As filed with the Securities and Exchange Commission on June 2, 1997

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

                                   FORM 10-K/A

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

[X]      Annual Report Pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934
         [Fee Required]
         For the fiscal year ended December 31, 1996

[ ]      Transition Report Pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934 [No Fee Required] For the Transition period from
         _____________________________

Commission File Number 1-8063

                     California Real Estate Investment Trust
             (Exact Name of Registrant as Specified in its Charter)

           California                              94-6181186
       (State or other jurisdiction of          (I.R.S. Employer
       incorporation or organization)          Identification No.)

131 Steuart Street, Suite 200, San Francisco, California          94105
           (Address of principal executive office)             (Zip Code)

Registrant's telephone number, including area code:          (415) 905-0288
                                                             --------------

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                                    Name of Each Exchange
                  Title of Each Class                on Which Registered
         Common Shares of Beneficial Interest      New York Stock Exchange
         $1.00 par value ("Common Shares")         Pacific Stock Exchange

        SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to the filing requirements for
at least the past 90 days.
                                                  Yes  X               No  __
                                         Sequential Page:              01 of
                                         Exhibit Index:                Page

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

                                                           [    ]

604320.3

<PAGE>





                                  MARKET VALUE

Based on the closing sales price of $5.125 per share, the aggregate market value
of the outstanding Common Shares of Beneficial Interest held by non-affiliates
of the Registrant as of March 7, 1997 was $11,160,927.

                               OUTSTANDING SHARES

As of March 7, 1997 there were 9,137,335 outstanding Common Shares of Beneficial
Interest ("Common Shares"). The Common Shares are listed on the New York and
Pacific Stock Exchanges (trading symbol "CT"). Trading is reported in many
newspapers as "Cal RE" (CUSIP No. 130559107).



604320.3

<PAGE>





                     CALIFORNIA REAL ESTATE INVESTMENT TRUST




                                                                           PAGE


PART II


Item 7.   Management's Discussion and Analysis of Financial Condition and
                   Results of Operations                                   1-5
Item 8.   Financial Statements and Supplementary Data                      6-24


PART III


Item 10.   Trustees and Executive Officers of the Registrant              25-26
Item 12.   Security Ownership of Certain Beneficial Owners and Management    27
Item 13.   Certain Relationships and Related Transactions                    28





604320.3

<PAGE>




                                     PART II



Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations


Overview

The Trust has heretofore elected to be taxed as REIT. As long as the Trust
qualifies as a REIT, dividends paid to shareholders will be allowed as a
deduction for purposes of determining income subject to federal corporate income
tax. As a result, as long as the Trust qualifies as a REIT, the Trust will not
be subject to federal income tax on the portion of its net income that is
distributed to shareholders. However, following consummation of the Investment
and the Acquisition, the Trust anticipates that its status as a REIT will
terminate and it will become subject to income and franchise taxes on its income
to the extent that it cannot offset such income with net operating losses or
capital loss carryforwards.

Since November 1990, the Trust has not made new investments in income-producing
real property. During this period, the Trust originated new mortgage loans in
connection with the disposition of property owned.

The Trust previously developed an expansion strategy to pursue growth
opportunities through acquisitions, joint venture arrangements and a possible
infusion of new capital. In late 1994 and 1995, after pursuing opportunities to
grow and improve the profitability of its real property and mortgage portfolio
(including acquiring the hotel assets of Peregrine), the Board of Trustees
determined that the Trust should redeploy its current asset portfolio into
better performing assets. The Trust pursued the foregoing, and by the end of
March 1997, the Trust had sold or disposed of all of its income-producing
properties and had invested the proceeds in liquid mortgage-backed securities
which satisfy REIT-asset qualification requirements and mortgage loans. As of
December 31, 1996, the Trust had $14,115,000 invested in such mortgage-backed
securities and $1,576,000 in mortgage loans.

Following is a discussion and analysis on the operations and financial results
of 1996 compared with the operations and financial results of 1995 and 1994. For
comparison purposes, it should be noted that the CalREIT property portfolio
underwent a significant reduction in size between 1994 and 1996. At the
beginning of 1994, CalREIT owned a total of six properties, one of which was
sold in the latter half of the year. In 1995, CalREIT owned four commercial
properties, one hotel and a portfolio of seven mortgage notes. During 1996, the
Trust disposed of two of its commercial properties, the hotel and four mortgage
notes. As of year end 1996, the Trust's real estate portfolio included two
commercial properties and three mortgage notes.

In 1994, Peregrine, the majority shareholder at the time, voted its shares to
replace CalREIT's Board of Trustees. The new Board terminated the contracts of
CalREIT's then outside advisor and property manager and appointed new
management. During 1994, management concentrated on stabilizing property
operations and bringing mortgage note payments due the Trust current. A new
property management company was selected to oversee operations at the Trust's
commercial properties and a hotel management company was engaged to lease the
hotel property.

