gains and temporary losses excluded from earnings and reported in other
comprehensive income or loss, a component of shareholders' equity.

The Trust's mortgage-backed securities consist of a portfolio of whole pool
adjustable rate mortgage-backed securities issued by Fannie Mae. All of the
Trust's mortgage-backed securities are pledged as collateral under the Trust's
repurchase agreement.

Interest income is accrued based on the outstanding principal balance of the
investment securities and their contractual terms. Premiums and discounts
associated with the purchase of investment securities are amortized into
interest income over the life of such securities using the effective yield
method, adjusted for actual prepayment activity.

Lease Intangibles

Upon acquisition of real estate, the Trust records intangible assets and
liabilities acquired at their fair market value. The Trust amortizes identified
intangible assets over the period which the assets are expected to contribute to
future cash flows of the property acquired, generally the term of the applicable
leases.

Unamortized Debt Issue Costs

Direct financing costs are deferred and amortized over the term of the related
agreements as a component of interest expense.

Equity Investment in Limited Partnership

The Trust accounts for its investment in entities which it can influence but not
control under the equity method.


                                       8
<PAGE>

             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q - JUNE 30, 2005
                          NOTES TO FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies (Continued)

Investment in Preferred Equity

The Trust invests in mezzanine loans that, in some cases, allow the Trust to
participate in a percentage of the underlying property's cash flows from
operations and proceeds from a sale or refinancing. At the inception of each
such investment, management must determine whether such investment should be
accounted for as a loan, preferred equity, joint venture or as real estate.
Mezzanine loans with these participation characteristics and that also provide
the Trust with a preferred return are classified as preferred equity investments
and are accounted for using the equity method.

Fair Value of Financial Instruments

Financial instruments include cash and cash equivalents, accounts receivable,
investments, accounts payable and long-term debt. The fair value of the cash and
cash equivalents, accounts receivable, investments in government securities,
equity securities and commercial paper and accounts payable approximate their
current carrying amounts due to their short-term nature. The fair value of the
Trust's mortgage loans payable and loan payable approximate their current
carrying amounts at June 30, 2005.

Derivative Financial Instruments

The Trust accounts for its interest rate swap agreements in accordance with FAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("FAS
133") as amended by FAS No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities", and FAS No. 149 "Amendment of Statement 133 on
Derivative Instrument and Hedging Activities." In accordance with FAS 133, all
interest rate swap agreements are carried on the balance sheet at their fair
value, as an asset, if their fair value is positive, or as a liability, if their
fair value is negative. Since the Trust's derivatives are designated as "cash
flow hedges," the change in the fair value of any such derivative is recorded in
other comprehensive income or loss for hedges that qualify as effective and is
transferred from other comprehensive income or loss to earnings as the hedged
liability affects earnings. The ineffective amount of all interest rate swap
agreements, if any, is recognized in earnings each quarter. To date, the Trust
has not recognized any change in the value of its interest rate swap agreements
in earnings as a result of the hedge or a portion thereof being ineffective.
Accordingly, changes in value are recorded through other comprehensive income.

Upon entering into hedging transactions, the Trust documents the relationship
between the interest rate swap agreements and the hedged liability. The Trust
also documents its risk-management policies, including objectives and
strategies, as they relate to its hedging activities. The Trust assesses, both
at inception of a hedge and on an on-going basis, whether or not the hedge is
highly "effective," as defined by FAS 133. The Trust discontinues hedge
accounting on a prospective basis with changes in the estimated fair value
reflected in earnings when: (i) it is determined that the derivative is no
longer effective in offsetting cash flows of a hedged item (including hedged
items such as forecasted transactions); (ii) it is no longer probable that the
forecasted transaction will occur; or (iii) it is determined that designating
the derivative as an interest rate swap agreement is no longer appropriate. To
date, the Trust has not discontinued hedge accounting for any of its interest
rate swap agreements.

The Trust utilizes interest rate swap agreements to manage interest rate risk
and does not anticipate entering into derivative transactions for speculative or
trading purposes.


                                       9
<PAGE>

             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q - JUNE 30, 2005
                          NOTES TO FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies (Continued)

Repurchase Agreements

The Trust financed its June 2005 acquisition of its mortgage-backed securities
through the use of a repurchase agreement. Although structured as a sale and
repurchase obligation, a repurchase agreement operates as a financing under
which the Trust pledges its securities as collateral to secure a loan which is
equal in value to a specified percentage of the estimated fair value of the
pledged collateral, while the Trust retains beneficial ownership of the pledged
collateral. At the maturity of a repurchase agreement, the Trust is required to
repay the loan and concurrently receives back its pledged collateral from the
lender or, with the consent of the lender, the Trust may renew such agreement at
the then prevailing financing rate. Margin calls, whereby the lender requires
that the Trust pledge additional collateral to secure borrowings under its
repurchase agreements with the lender, may be experienced by the Trust as the
current face value of its mortgage-backed securities declines due to scheduled
monthly amortization and prepayments of principal on such mortgage-backed
securities. In addition, margin calls may also occur when the fair value of the
mortgage-backed securities pledged as collateral declines due to increases in
market interest rates or other market conditions. Through June 30, 2005, the
Trust did not have any margin calls on its repurchase agreement.

The original term to maturity of the Trust's repurchase agreement is one month.
Should the counterparty decide not to renew a repurchase agreement at maturity,
the Trust must either refinance elsewhere or be in a position to satisfy this
obligation, which might require the Trust to liquidate a portion or all of its
investment in mortgage-backed securities.

Revenue Recognition

The Trust accounts for its leases with tenants as operating leases with rental
revenue recognized on a straight line basis over the lease term. Tenant leases
generally provide for (i) billings of fixed minimum rental and (ii) billings of
certain operating costs. The Trust accrues the recovery of operating costs based
on actual costs incurred.

Deferred revenue is derived primarily from revenue received in advance of its
due date.

Stock Options

Effective January 1, 2005, the Trust adopted the provisions of SFAS No. 123R,
"Accounting for Stock-Based Compensation." There was no impact on the net income
per share for the period ended June 30, 2005 on a basic and diluted basis.

Income Taxes

The Trust operates in a manner intended to enable it to continue to qualify as a
real estate investment trust ("REIT") under Sections 856-860 of the Code. In
order to qualify as a REIT, the Trust is generally required each year to
distribute to its shareholders at least 90% of its taxable income (excluding any
net capital gain). The Trust intends to comply with the foregoing minimum
distribution requirement. As of December 31, 2004, the Trust has net operating
loss carryforwards of $47,300,000 which will expire from 2019 through 2023. In
connection with the issuance of the Series B-1 Cumulative Convertible Redeemable
Preferred Shares of Beneficial Interest, the Trust's net operating loss
carryforwards will be subject to annual limitations pursuant to Section 382 of
the Code. The Trust also has capital loss carryforwards of $12,300,000 as of
December 31, 2004 which will expire from 2006 through 2007.

The Trust owns stock in a corporation that has elected to be treated for Federal
income tax purposes as a taxable REIT subsidiary ("TRS"). In order for the Trust
to continue to qualify as a REIT, the value of the TRS stock cannot exceed 20%
of the value of the Trust's total assets; at June 30, 2005 the TRS did not
exceed 20% of the value of the Trust's total assets. The net income of a TRS is
taxable at regular corporate tax rates. Current income taxes are recognized
during the period in which transactions enter into the determination of
financial statement income, with deferred income taxes being provided for
temporary differences between the carrying values of assets and liabilities


                                       10
<PAGE>

             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q - JUNE 30, 2005
                          NOTES TO FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies (Continued)

Income Taxes (Continued)

for financial reporting purposes and such values as determined by income tax
laws. Changes in deferred income taxes attributable to these temporary
differences are included in the determination of income. A valuation allowance
has been provided for the entire amount of deferred tax assets, which consists
of FUMI's net operating loss carryforwards, due to the uncertainty of
realization of the deferred tax assets. FUMI has net operating loss
carryforwards of $10,100,000 which will expire from 2009 through 2023. Effective
July 1, 2005, the Trust consummated a business combination with FUMI pursuant to
which FUMI became the Trust's TRS and enables the Trust to utilize these loss
carryforwards. The Trust and FUMI do not file consolidated tax returns.

Earnings Per Share

The Trust has calculated earnings per share for the three and six months ended
June 30, 2005 and 2004 in accordance with SFAS 128, "Earnings Per Share." SFAS
128 requires that common share equivalents be excluded from the weighted average
shares outstanding for the calculation of basic earnings per share. The
reconciliation of shares outstanding for the basic and diluted earnings per
share calculation is as follows (in thousands, except per share data):

The Trust's Series A Cumulative Preferred Shares of Beneficial Interest ("Series
A Shares") and Series B-1 Cumulative Preferred Shares of Beneficial Interest
("Series B-1 Shares") are anti-dilutive at June 30, 2005 and 2004 and,
accordingly, are not included in the weighted average shares outstanding for the
dilutive earnings per share.

<TABLE>
<CAPTION>
                                                                      For the Three Months Ended   For the Six Months Ended
                                                                                June 30,                  June 30,
                                                                      --------------------------   ------------------------
                                                                           2005         2004           2005         2004
                                                                         --------     --------       --------     --------
<S>                                                                      <C>          <C>            <C>          <C>
Basic
Income (loss) from continuing operations                                 $  1,584     $    287       $  3,022     $   (701)
Preferred dividend                                                         (2,011)        (516)        (3,037)      (1,032)
                                                                         --------     --------       --------     --------
Income (loss) from continuing operations, net of preferred dividend          (427)        (229)           (15)      (1,733)
Income from discontinued operations                                           487       20,159            522       20,942
                                                                         --------     --------       --------     --------
Net income applicable to Common Shares of Beneficial Interest            $     60     $ 19,930       $    507     $ 19,209
                                                                         ========     ========       ========     ========

Basic weighted-average Common Shares of Beneficial Interest                32,059       31,059         31,799       31,059
                                                                         ========     ========       ========     ========

Loss from continuing operations, net of preferred dividend               $  (0.01)    $  (0.01)      $   0.00     $  (0.05)
Income from discontinued operations                                          0.01         0.65           0.02         0.67
                                                                         --------     --------       --------     --------
Net income per Common Shares of Beneficial Interest                      $   0.00     $   0.64       $   0.02     $   0.62
                                                                         ========     ========       ========     ========

Diluted
Income (loss) from continuing operations                                 $  1,584     $    287       $  3,022     $   (701)
Preferred dividend                                                         (2,011)        (516)        (3,037)      (1,032)
                                                                         --------     --------       --------     --------
Loss from continuing operations, net of preferred dividend                   (427)        (229)           (15)      (1,733)
Income from discontinued operations                                           487       20,159            522       20,942
                                                                         --------     --------       --------     --------
Net income applicable to Common Shares of Beneficial Interest            $     60     $ 19,930       $    507     $ 19,209
                                                                         ========     ========       ========     ========

Basic weighted-average Common Shares of Beneficial Interest                32,059       31,059         31,799       31,059
Stock Options                                                                  43           25             44           23
                                                                         --------     --------       --------     --------
Diluted weighted-average Common Shares of Beneficial Interest              32,102       31,084         31,843       31,082
                                                                         ========     ========       ========     ========

Loss from continuing operations, net of preferred dividend               $   0.01     $  (0.01)      $   0.00     $  (0.05)
Income from discontinued operations                                          0.01         0.65           0.02         0.67
                                                                         --------     --------       --------     --------
Net income per Common Shares of Beneficial Interest                      $   0.00     $   0.64       $   0.02     $   0.62
                                                                         ========     ========       ========     ========
</TABLE>


                                       11
<PAGE>

             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q - JUNE 30, 2005
                          NOTES TO FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies (Continued)

Dividends

The Trust declared a dividend of $516,000 ($0.525 per share) on the Trust's
Series A Shares in both the first and second quarters of 2005. The first quarter
dividend was paid April 30, 2005 to beneficiaries of record at the close of
business on March 31, 2005. The second quarter dividend was paid July 31, 2005
to beneficiaries at the close of business on June 30, 2005.

The Trust declared a dividend of $510,000 ($0.14 per share) on the Trust's
Series B-1 Shares in the first quarter of 2005, which dividends represented the
pro rata portion of the quarterly distribution of $0.40625 per share. The first
quarter dividend was paid April 30, 2005 to beneficiaries of record as of the
close of business on March 31, 2005. In May 2005, the Trust declared and paid a
dividend on the Trust's Series B-1 Shares equal to $476,000 ($0.1308 per share)
for the period April 1, 2005 through April 30, 2005. In June 2005, the Trust
declared a dividend of $1,479,000 ($0.40625 per share) on the Trust's Series B-1
Shares issued in February 2005 and a dividend of $16,000 ($0.05 per share) on
the Trust's Series B-1 Shares issued in June 2005, which dividend represented
the pro rata portion of the quarterly distribution for the dividend period May
1, 2005 through July 30, 2005 of $0.40625. The dividend was paid July 31, 2005
to beneficiaries of record as of the close of business on June 30, 2005.

3. Related Party Transactions

The affairs of the Trust and its subsidiaries are administered by FUR Advisors
LLC ("FUR Advisors") pursuant to the terms of an Advisory Agreement (the
"Advisory Agreement") dated December 31, 2003 between the Trust and FUR
Advisors, which agreement was entered into in connection with the acquisition by
FUR Investors LLC of its interest in the Trust and the other transactions
entered into in connection therewith. FUR Advisors is controlled by and
partially owned by the executive officers of the Trust. Pursuant to the terms of
the Advisory Agreement, FUR Advisors is responsible for providing asset
management services to the Trust and coordinating with the Trust's shareholder
transfer agent and property managers. Effective as of January 1, 2005, the terms
of the Advisory Agreement were modified to provide that the quarterly fee
payable to FUR Advisors for providing such services would equal the lesser of an
asset based fee or an outstanding equity based fee. In general, the asset based
fee was the original fee set forth in the Advisory Agreement which is calculated
as follows: (x) 1% of the gross asset value of the Trust up to $100 million,
0.75% of the gross asset value of the Trust between $100 million and $250
million, 0.625% of the gross asset value of the Trust between $250 million and
$500 million and 0.50% of the gross asset value of the Trust in excess of $500
million (in light of the triple net lease nature of the 16 triple net lease
properties, FUR Advisors agreed to reduce its fee for these properties to 0.25%
of the gross asset value for the portion of this portfolio that is subject to
leverage) plus (y) a fee, not exceeding commercially reasonable rates approved
by a majority of the independent members of the board of trustees, for providing
administrative and clerical services with respect to loans made by the Trust to
third parties.

The equity based fee is calculated as follows: (i) 1.5% of the issued and
outstanding equity securities of the Trust plus (ii) .25% of any equity
contribution by a third party to a joint venture managed by the Trust. For
purposes of the equity based calculation, the 31,058,913 Common Shares of
Beneficial Interest ("Common Shares") outstanding at January 1, 2005 are to be
valued as follows: $2.30 (FUR Investors LLC's tender offer price in its December
2003 tender offer) with respect to 26,058,913 Common Shares and $2.60 (the
purchase price paid by FUR Investors LLC) with respect to the 5,000,000 Common
Shares acquired by FUR Investors LLC on December 31, 2003. The Trust's Series A
Shares are valued at their liquidation preference amount of $25 per share. All
Preferred and Common Shares issued subsequent to January 1, 2005 are valued at
the net issuance price: (i) Series B-1 Shares ($25 per share), (ii) Common
Shares sold to Kimco Realty Corporation ($4 per share).

In addition to the foregoing modification, regardless of whether the asset based
methodology or equity based methodology is used, the reimbursement to FUR
Advisors of up to $100,000 per annum for the costs associated with the
employment of one or more asset managers has been eliminated.


                                       12
<PAGE>

             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q - JUNE 30, 2005
                          NOTES TO FINANCIAL STATEMENTS

3. Related Party Transactions (Continued)

FUR Advisors is also entitled under both the asset based fee and the equity
based fee pursuant to the Advisory Agreement to receive (i) property and
construction management fees at commercially reasonable rates as determined by
the independent Trustees of the Board, and (ii) an incentive fee, both of which
were provided for in the original Advisory Agreement. The incentive fee entitles
FUR Advisors to receive (a) an amount equal to 20% of all distributions paid to
Beneficiaries of Common Shares after December 31, 2003 in excess of the
Threshold Amount, hereinafter defined, and, (b) upon the termination of the
Advisory Agreement, an amount equal to 20% of the "liquidation value" of the
Trust in excess of the Threshold Amount at the termination date. As defined in
the Advisory Agreement, the Threshold Amount is equal to (x) $71.3 million,
increased by the net issuance price of all Common Shares, with an adjustment for
Preferred Shares converted, issued after December 31, 2003, and decreased by the
redemption price of all shares redeemed after December 31, 2003, plus (y) a
return on the amount, as adjusted, set forth in (x) equal to 7% per annum
compounded annually. The incentive fee is reduced by any direct consequential
damages to the Trust if the Advisory Agreement is terminated by the Trust for
cause. At June 30, 2005, the Threshold Amount was $83,041,000.

Effective February 1, 2004, Winthrop Management L.P. (formerly known as Kestrel
Management L.P.), an affiliate of FUR Advisors and the Trust's executive
officers, assumed property management responsibilities for Circle Tower.
Pursuant to the terms of the property management agreement, Winthrop Management
L.P. receives a fee equal to 3% of the monthly revenues of Circle Tower which
fee has been approved by the independent members of the Board of Trustees, and
is less than the amount paid to the prior management company.

The following table sets forth the fees and reimbursements paid by the Trust for
the three and six months ended June 30, 2005 to FUR Advisors and Winthrop
Management L.P. (in thousands):

<TABLE>
<CAPTION>
                                  Three Months            Three Months          Six Months Ended        Six Months Ended
                                      Ended                   Ended               June 30, 2005           June 30, 2004
                                  June 30, 2005           June 30, 2004
<S>                                <C>                     <C>                     <C>                     <C>
Asset Management Fee(1)            $   693 (3)             $   302 (4)             $ 1,180 (3)             $   687 (4)
Loan Servicing Fee(1)                   20                       3                      21                       5
Property Management Fee(2)              10                      10                      20                      18
Reimbursement(1)                        --                      27                      --                      30
</TABLE>

      (1)   Payable to FUR Advisors
      (2)   Payable to Winthrop Management L.P.
      (3)   Determined using equity based method
      (4)   Determined using asset based method

The Trust and FUMI paid fees of $4,000 and $30,000 for the three months ended
June 30, 2005 and 2004, and $27,000 and $97,726 for the six months ended June
30, 2005 and 2004 respectively, to the Real Estate Systems Implementations
Group, LLC ("RE Systems") for financial reporting and advisory services. The
managing member of RE Systems assumed the position of Interim Chief Financial
Officer of the Trust on August 18, 2000, and Interim Chief Executive Officer in
January 2003. In addition, he became a trustee of the Trust in June 2003. He
resigned as Interim Chief Executive Officer and Interim Chief Financial Officer
on December 31, 2003 and resigned as Trustee on April 15, 2004.

4. Common Share Issuance

On February 17, 2005, the Trust sold to Kimco Realty Corporation, through a
private placement, 1,000,000 of its Common Shares for an aggregate purchase
price of $4,000,000. The Trust incurred a total of $23,000 in legal fees in
connection with this transaction.


                                       13
<PAGE>

             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q - JUNE 30, 2005
                          NOTES TO FINANCIAL STATEMENTS

5. Series B-1 Preferred Share Issuance

On February 28, 2005, the Trust sold to a number of institutional investors,
through a private offering, 3,640,000 shares of its Series B-1 Shares for
$91,000,000 in gross proceeds. The Trust incurred a total of $5,125,000 of
underwriting, placement agent and legal fees to unaffiliated third parties in
connection with this issuance.

On June 20, 2005, the Trust, through a private offering, sold an additional
360,000 shares to the existing shareholders of its Series B-1 Shares as well as
three additional investors for $9,000,000 in gross proceeds, bringing the total
issuance of its Series B-1 shares to $100,000,000 in gross proceeds. The Trust
incurred a total of $559,000 of underwriting, placement agent and legal fees to
unaffiliated third parties in connection with this issuance.

The Series B-1 Shares entitle the holders to cumulative dividends at a minimum
rate of 6.5% and can be convertible into Common Shares at a conversion price of
$4.50, subject to anti-dilution adjustments. If fully converted, the Series B-1
Shares would represent approximately 40.9% of the outstanding Common Shares
(based on the number of Common Shares outstanding at June 30, 2005). In
addition, the holders of the Series B-1 Shares have the right to elect one
Trustee to the Board of Trustees of the Trust as long as 910,000 Series B-1
Shares are outstanding.

6. Shelf Registration

On June 21, 2005, the Trust filed a Registration Statement on Form S-3 with the
Securities and Exchange Commission covering the offer and sale of up to an
aggregate offering price of $400,000,000 in any combination of debt securities,
Common and Preferred Shares of Beneficial Interest. The S-3 also covers the
resale of the 22,222,223 Common Shares issuable upon conversion of the Trust's
outstanding Series B-1 Preferred Shares, and the resale of the 1,000,000 common
shares currently held by one of the holders of the Series B-1 Preferred Shares.
Under a shelf registration, the Trust may sell securities in one or more
separate offerings with the amount, price and terms to be determined at the time
of sale. Proceeds from such offerings will be used for general corporate
purposes, including acquiring additional properties, repaying debt and improving
properties. The Trust will not receive any proceeds from resales of Common
Shares under the S-3. The S-3 was declared effective by the Securities and
Exchange Commission on July 25, 2005.