In 1995, the Board of Trustees was expanded to include two independent Trustees.
Also in 1995, CalREIT developed and began to implement its strategy to expand
the Trust to improve shareholder value. Management began to monetize the Trust's
assets to facilitate a growth strategy through a merger or acquisition
transaction. As part of this strategy, the Trust's four remaining commercial
properties were readied for sale. Leasing, capital and tenant improvement
expenditures were approved as they related to their impact on potential sales
prices. As of the end of 1995, Redfield Commerce Center was in escrow and the
other three commercial properties were listed with real estate brokerage firms.

In the first quarter of 1996, the sale of Redfield Commerce Center closed and
the Trust allowed foreclosure on its hotel because of the property's limited
investment potential given the lender's unwillingness to restructure the debt.
In the second quarter of 1996, the Bekins Storage Facility was sold. As part of
the Trust's disposition activities, a portion of the Trust's portfolio of
mortgage notes were packaged for sale and by the end of the third quarter four
mortgage notes had been sold. The two remaining commercial properties, Fulton
Square and Totem Square, had

604320.3
                                        1

<PAGE>



a total net book value of $8,585,000 at December 31, 1996 with collateralized
indebtedness totaling $4,283,000 (50%). The Trust's $7,703,000 mortgage note
portfolio of three notes had a net book value of $1,576,000 as of December 31,
1996, the reduction in value due primarily to cumulative write downs in
valuation.

Simultaneous with disposition activities throughout 1996, management and a
Special Committee appointed by the Board of Trustees continued to explore growth
opportunities for the Trust. Potential transactions involving hotels,
apartments, mortgage investments, mobile home communities and a variety of other
proposals were reviewed and potential merger candidates investigated.

Liquidity and Capital Resources

The Trust's primary liquidity and capital resources include its cash, marketable
securities and cash generated from the monetization of assets. The Trust's
unrestricted cash totaled $4,698,000 on December 31, 1996, down slightly from
$4,778,000 at December 31, 1995. In 1996, the Trust's principal sources of
liquidity were from cash on hand, operating income, and from interest and
principal payments from investments in liquid mortgage-backed securities. As of
December 31, 1996, the Trust had $14,115,000 invested in such marketable
securities. No dividends were paid by CalREIT in 1996.

Debt service paid on the Trust's first mortgage notes totaled $496,000 in 1996.
The note on Totem Square of $4,256,000 was originally scheduled to mature on
April 1, 1996. The Trust received an extension from the lender to May 1, 1997,
under the same terms and conditions as the original agreement. Upon the sale of
its two remaining commercial properties, which occurred in February and March of
1997, the Trust has retired all first mortgage debt obligations.

The major sources of liquidity for the Trust in 1997 will be its cash on hand as
well as interest and principal payments from its investments in real estate
securities. In addition, in connection with the Investment, the Trust will
obtain between $32 and $34 million in new equity capital to be used in
implementing the New Business Plan. See "Item 1 - Recent Developments."

The primary demands on the Trust's capital resources in 1997 will be funding the
implementation of the New Business Plan. The Trust believes that the Trust has
sufficient financial resources to meet the cash requirements contemplated by the
plan.

Funds From Operations

The Trust believes that funds from operations ("FFO") is an appropriate measure
of performance of a REIT because, among other things, industry analysts have
accepted it as an appropriate measure of the performance of REITS. FFO is
defined by the National Association of Real Estate Investment Trusts as net
income computed in accordance with generally accepted accounting principles
before gains and losses on sales of property and from debt restructuring plus
depreciation and amortization. In calculating the gain or loss on sales of
property, the Trust has included and combined the gain or loss on the sales of
real estate assets and mortgage loans secured by real estate assets. Funds
Available for Distribution ("FAD") is defined as FFO less capital expenditures
funded by operations and loan amortization. The Trust believes that in order to
facilitate a clear understanding of the historical operating results of the
Trust, FFO and FAD should be examined in conjunction with net income (loss) as
presented in this report. FFO and FAD should not be considered as an alternative
to net income (loss) as an indication of the Trust's performance or to cash flow
as a measure of liquidity.