7. Loans Receivable

As of June 30, 2005, the Trust held the following loans receivable (in
thousands):

<TABLE>
<CAPTION>
                                                   Outstanding
                            Property                Principal      Accrued     Carrying     Interest
Property/Collateral         Location                 Balance       Interest     Amount        Rate          Maturity
-------------------         --------                 -------       --------     ------        ----          --------

<S>                         <C>                      <C>             <C>        <C>          <C>            <C>
Wingate Inn (1)             Clearwater,  FL          $ 2,764         $  1       $2,765       10%            February
                                                                                                            2007

536 West 28th St. (1)       New York, NY               2,506           26        2,532       12.25%         April 2009
                                                                                             (LIBOR
                                                                                             +9.5%)
5400 Westheimer L.P.                                                                                        January 2007
Interests (2)               Houston, TX                1,338           10        1,348       12%
                                                     -------         ----       ------

                                                     $ 6,608         $ 37       $6,645
                                                     =======         ====       ======
</TABLE>

      (1)   Secured by a first mortgage.

      (2)   Seven loans secured by limited partnership interests.


                                       14
<PAGE>

             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q - JUNE 30, 2005
                          NOTES TO FINANCIAL STATEMENTS

7. Loans Receivable (continued)

For the period ended June 30, 2005, activity related to the principal balance of
loans is as follows (in thousands):

            Balance at January 1, 2005                                  $ 8,319
            Advances made                                                 1,338
            Repayments                                                   (3,049)
                                                                        -------
            Balance at June 30, 2005                                    $ 6,608
                                                                        =======

8. Real Estate Securities Available for Sale

The detail of real estate securities held for sale as of June 30, 2005 is as
follows (in thousands):

<TABLE>
<CAPTION>
                                                                             Unrealized
                                       Date              Cost at           Gain (Loss) at         Balance at
         Name                        Purchased        June 30, 2005         June 30, 2005       June 30, 2005
         ----                        ---------        -------------         -------------       -------------
<S>                                   <C>              <C>                   <C>                  <C>
Sizeler Property
  Investors, Inc.                     Various          $   14,442            $  5,366             $ 19,808
Securities of other real
  estate companies                    Various               9,097                 190                9,287
                                                       ----------            --------             --------

                                                       $   23,539            $  5,556             $ 29,095
                                                       ==========            ========             ========
</TABLE>

9. Mortgage-Backed Securities Pledged Under Repurchase Agreement

At June 30, 2005, all of the Trust's mortgage-backed securities were classified
as available-for-sale and, as such, were carried at their estimated fair value,
based on prices obtained from a third party. The following table presents the
carrying value of the Trust's mortgage-backed securities as of June 30, 2005 and
December 31, 2004.

                                                         June 30,   December 31,
                                                          2005          2004
                                                        --------    ------------
          (In thousands)

          Agency Mortgage-Backed Securities:
                   Fannie Mae Whole Pool Certificates   $122,310      $     --

Although not rated, Agency mortgage-backed securities carry an implied AAA
rating. Agency mortgage-backed securities are guaranteed as to principal and/or
interest by the Federal National Mortgage Association ("Fannie Mae"), a
federally chartered corporation.


                                       15
<PAGE>

             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q - JUNE 30, 2005
                          NOTES TO FINANCIAL STATEMENTS

9. Mortgage-Backed Securities Pledged Under Repurchase Agreement (Continued)

The following table presents the amortized cost and fair value of the Trust's
mortgage-backed securities at June 30, 2005 (in thousands):

                                                                        June 30,
                                                                          2005
                                                                        --------
            Principal balance (par value)                               $121,233
            Interest payment receivable                                      411
            Unamortized premium                                              666
                                                                        --------
            Carrying value/estimated fair value                         $122,310
                                                                        ========

The mortgage-backed securities bear interest at a weighted average interest rate
of 4.21%.

10. Hedge Instruments

In connection with the Trust's interest rate risk management process, the Trust
periodically hedges a portion of its interest rate risk by entering into
derivative financial instrument contracts. Through June 30, 2005, such
instruments have been interest rate swaps, which in effect modify the repricing
characteristics of the Trust's repurchase and floating rate mortgage debt
agreements as well as cash flows for such liabilities. The use of hedging
instruments creates exposure to credit risk relating to potential losses that
could be recognized if the counterparties to these instruments fail to perform
their obligations under the contracts. To mitigate this exposure, the Trust only
enters into such transactions with financial institutions whose long-term debt
rating is A or better, as determined by Standard & Poor's. In the event of a
default by the counterparty, the Trust would not receive payments provided for
under the terms of the hedging instrument and could have difficulty obtaining
its assets pledged as collateral for the interest rate swaps.

The Trust's interest rate swaps are used to lock-in the fixed interest rate
related to its repurchase agreement as well as a portion of its floating rate
mortgage debt.

The table below presents information about the Trust's interest rate swaps at
June 30, 2005: (dollars in thousands)

                                                    Estimated Fair     Gross
                                          Notional  Value/Carrying   Unrealized
      Active Period Through    Swap Rate   Amount       Value        Gain/(Loss)
      ---------------------    ---------  --------  --------------   -----------

      November 2007              8.55%    $ 40,000    $      (75)    $     (75)
      January 2008              4.045%    $118,000    $        -     $       -

11. Repurchase Agreements

Information pertaining to the repurchase agreements as of June 30, 2005 is as
follows (dollars in thousands):

December 31,              June 30,   Carrying Value
   2004         Net        2005      of Underlying
  Balance      Change     Balance      Collateral     Type of Collateral
  -------      ------     -------      ----------     ------------------

$       -     $118,243    $118,243      $122,310      Mortgage-Backed Securities

As of June 30, 2005, the borrowing rate on the Trust's repurchase agreement was
LIBOR minus 3 basis points and is renewed monthly.


                                       16
<PAGE>

             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q - JUNE 30, 2005
                          NOTES TO FINANCIAL STATEMENTS

12. Preferred Equity Investment

On April 19, 2005, the Trust made 22 separate convertible mezzanine loans and
equity investments in 22 separate entities (each, a "Borrower") in the aggregate
amount of approximately $69,326,000 (exclusive of a $980,000 subsequent advance,
which is included in the Trust's restricted cash balance at June 30, 2005). Each
of the Borrowers was owned primarily by a group of individuals (collectively
"Marc") who were not affiliates of the Trust. Each loan is secured by the
applicable Borrower's ownership interest in a limited liability company (each a
"Property Owner") that in turn owns an office building or complex. Each Borrower
holds a 100% interest in the applicable Property Owner other than with respect
to one property, in which the Borrower holds a 75% interest in the Property
Owner. Each loan bears interest at 7.65%, matures on April 18, 2012 and requires
monthly payments of interest only. The amounts advanced under each loan together
with the equity investment in the applicable Borrower, as described below, was
equal to 49% of the difference between the agreed value of the property owned by
the applicable Property Owner and the existing debt encumbering such property.

On May 6, 2005, the Trust made additional convertible mezzanine loans and equity
investments in the amount of approximately $5,810,000 with respect to two
additional properties on the same terms as the loans made on April 19 except
that the amount advanced under these loans together with the equity investment,
as described below, was equal to 60% of the difference between the agreed value
of the property and the existing debt encumbering the property. The two
properties have a value of approximately $31 million.

As part of the above transactions, First Union acquired an equity interest in
each of the Borrowers. The equity interest entitles First Union to participate
in capital proceeds derived from the sale or refinancing of the applicable
property to the extent such proceeds generate amounts sufficient to fully
satisfy all of the debt encumbering the applicable property, including its
respective loan and a return to the Borrower of its deemed equity (the agreed
value of the applicable property less all debt encumbering the applicable
property including the loan made by First Union) plus a 7.65% cumulative return
thereon.

On June 15, 2005, the Trust made a $1,600,000 second mortgage loan to a borrower
beneficially owned my Marc. The terms of the loan are the same as the terms of
loans made on April 19, 2005. In addition, this loan entitles the Trust to
participation in the cash flow and capital proceeds of the property on terms
equivalent to the equity interest that the Trust holds in the Borrowers.

Further, the Trust has committed to advance approximately $6,900,000 to cover
the costs of tenant improvements and capital expenditures at the 25 properties.

First Union also has the right to co-invest in all other office properties
acquired by Marc and their affiliates in the Chicago, Illinois metropolitan and
suburban areas.

13. Circle Tower Mortgage Loan

On March 17, 2005, the Trust obtained a $4,600,000 loan from Nomura Credit &
Capital, Inc., an unaffiliated third party lender, which is secured by the
Trust's Indianapolis, Indiana property. The loan bears interest at 5.82%,
requires monthly payments of principal, interest and real estate tax escrow of
$54,000 and is scheduled to mature on April 11, 2015, at which time the
outstanding principal balance is estimated to be approximately $3,831,000. The
Trust received net proceeds from this loan, after satisfying closing costs of
approximately $4,387,000.

14. Portfolio Investments

On May 25, 2005, the Trust acquired two adjacent office building properties in
Amherst, New York that are triple net leased to, and serve as the east coast
headquarters of, Ingram Micro, Inc. The properties contain an aggregate of
200,000 square feet of office space and were acquired for an aggregate purchase
price of $22,054,955. In connection with this acquisition, the Trust obtained an
$18,000,000 first mortgage loan from Greenwich Capital Financial Products, Inc.,
an unaffiliated third party lender.


                                       17
<PAGE>

             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q - JUNE 30, 2005
                          NOTES TO FINANCIAL STATEMENTS

14. Portfolio Investments (continued)

The loan bears interest at 5.65%, requires monthly payments of principal,
interest and real estate tax escrow of $117,989 commencing November 2005 and is
scheduled to mature on November 6, 2013. The loan requires payments of only
interest and escrow until November 2005. The Trust received net proceeds from
this loan, after satisfying closing costs, of approximately $17,796,000.

15. 5400 Westheimer Holding, L.P.

On January 3, 2005, the loan previously made by the Trust to 5400 Westheimer
Holding L.P. ("5400 Westheimer") was satisfied by the payment of $7,140,000 with
the Trust retaining a 7% limited partnership interest in 5400 Westheimer.

Also on January 3, 2005, the Trust made non-recourse loans to seven limited
partners in 5400 Westheimer aggregating $1,338,000 (the "LP Loans"), the
proceeds of which were used by the limited partners to fund their capital
contribution requirements to 5400 Westheimer. The LP Loans are secured by the
applicable limited partner's interest in 5400 Westheimer. The loans bear
interest at 12% per annum and require quarterly payments of interest only.
Principal payments of $669,000 are required to be made on January 5, 2006 and
January 5, 2007. If all of the borrowers of the LP Loans were to default on
their LP Loans, the Trust would acquire an additional 25% limited partner
interest in 5400 Westheimer. In addition to the 7% limited partnership interest
transferred to the Trust in satisfaction of its initial loan, the Trust also
holds a 1% general partner interest in 5400 Westheimer. 5400 Westheimer
indirectly holds a 100% ownership interest in real property located at 5400
Westheimer Court, Houston, Texas (the "Houston Property").

In addition to its ownership, the Trust will receive an incentive payment equal
to 20% of any distributions paid to the limited partners of 5400 Westheimer
after each limited partner has received distributions of the their investment
plus a 6% cumulative annual, compounded return.

For financial reporting purposes, at December 31, 2004, the Houston Property was
classified as real estate held for syndication and reflected 100% of 5400
Westheimer's assets and liabilities. The Trust recognized a gain on sale of real
estate held for syndication of $169,000 in the first quarter of 2005 upon
completion of the sale. As of June 30, 2005, this investment was classified on
the Trust's balance sheet as a loan receivable in the amount of $1,338,000 and
an equity investment in limited partnership of $616,000.

16. Winn-Dixie Bankruptcy

On February 22, 2005, Winn-Dixie Stores, Inc., the tenant at the Trust's
Jacksonville, Florida property, filed for protection under Chapter 11 of the
United States Bankruptcy Code. The Trust has not received notification as to
whether Winn-Dixie will assume or reject its lease. If it elects to reject its
lease, the lease will be terminated and the Trust will become responsible for
all costs associated with the property. If the lease is rejected, the Trust will
seek to re-tenant or sell the property. Until such time as Winn-Dixie makes its
election, all rents (approximately $1,500,000 a year) and other payments due
under the lease from and after the date of Winn-Dixie's bankruptcy filing are
required to be paid. All required payments have been made through June 30, 2005.

17. Discontinued Operations

The tenant for the Trust's Sherman, Texas property has exercised its purchase
option under the lease pursuant to which it was to acquire the property
effective May 1, 2005 for a gross sales price of approximately $2,018,000.
However, due to negotiations between the tenant and the ground owner, the
consummation of this sale is not anticipated to occur until the third quarter
2005. The tenant will continue to be obligated to make its scheduled rental
payments until the sale has closed. For financial reporting purposes, the Trust
expects to recognize a net gain on the sale of this property of approximately
$535,000.


                                       18
<PAGE>

             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q - JUNE 30, 2005
                          NOTES TO FINANCIAL STATEMENTS

17. Discontinued Operations (Continued)

SFAS No. 144 requires that disposals of a "component" of an entity be treated as
discontinued operations. In accordance with SFAS No. 144, for all periods
presented, the Trust reclassified its statements of operations to reflect income
and expenses for properties held for sale as discontinued operations. In
addition, the Trust has reflected assets and liabilities related to such
properties as real estate held for sale and liabilities of real estate held for
sale and discontinued operations.

The combined results related to discontinued operations for the three and six
months ended June 30, 2005 and June 30, 2004 are as follows (in thousands):

                                      For the Three Months    For the Six Months
                                         Ended June 30,          Ended June 30,
                                      --------------------    ------------------
(Amounts in thousands)                   2005       2004        2005       2004
                                       -------    -------     -------    -------

Total revenues                         $   505    $ 4,574     $   556    $ 8,738
Total expenses                              17      4,001          34      7,447
Gain on sale of property                    --     19,651          --     19,651
                                       -------    -------     -------    -------
Income from discontinued operations    $   488    $20,224     $   522    $20,942
                                       =======    =======     =======    =======

Liabilities of discontinued operations at June 30, 2005 and December 31, 2004
are as follows:

(Amounts in thousands)                                           2005      2004
                                                                ------    ------

Mortgage loans payable                                          $  890    $  956
Accounts payable and accrued expenses                              876     1,659
                                                                ------    ------
                                                                $1,766    $2,615
                                                                ======    ======

Discontinued operations for 2004 consisted primarily of the sale of the Park
Plaza Mall and VenTek. The 2005 discontinued operations represented the Sherman,
Texas triple net lease property and adjustments related to the Park Plaza Mall
and VenTek.

18. Contingencies

William Ackman, a former Trustee of the Trust, has made demand on the Trust for
indemnification for approximately $1.5 million of expenses incurred by him in
his capacity as a Trustee in connection with the litigation matters relating to
the aborted merger of the Trust with Gotham Golf Corp., an entity controlled by
Mr. Ackman. The Trust has forwarded this demand to its insurance carrier. Both
the Trust's insurance carrier and the Trust have denied this demand based on the
documentation submitted to date. No provision for liabilities, if any,
attributable to this matter has been accrued in the accompanying financial
statements.

Revenue Canada has made inquiries of Imperial Parking relating to deductions
taken by Imperial Parking at the time it was owned by FUMI. If these deductions
are ultimately disallowed Imperial Parking may make a claim for indemnification
for amounts owed to Revenue Canada. Although FUMI is required to indemnify
Imperial Parking for certain damages, FUMI might not be required to indemnify
Imperial Parking for these damages. However, the Trust has reserved certain
amounts for possible costs related to this matter.


                                       19
<PAGE>

             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q - JUNE 30, 2005
                          NOTES TO FINANCIAL STATEMENTS

19. Business Segments

The Trust operates in three business segments: (i) ownership of real estate
operating properties (the "Operating Properties"), (ii) ownership of loans
receivable ("Loans") and (iii) ownership and trading of real estate securities
("Real Estate Securities"). The Trust and FUMI's other assets ("Other Assets")
consist primarily of cash and cash equivalents, deferred issue costs for loans
payable and real estate held for syndication. All intercompany transactions
between segments have been eliminated. Revenues and expenses from discontinued
operations have been excluded from the segment presentation.

<TABLE>
<CAPTION>
Business Segments (in thousands)           Three Months Ended June 30,  Six Months Ended June 30,
                                           ---------------------------  -------------------------
                                               2005         2004            2005         2004
                                             --------     --------        --------     --------
<S>                                          <C>          <C>             <C>          <C>
Rents & Other Revenues
     Operating Properties                    $  4,045     $    371        $  7,907     $    743
     Loans                                      1,325          439           1,590          636
     Real Estate Securities                       105          276             495          276
                                             --------     --------        --------     --------
                                                5,475        1,086           9,992        1,655
Less - Operating Expenses
     Operating Properties                         181          151             366          348
                                             --------     --------        --------     --------
                                                  181          151             366          348
                                             --------     --------        --------     --------
Less - Real Estate Taxes
     Operating Properties                          20            8              41           25
                                             --------     --------        --------     --------
                                                   20            8              41           25
                                             --------     --------        --------     --------
Net Operating Income
     Operating Properties                       3,844          212           7,500          370
     Loans                                      1,325          439           1,590          636
     Real Estate Securities                       105          276             495          276
                                             --------     --------        --------     --------
                                                5,274          927           9,585        1,282
                                             --------     --------        --------     --------

Less - Depreciation and Amortization              983           60           1,825          121

Less - Interest Expense                         1,838          (20)          3,538           11

Corporate Income (Expense)
     Interest                                     817          250           1,317          308
     General and administrative                (1,686)        (850)         (2,686)      (2,159)
     Gain on sale of real estate held for
     syndication                                   --           --             169           --
                                             --------     --------        --------     --------

Income/(Loss) from continuing operations        1,584          287           3,022         (701)

Income from discontinued operations               487       20,159             522       20,942
                                             --------     --------        --------     --------

Net income                                   $  2,071     $ 20,446        $  3,544     $ 20,241
                                             ========     ========        ========     ========

Capital Expenditures
     Operating Properties                    $    381     $    672        $    506     $    808
                                             --------     --------        --------     --------
                                             $    381     $    672        $    506     $    808
                                             ========     ========        ========     ========
</TABLE>


                                       20
<PAGE>

             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q - JUNE 30, 2005
                          NOTES TO FINANCIAL STATEMENTS

                                                        June 30,    December 31,
                                                          2005          2004
                                                        --------      --------
Identifiable Assets
     Operating Properties                               $115,938      $ 95,540
     Loans                                               207,287         8,390
     Real Estate Securities                               29,711        14,734
     Other Assets                                         98,077       171,304
                                                        --------      --------
Total Assets                                            $451,013      $289,968
                                                        ========      ========

(1) Discontinued operations for 2004 consisted primarily of the sale of the Park
Plaza Mall and VenTek. The 2005 discontinued operations represented the Sherman,
Texas triple net lease property and adjustments related to the Park Plaza Mall
and VenTek.

20. Subsequent Events

Sale of Common Shares

On July 14, 2005, the Trust sold as a selling shareholder in the initial public
offering of JER Investors Trusts, Inc. ("JER") (NYSE:JER) its 66,667 shares of
common stock in JER for the initial offering price of $17.75 per share, less the
underwriters discount. The Trust received gross proceeds of $1,183,000 from its
sale and recognized a gain of approximately $183,000.

Newkirk Transaction

On August 5, 2005, the Trust agreed to acquire $50 million in newly issued
common shares of Newkirk Realty Trust, Inc. ("Newkirk"), a newly formed real
estate investment trust, with the timing of such investment to coincide with the
Newkirk initial public offering ("Newkirk IPO"). In addition to the acquisition
of the common stock in Newkirk, the Trust also agreed to assign to Newkirk
certain rights of the Trust under its Exclusivity Services Agreement with
Michael Ashner, the Trust's Chief Executive Officer, relating to the utilization
of his services for Newkirk's future net lease investments (the "Exclusivity
Assignment"), the timing of which shall coincide with the Newkirk IPO In
consideration of the Exclusivity Assignment and the receipt of such services,
Newkirk will: (i) issue $20 million of additional Newkirk common shares, 50% of
which will vest immediately and 50% of which will vest ratably over a three year
period, and that the Trust will receive all dividends and the right to vote with
respect to the unvested Newkirk shares; and (ii) the Trust will receive the
economic benefit of 80% of the incentive management fee payable by Newkirk to
NKT Advisors LLC ("NKT"), the entity that will provide advisory services to
Newkirk.

In connection with the issuance of the Newkirk shares, the Trust has agreed not
sell, transfer, pledge, redeem or otherwise dispose of its shares of common
stock in Newkirk for a period equal to the earlier of (i) three years from the
date of the Newkirk IPO or (ii) at such time as NKT is no longer providing
advisory services to Newkirk; provided, however, in no event shall such period
be less than one year from the date of the Newkirk's IPO. Notwithstanding the
foregoing, commencing one year from the date of the Newkirk IPO, the Trust is
permitted to pledge its shares of common stock in Newkirk in connection with
borrowings with a maximum principal amount no greater than 35% of the value of
all shares of Newkirk's common stock (based on the Newkirk IPO common stock
price) held by the Trust. With respect to the shares that are to vest over a
three year period, such shares will be forfeited if: (i) the advisory agreement
with NKT is terminated by Newkirk for cause; (ii) Michael Ashner dies or becomes
disabled, unless the other members of NKT's senior management then in place
remain in their positions; or (iii) Michael Ashner resigns as an officer and
director of both Newkirk and NKT (each, a "Forfeiture Event"). Conversely, all
of the unvested shares shall become immediately vested if: (i) Newkirk
terminates the advisory


                                       21
<PAGE>

             FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
                            FORM 10-Q - JUNE 30, 2005
                          NOTES TO FINANCIAL STATEMENTS

20. Subsequent Events (Continued)

Newkirk Transaction (Continued)

agreement with NKT other than for cause; or (ii) NKT terminates the advisory
agreement following a breach of a material term of the advisory agreement by
Newkirk that is not timely cured. The Exclusivity Assignment shall immediately
be deemed terminated and revert back to the Trust upon: (i) a Forfeiture Event
other than as a result of the death or disability of Michael Ashner; or (ii) the
termination or non-renewal of the advisory agreement with NKT for any reason.

All of the foregoing is subject to the consummation of the Newkirk IPO, the
entering into of definitive documentation and other customary closing
conditions.

Newkirk has been formed to acquire a controlling interest in The Newkirk Master
Limited Partnership, an entity in which Michael Ashner and certain other members
of the Trust's senior management own an interest and of which his affiliate is
the general partner. The business of the Newkirk MLP is investment in net leased
properties. In addition, Newkirk's advisor, NKT, will be 80% owned by FUR
Holdings LLC, the entity that owns our advisor. The proposed transactions with
Newkirk are referenced, and more fully discussed, in a registration statement on
Form S-11 filed on August 5, 2005 with the Securities and Exchange Commission by
Newkirk in connection with the Newkirk IPO.

A Special Committee of the Trust's Board considered and recommended for Board
approval the proposed transactions. The members of the Trust's Special Committee
are Arthur Blasberg, Jr., chair, Talton Embry and Howard Goldberg, each of whom
is an independent trustee of the Trust.

Sale of Common Shares to Vornado Realty Trust

Also on August 5, 2005, the Trust agreed to sell to Vornado Realty Trust or its
wholly-owned subsidiary, a number of shares of the Trust's common shares of
beneficial interest equal to the lesser of (i) 9.9% of the outstanding common
shares (after giving effect to such issuance) (3,522,566 based on the common
shares outstanding at August 5, 2005) or (ii) 4,000,000, in each case for a
purchase price of $4.00 per share. The sale, which will be made pursuant to the
Trust's effective shelf registration statement on Form S-3, is conditioned upon
the execution of definitive documentation containing the final terms and
conditions of the agreement as well as customary closing conditions. The closing
of the sale transaction shall occur on the earlier of the date of closing of the
Newkirk IPO or March 31, 2006. the Trust shall have the right, but not the
obligation, to terminate the sale agreement with Vornado if the Newkirk IPO is
not consummated by March 28, 2006.


                                       22
<PAGE>

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

CAUTIONARY STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.

Statements contained herein may constitute "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Any statements
contained herein which are not statements of historical facts and that address
activities, events or developments that First Union Real Estate Equity and
Mortgage Investments expects, believes or anticipates will or may occur in the
future shall be deemed to be forward-looking statements. Forward-looking
statements are inherently subject to risks and uncertainties, many of which
cannot be predicted with accuracy and some of which might not even be
anticipated. Future events, actual results and performance, financial and
otherwise, could differ materially from those set forth in or contemplated by
the forward-looking statements herein. Factors that could cause actual results
to differ materially from those in forward-looking statements include the terms
of future property sales, investments and financings, general economic and
business conditions and various other risk factors listed in the annual report
on Form 10-K of First Union Real Estate Equity and Mortgage Investments filed
with the Securities and Exchange Commission.

This item should be read in conjunction with the financial statements, footnotes
thereto and other items contained elsewhere in the report.

General

We are a real estate investment trust ("REIT") engaged in the business of owning
real property and real estate related assets. As of June 30, 2005, we held, in
addition to our cash reserves, the following assets: (i) an office building
located in Indianapolis, Indiana commonly referred to as Circle Tower; (ii) 18
triple net lease properties; (iii) a 1% general partner interest in 5400
Westheimer Holding L.P. ("5400 Westheimer"), a limited partnership that
indirectly owns an office building in Houston, Texas; (iv) an additional 7%
limited partnership interest in 5400 Westheimer; (v) loans secured by an
aggregate 25% of limited partnership interests in 5400 Westheimer; (vi) a 25%
participation interest in a loan secured by a first mortgage on a commercial
property located in New York City's Chelsea area; (vii) a first mortgage loan
secured by a Wingate Hotel and the land on which it is situated located in
Clearwater Florida; (viii) 7.2% of the outstanding shares of common stock of
Sizeler Property Investors, Inc. (NYSE:SIZ); (ix) equity interests in various
public and private REITs; (x) 24 separate convertible mezzanine loans and equity
investments in 24 separate entities located in the Chicago metropolitan and
suburban area; (xi) one second mortgage on a property located in Westchester,
Illinois and suburban area; and (xii) mortgage-backed securities pledged under
repurchase agreements.

The average occupancy rate at Circle Tower for the six months ended June 30,
2005 and June 30, 2004 was 82.73% and 87.72% respectively. The average occupancy
rate at the Amherst property was 100% for the six months ended June 30, 2005 and
June 30, 2004. The triple net lease portfolio purchased in November 2004 is 100%
leased at June 30, 2005. However, on February 22, 2005, Winn-Dixie Stores, Inc.,
the tenant at our Jacksonville, Florida property, filed for protection under
Chapter 11 of the United States Bankruptcy Code. We have not received
notification as to whether Winn-Dixie will assume or reject its lease. If it
elects to reject its lease, the lease will be terminated and we will become
responsible for all costs associated with the property. If the lease is
rejected, we will seek to re-tenant or sell the property. Until such time as
Winn-Dixie makes its election, all rents (annually, approximately $1,500,000)
and other payments due under the lease from and after the date of Winn-Dixie's
bankruptcy filing are required to be paid.

Investment Policy

Rather than focus on a particular type of real estate asset or a specific
geographic sector, our investments will continue to be based, at least for the
foreseeable future, on our assessment that a potential investment is
significantly undervalued or presents an opportunity to outperform the
marketplace. Additionally, we will continue to make investments in assets
believed to be underperforming and in which we believe, through an infusion of


                                       23
<PAGE>

capital and improved management, an appropriate return on investment can be
realized. Consequently, with certain limitations, we will continue to seek to
invest in or acquire most types of real estate assets or securities. If the
proposed investment in Newkirk is consummated, we will no longer invest directly
in net leased properties. However, we will have a significant investment in net
leased assets through our ownership of shares in Newkirk.

Except as limited by the restrictions placed on us in order to meet our
requirements to maintain REIT status or other regulatory restrictions, our
investment decisions will not be materially affected by the nature of an
investment or where that investment falls in an entity's capital structure. We
will continue to acquire entities that own real estate, invest in the equity of
a real estate asset directly or through a venture, acquire preferred equity,
mezzanine debt or first mortgage debt of a real estate asset to the extent we
believe the ownership of the underlying real estate would be consistent with our
investment strategy. In general, it is not expected that we will invest in an
entity in which we do not own 100% of the equity unless we control, have the
means to acquire control of the investment or have a mechanism in place to exit
the investment for a price consistent with fair market value. In order to fund
future acquisitions, we will utilize our cash reserves, obtain debt financing
and/or sell additional equity.

In view of the foregoing, our near-term investment strategy will be to identify
and invest in discrete real estate investments consistent with the foregoing
criteria. As appropriate investment opportunities arise, we will aggressively
pursue such opportunities. For the long-term, as investments mature in value to
the point where we are unlikely to achieve better than a market return on their
then enhanced value, it is likely we will exit the investment and seek to
redeploy the capital to higher yielding opportunities. Accordingly, our
Statements of Operations and Comprehensive Income include both income from
continuing operations and discontinued operations.

Investments and dispositions made by us during the six months ended June 30,
2005 included the following:

West 38th Street Loan

We held a 50% interest in a $20,000,000 first mortgage loan secured by a
property located at 63 West 38th Street, New York, New York ("West 38th Street
Loan"). The interest rate was LIBOR plus 400 basis points (with a minimum rate
of 5.42%). The loan had a three-year term and required payments of interest
only. We indirectly obtained $7,000,000 of financing in connection with this
investment that had a stated interest rate of LIBOR plus 175 basis points and
required payments of interest only. The West 38th Street Loan was repaid in full
on January 18, 2005.

Presidential Realty Corp.

We had previously acquired 54,500 shares in Presidential Realty Corp.
("Presidential Realty") (AMEX:PDLA) for a total cost of $407,000. We sold our
shares at various times during February of 2005 for a total gain of $142,000.

Sizeler Property Investors, Inc.

Beginning in August 2004, we began acquiring shares of common stock in Sizeler
Property Investors, Inc. ("Sizeler") (NYSE:SIZ), a real estate investment trust
that primarily is in the business of owning and operating income producing
retail shopping centers and apartment communities in the southeastern United
States. As of June 30, 2005, we had acquired a total of 1,500,600 shares of
common stock of Sizeler which represents approximately 7.2% of all of the
outstanding shares of common stock of Sizeler for an aggregate purchase price of
approximately $14,395,000. On December 21, 2004, we sent a letter to Sizeler
advising Sizeler of our intention to nominate a slate of three directors,
consisting of Michael L. Ashner, Peter Braverman and Steven Zalkind, for
election at Sizeler's 2005 annual meeting of stockholders. On January 19, 2005,
we filed with the Securities and Exchange Commission a preliminary proxy
statement in connection with our intention to nominate a slate of directors at
Sizeler's 2005 annual meeting of stockholders. In March 2005, Sizeler brought an
action (i) alleging that we had violated Federal Securities laws by not
disclosing all required information in our Schedule 13D filings and (ii) seeking
declaratory relief that the actions taken by Sizeler's Board in connection with
its approval of a below market stock sale on March 15, 2005 did not breach their
fiduciary duty or breach their obligation not to act fraudulently, in bad faith,
recklessly, negligently or with corporate waste. We have filed an answer denying
all of Sizeler's material allegations with respect to our 13D filings and will
continue to vigorously defend this claim. Our answer also requested that the
court deny the declaratory relief requested by Sizeler with respect to the March
15 stock sale. Sizeler's claims do not seek monetary damages. Sizeler announced
that their 2005 Annual Meeting of Stockholders will be held on the last Thursday
of September or within 30 days thereafter.


                                       24
<PAGE>

Preferred Equity Investment

On April 19, 2005, the Trust made 22 separate convertible mezzanine loans and
equity investments in 22 separate entities (each, a "Borrower") in the aggregate
amount of approximately $69,326,000 (exclusive of a $980,000 subsequent advance,
which is included in the Trust's restricted cash balance). Each of the Borrowers
was owned primarily by a group of individuals (collectively "Marc") who were not
affiliates of the Trust. Each loan is secured by the applicable Borrower's
ownership interest in a limited liability company (each a "Property Owner") that
in turn owns an office building or complex. Each Borrower holds a 100% interest
in the applicable Property Owner other than with respect to one property, in
which the Borrower holds a 75% interest in the Property Owner. Each loan bears
interest at 7.65%, matures on April 18, 2012 and requires monthly payments of
interest only. The amounts advanced under each loan together with the equity
investment in the applicable Borrower, as described below, was equal to 49% of
the difference between the agreed value of the property owned by the applicable
Property Owner and the existing debt encumbering such property.

On May 6, 2005, the Trust made additional convertible mezzanine loans and equity
investments in the amount of approximately $5,810,000 with respect to two
additional properties on the same terms as the loans made on April 19 except
that the amount advanced under these loans together with the equity investment,
as described below, was equal to 60% of the difference between the agreed value
of the property and the existing debt encumbering the property. The two
properties have a value of approximately $31 million.

As part of the above transactions, First Union acquired an equity interest in
each of the Borrowers. The equity interest entitles First Union to participate
in capital proceeds derived from the sale or refinancing of the applicable
property to the extent such proceeds generate amounts sufficient to fully
satisfy all of the debt encumbering the applicable property, including its
respective loan and a return to the Borrower of its deemed equity (the agreed
value of the applicable property less all debt encumbering the applicable
property including the loan made by First Union) plus a 7.65% return thereon.

On June 15, 2005, the Trust made a $1,600,000 second mortgage loan to a borrower
beneficially owned my Marc. The terms of the loan are the same as the terms of
loans made on April 19. In addition, this loan entitles the Trust to
participation in the cash flow and capital proceeds of the property on terms
equivalent to the equity interest that the Trust holds in the Borrowers.

Further, the Trust has committed to advance approximately $6,900,000 to cover
the costs of tenant improvements and capital expenditures at the 25 properties.

First Union also has the right to co-invest in all other office properties
acquired by Marc and their affiliates in the Chicago, Illinois metropolitan and
suburban areas.

Amherst, New York Property

On May 25, 2005, the Trust acquired two adjacent office building properties in
Amherst, New York that are triple net leased to and serve as the east coast
headquarters of, Ingram Micro, Inc. The properties contain an aggregate of
200,000 square feet of office space and were acquired for an aggregate purchase
price of $22,054,955. In connection with this acquisition, the Trust obtained an
$18,000,000 first mortgage loan from Greenwich Capital Financial Products, Inc.,
an unaffiliated third party lender. The loan bears interest at 5.65%, requires
monthly payments of principal, interest and real estate tax escrow of $117,989
commencing November 2005 and is scheduled to mature on November 6, 2013. The
loan requires payments of only interest and escrow until November 2005.


                                       25
<PAGE>

Mortgage Securities Pledged Under Repurchase Agreements

On June 30, 2005, the Trust purchased whole pool three year adjustable-rate
Fannie Mae guaranteed mortgage-backed securities with a par value of
$121,200,000, a weighted average coupon of 4.21% and a weighted average reset
date of December 2007 for an aggregate purchase price of $121,900,000. The
purchase price was funded using reserves of $3,700,000 and financing obtained
through a repurchase agreement, which re-prices monthly based upon the one-month
LIBOR index. The Trust entered into an interest rate swap agreement in order to
effectively fix the interest rate under the agreement at 4.04%.

Liquidity and Capital Resources

General

Liquidity is a measurement of our ability to meet potential cash requirements,
including ongoing commitments to repay borrowings, fund and maintain investments
and other general business needs. Additionally, to maintain our status as a REIT
under the Internal Revenue Code, we must distribute annually at least 90% of our
REIT taxable income.

Our primary sources of funds for liquidity consist of cash and cash equivalents,
net cash provided by operating activities, payments received on the loans
receivable and dividends received on the real estate equity securities. In the
future, we may raise additional funds through debt financing and/or equity
offerings.

Our ability to execute our business strategy, particularly the growth of our
investment portfolio, depends to a significant degree on our ability to
implement our investment policy as described above. We compete with numerous
other companies for investments, including other REITs, insurance companies and
other investors. Some of our competitors have greater resources than we do and
for this and other reasons, we may not be able to compete successfully for
investments.

We had cash and cash equivalents of $91,307,000 at June 30, 2005, which
consisted of $13,622,000 in cash and $77,685,000 in cash equivalents with
maturities of less than 90 days.

U.S. Treasury Bills are classified as cash equivalents. The average annual
yields on the U.S. Treasury Bills were 2.50% and .98% for the six months ended
June 30, 2005 and 2004, respectively.

Our level of liquidity based upon cash and cash equivalents increased by
approximately $8,749,000 during the six months ended June 30, 2005. The increase
resulted from $233,111,000 of cash provided by financing activities and
$2,846,000 of cash provided by operating activities, which was partially offset
by $227,208,000 of cash used in investing activities.

Cash provided by financing activities consisted of $94,316,000 of net proceeds
from the issuance of the Series B-1 Cumulative Convertible Redeemable Preferred
Shares ("Series B-1 Shares"), $3,977,000 of net proceeds from the issuance of
Common Shares of Beneficial Interest, $22,600,000 of mortgage loan proceeds and
$118,243,000 of net proceeds from borrowings under repurchase agreements.

Cash used in financing activities consisted of $1,032,000 of dividend payments
on our Series A Cumulative Convertible Redeemable Preferred Shares of Beneficial
Interest ("Series A Shares"), $986,000 of dividend payments on our Series B-1,
$3,799,000 of mortgage loan repayments, $198,000 of debt issuance costs and a
decrease in loans payable of $10,000.

Cash used in investing activities consisted of $12,599,000 of purchases of
various real estate securities, $18,595,000 of building acquisitions and capital
improvements to our existing operating properties, $3,955,000 of lease
intangible purchases, $122,310,000 of purchases of mortgage-backed securities
available for sale, $77,847,000 of investments in preferred equity, $642,000 of
investment in limited partnership, $1,068,000 of increase in restricted cash and
$1,311,000 of an increase in loans receivable.


                                       26
<PAGE>

Cash provided by investing activities consisted of $7,613,000 of proceeds from
the sale of 5400 Westheimer (disposition of real estate held for syndication),
$3,703,000 received from the repayment of the West 38th Street Loan and $419,000
of proceeds from the sale of shares in Presidential Realty.

Cash provided by operating activities amounted to $2,846,000 which was the
result of a $2,020,000 increase in straight lining of rental income, $1,398,000
of depreciation and amortization, $691,000 of amortization of lease intangibles,
$26,000 of equity in loss of limited partnership and $646,000 of distribution of
income from preferred equity investment. This was offset by $28,000 of decreases
in deferred items and $4,320,000 of changes in other operating assets and
liabilities. The majority of the change in other operating assets and
liabilities is related to an increase in accounts receivable due to certain of
the leases on our triple net lease properties which require that the tenants pay
rent semi-annually.

We declared a dividend of $516,000 ($0.525 per share) on our Series A Shares in
both the first and second quarters of 2005. The first quarter dividend was paid
April 30, 2005 to beneficiaries of record at the close of business on March 31,
2005. The second quarter dividend was paid July 31, 2005 to beneficiaries of
record at the close of business on June 30, 2005.

We declared a dividend of $510,000 ($0.14 per share) on our Series B-1 Shares in
the first quarter of 2005, which dividends represented the pro rata portion of
the quarterly distribution of $0.40625 per share. The first quarter dividend was
paid April 30, 2005 to beneficiaries of record as of the close of business on
March 31, 2005. In May 2005, we declared and paid a dividend on our Series B-1
Shares equal to $476,000 ($0.1308 per share) for the period April 1, 2005
through April 30, 2005. In June 2005, we declared a dividend of $1,479,000
($0.40625 per share) on our Series B-1 Shares issued in February 2005 and a
dividend of $16,000 ($0.05 per share) on our Series B-1 Shares issued in June
2005, which dividend represented the pro rata portion of the quarterly
distribution for the dividend period May 1, 2005 through July 30, 2005 of
$0.40625. The dividend was paid July 31, 2005 to beneficiaries of record as of
the close of business on June 30, 2005.

Results of Operations - Six Months Ended June 30, 2005 Versus June 30, 2004

We operate in three business segments: (i) ownership of real estate operating
properties, (ii) ownership of loans receivable and (iii) ownership and trading
of real estate securities. (See Business Segments - Footnote 19 to the financial
statements in Item 1).

Net Income

Net income applicable to Common Shares of Beneficial Interest ("Common Shares")
for the six months ended June 30, 2005 was $507,000 as compared to net income of
$19,209,000 for the six months ended June 30, 2004. The primary reason for the
decrease in net income was a decrease in income from discontinued operations of
$20,420,000, of which $19,651,000 resulted from a gain on sale of Park Plaza
Mall and an increase in expenses of $5,792,000, partially offset by an increase
in revenues of $8,375,000 and other income of $1,140,000.

Rents

Rental income increased by $7,164,000 to $7,907,000 for the six months ended
June 30, 2005 from $743,000 for the six months ended June 30, 2004. The increase
was primarily due to the acquisition of the triple net lease properties in
November 2004 and May 2005 by our operating properties business segment which
contributed $7,193,000 of revenue. This increase in rental income was partially
offset by a decrease in revenues at Circle Tower of $29,000.

Interest and Dividends

Interest and dividends income increased by $1,211,000 to $2,155,000 for the six
months ended June 30, 2005 from $944,000 for the six months ended June 30, 2004.
The increase is primarily attributed to higher amounts invested in real estate
securities and higher interest rates on invested cash balances resulting in an
increase in interest income of $1,420,000 and an increase in dividends received
on real estate securities of $19,000 for the six months ended June 30, 2005.
Partially offsetting the income increase was a decrease in interest earned on
loans in the amount of $227,803 due to the repayment of loans in 2005 and 2004.


                                       27
<PAGE>

Property Operating

Property operating expenses increased by $18,000 to $366,000 for the six months
ended June 30, 2005 from $348,000 for the six months ended June 30, 2004. The
increase was due to increases in operating expenses at the Circle Tower property
particularly related to utilities, cleaning services and administrative
expenses.

Real Estate Taxes

Real estate taxes increased by $16,000 to $41,000 for the six months ended June
30, 2005 from $25,000 for the six months ended June 30, 2004 due to an abatement
received in 2004 which reduced real estate taxes for the 2004 period.

Depreciation and Amortization

Depreciation and amortization expense increased by $1,704,000 to $1,825,000 for
the six months ended June 30, 2005 compared to $121,000 for the six months ended
June 30, 2004. The increase was due primarily to depreciation and amortization
of $1,608,034 on the newly acquired triple net leased properties.

Interest Expense

Interest expense increased by $3,527,000 to $3,538,000 for the six months ended
June 30, 2005 compared to $11,000 for the six months ended June 30, 2004. The
increase was due to the debt related to the triple net lease portfolio and the
new debt placed on the Circle Tower property.

General and Administrative Expenses

General and administrative expenses increased by $527,000 to $2,686,000 for the
six months ended June 30, 2005 from $2,159,000 for the six months ended June 30,
2004. The primary cause of this increase was additional audit fees related to
current year transactions, in particular the Trust's preferred equity investment
in Marc and the required Securities and Exchange Commission filings associated
with such transactions, an increase in management fees and additional legal fees
incurred with respect to the litigation instituted by Sizeler, partially offset
by a reduction in insurance and other professional fees.

Gain on Sale of Securities Available for Sale

The gain on sale of securities available for sale decreased by $134,000 to
$142,000 for the six months ended June 30, 2005 from $276,000 for the six months
ended June 30, 2004. The 2005 gain on sale of securities available for sale
consists primarily of the gain on sale of shares in Presidential Realty.

Equity in Earnings of Preferred Equity Investment

Equity in earnings of preferred equity investment in Marc was $1,131,000 for the
six months ended June 30, 2005. During the six months ended June 30, 2004, the
Trust did not hold an investment in preferred equity.

Equity in Loss from Investment in Limited Partnership

Equity in loss from investment in limited partnership increased by $26,000 for
the six months ended June 30, 2005 from $0 for the six months ended June 30,
2004. The increased loss was related to the Trust's share of the loss from 5400
Westheimer.


                                       28
<PAGE>

Gain on Sale of Real Estate held for Syndication

Gain on sale of real estate held for syndication increased by $169,000 to
$169,000 for the six months ended June 30, 2005 from $0 for the six months ended
June 30, 2004. The increase was related to the gain on sale of the 5400
Westheimer property that was held for syndication.

Discontinued Operations

Income from discontinued operations decreased by $20,420,000 to $522,000 for the
six months ended June 30, 2005 compared to $20,942,000 for the six months ended
June 30, 2004. The decrease is attributed to the sale of the Park Plaza Mall and
VenTek, which comprise the majority of the 2004 discontinued operations. The
2005 discontinued operations represents the Sherman, Texas triple net lease
property and adjustments related to the Park Plaza Mall and VenTek.

Results of Operations - Three Months ended June 30, 2005 Versus June 30, 2004

Net Income

Net income applicable to Common Shares for the three months ended June 30, 2005
was $60,000 as compared to net income of $19,930,000 for the three months ended
June 30, 2004. The primary reason for the increase in net income was a decrease
in income from discontinued operations of $19,672,000 and an increase in
expenses of $3,658,000, partially offset by an increase in revenues of
$4,102,000 and other income of $853,000.

Rents

Rental income increased by $3,673,000 to $4,045,000 for the three months ended
June 30, 2005 from $372,000 for the three months ended June 30, 2004. The
increase was primarily due to the acquisition of the triple net lease properties
in November 2004 and May 2005 by our operating properties business segment which
contributed $3,693,000 of revenue. This increase in rental income was partially
offset by a decrease in revenues at Circle Tower of $20,000.

Interest and Dividends

Interest income increased by $429,000 to $1,118,000 for the three months ended
June 30, 2005 from $689,000 for the three months ended June 30, 2004. The
increase is primarily attributed to higher amounts invested in real estate
securities and higher interest rates on invested cash balances resulting in an
increase in interest income of $641,000 and an increase in dividends received on
real estate securities of $16,000 for the three months ended June 30, 2005.
Partially offsetting the income increase was a decrease in interest earned on
loans in the amount of $227,000 due to the repayment of loans in 2005 and 2004.

Property Operating

Property operating expenses increased by $30,000 to $181,000 for the three
months ended June 30, 2005 from $151,000 for the three months ended June 30,
2004. The increase was due to increases in operating expenses at the Circle
Tower property particularly related to utilities, cleaning services and
administrative expenses.

Real Estate Taxes

Real estate taxes increased by $12,000 to $20,000 for the three months ended
June 30, 2005 from $8,000 for the three months ended June 30, 2004 due to an
abatement received in 2004 which reduced real estate taxes for the 2004 period.


                                       29
<PAGE>

Depreciation and Amortization

Depreciation and amortization expense increased by $923,000 to $983,000 for the
three months ended June 30, 2005 compared to $60,000 for the three months ended
June 30, 2004. The increase was due primarily to depreciation and amortization
of $871,000 on the newly acquired triple net leased properties.

Interest Expense

Interest expense increased by $1,858,000 to $1,838,000 for the three months
ended June 30, 2005 compared to ($20,000) for the three months ended June 30,
2004. The increase was due to the debt related to the triple net lease portfolio
and the new debt placed on the Circle Tower property.

General and Administrative Expenses

General and administrative expenses increased by $835,000 to $1,686,000 for the
three months ended June 30, 2005 from $851,000 for the three months ended June
30, 2004. The primary cause of this increase was additional audit fees related
to current year transactions, in particular the Trust's preferred equity
investment in Marc and the required Securities and Exchange Commission filings
associated with such transactions, an increase in management fees and additional
legal fees incurred with respect to the litigation instituted by Sizeler,
partially offset by a reduction in insurance and other professional fees.

Gain on Sale of Securities Available for Sale

The gain on sale of securities available for sale decreased by $276,000 to $0
for the three months ended June 30, 2005 from $276,000 for the three months
ended June 30, 2004. For the three months ended June 30, 2004, the gain consists
primarily of the gain on sale of shares in Hallwood Realty Partners.

Equity in Earnings of Preferred Equity Investment

Equity in earnings of preferred equity investment in Marc was $1,131,000 for the
three months ended June 30, 2005. During the three months ended June 30, 2004,
the Trust did not hold an investment in preferred equity investment.

Equity in loss from Investment in Limited Partnership

Equity in loss from investment in limited partnership increased by $2,000 for
the three months ended June 30, 2005 from $0 for the three months ended June 30,
2004. The increased loss was related to the Trust's share of the loss from 5400
Westheimer.

Discontinued Operations

Income from discontinued operations decreased by $19,672,000 to $487,000 for the
three months ended June 30, 2005 compared to $20,159,000 for the three months
ended June 30, 2004. The decrease is attributed to the sale of the Park Plaza
Mall and VenTek, which comprise the majority of the 2004 discontinued
operations. The 2005 discontinued operations represents the Sherman, Texas
triple net lease property and adjustments related to the Park Plaza Mall and
VenTek.


                                       30
<PAGE>

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK

Interest Rate Risk

We have exposure to fluctuations in market interest rates. Market interest rates
are highly sensitive to many factors beyond our control. Various financial
vehicles exist which would allow management to mitigate the impact of interest
rate fluctuations on our cash flow and earnings.

At June 2005, we had one loan payable that had a variable interest rate and
short term financing pursuant to a repurchase agreement that had a variable
interest rate. The loan payable had an outstanding balance of $51,417,130 at
June 30, 2005, was obtained in November 2004 and has a three-year term. Interest
on the outstanding balance accrues at the LIBOR rate plus 450 basis points. As
of June 30, 2005, we have an interest rate swap with a $40,000,000 notional
amount that effectively converted the interest rate on that portion of principal
from a floating LIBOR plus 4.5% ( 7.625% at June 30, 2005) to a fixed rate of
8.55%.

The repurchase agreement had an outstanding balance of $118,243,000 at June 30,
2005, was obtained in June 2005 and has a one-month term. Interest on the
outstanding balance accrues at the LIBOR rate minus 3 basis points. As of June
30, 2005, we have an interest rate swap with a notional amount of $118,243,000
that effectively converted the interest rate from a floating rate of LIBOR minus
3.0% to a fixed rate of 4.045%.

The following table shows what the effect of a change in the LIBOR rate will
have on annual interest expense.

                                                      Change in LIBOR
                                                      ---------------
                                                1%           2%            3%

      Additional interest expense           $ 114,000    $ 228,000     $ 343,000

The fair market value of our debt, based on discounted cash flows at current
market conditions and interest rates, approximates the aggregate carrying value
of the debt at June 30, 2005.

Item 4. CONTROLS AND PROCEDURES

The Registrant's principal executive and financial officers have, 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 Securities
Exchange Act Rules 13a - 14(c)) and have 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
Securities Exchange Act is recorded, processed, 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.


                                       31
<PAGE>

                           PART II. OTHER INFORMATION

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

On April 6, 2005, the Trust solicited the vote from its holders of its Common
Shares of beneficial interest for the vote of six Trustees, the ratification of
Deloitte & Touche LLP as the Trust's independent auditors for 2005 and amendment
to the Trust's Declaration of Trust to change the name of the Trust to "Winthrop
Realty Trust" at any time prior to December 31, 2005. The meeting to vote on
these matters was held on May 10, 2005 at which time (i) each of Michael L.
Ashner, Bruce Berkowitz, Arthur Blasberg, Jr., Peter Braverman, Talton Embry and
Howard Goldberg were elected as Trustees of the Trust, (ii) Deloitte & Touche
LLP was ratified as the Trust's independent auditors and (ii) the amendment to
the Declaration of Trust was approved.

The following table indicates the votes "for" and "against" on these matters,
and abstentions.

<TABLE>
<CAPTION>
Action                                        Votes For         Votes Against       Abstentions
------                                        ---------         -------------       -----------
<S>                                           <C>                  <C>                 <C>
Election of Trustees
     Michael Ashner                           26,295,648            78,980               --
     Bruce Berkowitz                          26,268,116           106,512               --
     Arthur Blasberg, Jr.                     26,287,458            87,170               --
     Peter Braverman                          26,294,453            80,175               --
     Talton Embry                             26,270,288           104,340               --
     Howard Goldberg                          26,294,551            80,077               --

Ratification of Deloitte & Touche LLP         26,321,112            27,881             25,635

Name Change                                   26,180,505           136,863             57,260
</TABLE>

Item 5. OTHER INFORMATION

Newkirk Transaction

On August 5, 2005, the Trust agreed to acquire $50 million in newly issued
common shares of Newkirk Realty Trust, Inc. ("Newkirk"), a newly formed real
estate investment trust, with the timing of such investment to coincide with the
Newkirk initial public offering ("Newkirk IPO"). In addition to the acquisition
of the common stock in Newkirk, the Trust also agreed to assign to Newkirk
certain rights of the Trust under its Exclusivity Services Agreement with
Michael Ashner, the Trust's Chief Executive Officer, relating to the utilization
of his services for Newkirk's future net lease investments (the "Exclusivity
Assignment"), the timing of which shall coincide with the Newkirk IPO In
consideration of the Exclusivity Assignment and the receipt of such services,
Newkirk will: (i) issue $20 million of additional Newkirk common shares, 50% of
which will vest immediately and 50% of which will vest ratably over a three year
period, and that the Trust will receive all dividends and the right to vote with
respect to the unvested Newkirk shares; and (ii) the Trust will receive the
economic benefit of 80% of the incentive management fee payable by Newkirk to
NKT Advisors LLC ("NKT"), the entity that will provide advisory services to
Newkirk.

In connection with the issuance of the Newkirk shares, the Trust has agreed not
sell, transfer, pledge, redeem or otherwise dispose of its shares of common
stock in Newkirk for a period equal to the earlier of (i) three years from the
date of the Newkirk IPO or (ii) at such time as NKT is no longer providing
advisory services to Newkirk; provided, however, in no event shall such period
be less than one year from the date of the Newkirk's IPO. Notwithstanding the
foregoing, commencing one year from the date of the Newkirk IPO, the Trust is
permitted to pledge its shares of common stock in Newkirk in connection with
borrowings with a maximum principal amount no greater than 35% of the value of
all shares of Newkirk's common stock (based on the Newkirk IPO common stock
price) held by the Trust. With respect to the shares that are to vest over a
three year period, such shares will be forfeited if: (i) the advisory agreement
with NKT is terminated by Newkirk for cause; (ii) Michael Ashner dies or becomes


                                       32
<PAGE>

disabled, unless the other members of NKT's senior management then in place
remain in their positions; or (iii) Michael Ashner resigns as an officer and
director of both Newkirk and NKT (each, a "Forfeiture Event"). Conversely, all
of the unvested shares shall become immediately vested if: (i) Newkirk
terminates the advisory agreement with NKT other than for cause; or (ii) NKT
terminates the advisory agreement following a breach of a material term of the
advisory agreement by Newkirk that is not timely cured. The Exclusivity
Assignment shall immediately be deemed terminated and revert back to the Trust
upon: (i) a Forfeiture Event other than as a result of the death or disability
of Michael Ashner; or (ii) the termination or non-renewal of the advisory
agreement with NKT for any reason.

All of the foregoing is subject to the consummation of the Newkirk IPO, the
entering into of definitive documentation and other customary closing
conditions.

Newkirk has been formed to acquire a controlling interest in The Newkirk Master
Limited Partnership, an entity in which Michael Ashner and certain other members
of the Trust's senior management own an interest and of which his affiliate is
the general partner. The business of the Newkirk MLP is investment in net leased
properties. In addition, Newkirk's advisor, NKT, will be 80% owned by FUR
Holdings LLC, the entity that owns our advisor. The proposed transactions with
Newkirk are referenced, and more fully discussed, in a registration statement on
Form S-11 filed on August 5, 2005 with the Securities and Exchange Commission by
Newkirk in connection with the Newkirk IPO.

A Special Committee of the Trust's Board considered and recommended for Board
approval the proposed transactions. The members of the Trust's Special Committee
are Arthur Blasberg, Jr., chair, Talton Embry and Howard Goldberg, each of whom
is an independent trustee of the Trust.

Sale of Common Shares to Vornado Realty Trust

Also on August 5, 2005, the Trust agreed to sell to Vornado Realty Trust or its
wholly-owned subsidiary, a number of shares of the Trust's common shares of
beneficial interest equal to the lesser of (i) 9.9% of the outstanding common
shares (after giving effect to such issuance) (3,522,566 based on the common
shares outstanding at August 5, 2005) or (ii) 4,000,000, in each case for a
purchase price of $4.00 per share. The sale, which will be made pursuant to the
Trust's effective shelf registration statement on Form S-3, is conditioned upon
the execution of definitive documentation containing the final terms and
conditions of the agreement as well as customary closing conditions. The closing
of the sale transaction shall occur on the earlier of the date of closing of the
Newkirk IPO or March 31, 2006. the Trust shall have the right, but not the
obligation, to terminate the sale agreement with Vornado if the Newkirk IPO is
not consummated by March 28, 2006.

Item 6. EXHIBITS

Exhibits required by Item 601 of Regulation S-K are filed herewith or
incorporated herein by reference and are listed in the attached Exhibit Index.


                                       33
<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


Date: August 5, 2005                          By: /s/ Michael L. Ashner
                                                  ------------------------------
                                                  Michael L. Ashner
                                                  Chief Executive Officer


Date: August 5, 2005                          By: /s/ Thomas C. Staples
                                                  ------------------------------
                                                  Thomas C. Staples
                                                  Chief Financial Officer


                                       34
<PAGE>

                                  EXHIBIT INDEX

Exhibit                             Description                            Page
                                                                          Number

3.1         Bylaws of Trust as amended                                      (a)

3.2         Certificate of Amendment to Amended and Restated Declaration    (b)
            of Trust as of March 6, 2001

3.3         Amendments to Amended and Restated Declaration of Trust         (f)
            dated April 15, 2004

3.4         By-Law Amendments                                               (q)

4.1         Form of certificate for Shares of Beneficial Interest           (c)

4.2         Certificate of Designations relating to Trust's Series A        (d)
            Cumulative Redeemable Preferred Shares of Beneficial
            Interest

4.3         Warrant to purchase 500,000 shares of Beneficial Interest of    (a)
            Trust

4.4         Agreement of Limited Partnership of First Union REIT L.P.,      (k)
            dated as of January 1, 2005

4.5         Amended and Restated Certificate of Designations for Series     (q)
            B-1 Cumulative Convertible Redeemable Preferred Shares of
            Beneficial Interest

10.1        1999 Trustee Share Option Plan                                  (e)

10.2        1999 Long Term Incentive Performance Plan

10.3        Indemnification Agreement with Neil Koenig, dated as of         (e)
            April 29, 2002

10.4        Stock Purchase Agreement between First Union Real Estate        (n)
            Equity and Mortgage Investments and FUR Investors, LLC,
            dated as of November 26, 2003 ("Stock Purchase Agreement"),
            including Annex A thereto, being the list of Conditions to
            the Offer.

10.5        Guaranty of Michael L. Ashner, Guarantor, dated November 26,    (h)
            2003, in favor of First Union Real Estate Equity and
            Mortgage Investments, Guarantee, in the form provided as
            Annex F to the Stock Purchase Agreement.

10.6        Advisory Agreement between First Union Real Estate Equity       (h)
            and Mortgage Investments and FUR Advisors, LLC.

10.7        Exclusivity Services Agreement between First Union Real         (h)
            Estate Equity and Mortgage Investments and Michael L.
            Ashner.

10.8        Covenant Agreement between First Union Real Estate Equity       (h)
            and Mortgage Investments and FUR Investors, LLC.


                                       35
<PAGE>

10.9        Loan Agreement, dated November 18, 2004, among FT-Fin           (j)
            Acquisition LLC, Keybank National Association, Newstar CP
            Funding LLC, Keybank National Association, as agent for
            itself and such other lending institutions, and Keybanc
            Capital Markets, as the Arranger

10.10       Form of Mortgage, dated November 18, 2004, in favor of          (j)
            Keybank National Association

10.11       Ownership Interest Pledge Agreement, dated November 18,         (j)
            2004, from FT-Fin Acquisition LLC to Keybank National
            Association

10.12       Guaranty, dated as of November 18, 2004, by First Union Real    (j)
            Estate Equity and Mortgage Investments in favor of Keybank
            National Association, as the agent.

10.13       Indemnity Regarding Hazardous Materials, dated as of            (j)
            November 18, 2004, by First Union Real Estate Equity and
            Mortgage Investments in favor of Keybank National
            Association, as the agent.

10.14       Amended and Restated Omnibus Agreement, dated March16, 2005,    (l)
            among Gerald Nudo, Laurence Weiner and First Union REIT L.P.

10.15       Securities Purchase Agreement, dated February 16, 2005,         (m)
            between First Union Real Estate Equity and Mortgage
            Investments and Kimco Realty Corporation

10.16       Securities Purchase Agreement, dated February 25, 2005,         (n)
            between First Union Real Estate Equity and Mortgage
            Investments, Perrin Holden & Davenport Capital Corp. and the
            Investors named therein

10.17       Securities Purchase Agreement, dated June 15, 2005, between     (q)
            First Union Real Estate Equity and Mortgage Investments,
            Perrin Holden & Davenport Capital Corp. and the Investors
            named therein.

10.18       Amended and Restated Registration Rights Agreement, dated       (q)
            June 20, 2005, between First Union Real Estate Equity and
            Mortgage Investments and the Investors named therein.

10.19       Amended and Restated Investor Rights Agreement, dated June      (q)
            20, 2005, between First Union Real Estate Equity and
            Mortgage Investments and the Investors named therein.

10.20       Purchase and Sale Agreement, dated March 10, 2005, between      (o)
            Amherst Investors Business Trust and Micron Realty LLC

10.21       Assignment of Purchase and Sale Agreement, dated March 21,      (o)
            2005, between Micron Realty LLC and First Union Real Estate
            Equity and Mortgage Investments

10.22       Loan Agreement, dated May 25, 2005, between FT-Amherst          (p)
            Property LLC, as borrower, and Greenwich Capital Financial
            Products, Inc., as lender

10.23       Promissory Note, dated May 25, 2005, in the original            (p)
            principal amount of $18,000,000 from FT-Amherst Property LLC
            to Greenwich Capital Financial Products, Inc.

10.24       Amendment No. 2 to Advisory Agreement between First Union        *
            Real Estate Equity and Mortgage Investments and FUR
            Advisors, LLC


                                       36
<PAGE>

31          Certifications Pursuant to Section 302 of the Sarbanes-Oxley     *
            Act of 2002

32          Certification Pursuant to Section 906 of the Sarbanes-Oxley      *
            Act of 2002

* filed herewith

      (a)   Incorporated by reference to the Trust's 1998 Form 10-K
      (b)   Incorporated by reference to the Trust's 2000 Form 10-K
      (c)   Incorporated by reference to the Trust's Registration Statement on
            Form S-3 No. 33-2818
      (d)   Incorporated by reference to the Trust's Form 8-K dated October 24,
            1996
      (e)   Incorporated by reference to the Trust's 1999 Proxy Statement for
            Special Meeting held May 17, 1999 in lieu of Annual Meeting
      (f)   Incorporated by reference to the Trust's March 31, 2004 Form 10-Q
      (g)   Incorporated by reference to the Trust's 2002 Form 10-K
      (h)   Incorporated by reference to the Trust's Form 8-K dated November 26,
            2003
      (i)   Incorporated by reference to the Trust's Form 8-K dated March 2,
            2004
      (j)   Incorporated by reference to the Trust's Form 8-K dated November 18,
            2004
      (k)   Incorporated by reference to the Trust's Form 8-K dated January 1,
            2004
      (l)   Incorporated by reference to the Trust's Form 8-K dated March 18,
            2005
      (m)   Incorporated by reference to the Trust's Form 8-K dated February 17,
            2005
      (n)   Incorporated by reference to the Trust's Form 8-K dated March 2,
            2005
      (o)   Incorporated by reference to the Trust's Form 8-K dated March 23,
            2005
      (p)   Incorporated by reference to the Trust's Form 8-K dated May 27, 2005
      (q)   Incorporated by reference to the Trust's Form 8-K dated June 21,
            2005


                                       37