FFO (which was computed without adding back amortization of deferred financing
costs and depreciation of non-rental real estate assets) and FAD for the years
ended December 31, 1996, 1995 and 1994 are summarized as follows:


604320.3
                                        2

<PAGE>


<TABLE>
<CAPTION>

    Calculation of Funds From Operations and Funds Available for Distribution
                             (Dollars in thousands)
                                                                       1996             1995               1994
                                                                       ----             ----               ----
           <S>                                                   <C>                <C>               <C>
           Net income before gain (loss)
             on foreclosure or sale of investments and
             valuation losses                                       $   260         $    437          $     301
           Depreciation and amortization                                 64              662                595
                                                                 ----------          -------           --------

           Funds From Operations                                        324            1,099                896

           Capital Improvements                                       (146)            (321)              (106)

           Loan principal payments                                     (77)            (405)               (94)
                                                                -----------        ---------         ---------

           Funds Available for Distribution                       $     101         $    373          $     696
                                                                  =========          =======           ========
</TABLE>

FFO totaled $324,000 in 1996, down 71% from the FFO of $1,099,000 in 1995. FFO
in 1995 was up 23% from $896,000 in 1994. The decrease in 1996 was primarily due
to a reduction in the number of assets contributing to the Trust's income pool.
The increase in FFO in 1995 over 1994 was a result of significant reductions in
operating expenses resulting from the sales of properties and the leasing of the
hotel to a third party. There were no cash distributions paid to shareholders in
either 1995 or 1996 as the Trust continued to build its reserves for a potential
expansion transaction; distributions paid to shareholders totaled $890,000 in
1994. FFO is not intended to be a measure of the Trust's ability to pay cash
dividends, and FFO as calculated by the Trust may not be comparable with
similarly titled information reported by other REITs.

Results of Operations

As of December 31, 1996, 1995, and 1994 overall weighted occupancy levels by
class of property were as follows:

         Property Type                1996              1995               1994
         -------------                ----              ----               ----

         Shopping Center                77%              83%                77%
         Hotel                         -                 52%                42%


The weighted average occupancy is calculated by multiplying the occupancy for
each property by its square footage and dividing by the square footage in the
portfolio.

Revenues

Total revenues were $3,155,000 in 1996, down 11% from $3,535,000 in 1995, which
were down 26% from $4,787,000 in 1994. The decrease reported in 1996 was
primarily attributable to a decrease in interest revenue as a result of the
liquidation of a portion of the Trust's note portfolio and decreased rental
revenues. In 1995, there was a $473,000 reduction in hotel revenue compared to
the prior year as a result of the terms and conditions of the lease arrangement
in place throughout 1995.

Rental revenues at the Trust's commercial properties were $2,019,000 in 1996,
down 4% from $2,093,000 in 1995. Rental revenues in 1995 were down 19% from
$2,593,000 in 1994. The decrease in rental revenues reported in 1996 was
attributable primarily to the absence of rent collected at Redfield Commerce
Center and the Bekins Storage Facility which were sold in the first half of the
year. The decrease in rental revenue in 1995 compared to that collected in 1994
was attributable to the absence of $196,000 in rent collected in the prior year
at the Imperial Canyon Shopping Center prior to its sale, as well as a decrease
of $305,000 in rents collected at Fulton Square Shopping Center and Totem
Square.

Because of the disposition of the Trust's hotel property in February 1996, and
the change in the status of the hotel from direct management to a lease
arrangement, a comparison of 1996, 1995 and 1994 revenues generated by this

604320.3
                                        3

<PAGE>



property is not relevant. No revenues were generated to the Trust by the hotel
in 1996. The revenues generated in 1996 are comprised of lease revenues net of
any bad debt from CapStar, the hotel management company which leased the Casa
Grande Motor Inn. Despite improvements in operations and the implementation of a
lease arrangement financially favorable to the Trust, in 1994 the hotel was
unable to generate sufficient revenue to cover its debt service requirements.
The Trust suspended debt payments in 1995 and after a refusal by the lender to
restructure debt terms, CalREIT allowed the property to be foreclosed upon in
the first quarter of 1996.

Revenues from interest were $1,136,000 in 1996, down 19% from $1,396,000 in
1995. The decrease was the result of a lower amount of interest received due to
the sale of certain mortgage notes offset by an increase in interest earned on
cash accounts and marketable securities. Revenues from interest in 1995 were
down 17% from 1994 revenues from interest of $1,675,000. In 1994, the Trust
recognized an additional $735,000 in interest income on one of its mortgage
notes. In September 1994, this note was modified and $491,000 of accrued
interest, the recognition of which had been deferred, was paid in consideration
for releasing an asset from the pool of properties collateralizing the note.
This event was the primary cause of the decrease of interest income in 1995 from
1994.

Expenses

Total expenses were $2,895,000 in 1996, down 7% from $3,098,000 in 1995. In
1995, total expenses were down 31% from total expenses of $4,486,000 in 1994.
The reduction in expenses in 1996 was primarily the result of the downsizing of
the Trust's portfolio which reduced depreciation, interest expense and
associated property operating expenses. The reduction in expenses by $1,388,000
in 1995 over those of 1994 resulted from reduced interest expense and hotel and
commercial property operating expenses caused by the downsizing of the Trust's
portfolio and the lease agreement with the hotel management company. As noted
above, due to the disposition of the hotel property and the change in the
management of hotel operations in 1994, a direct comparison of 1996, 1995 and
1994 results is not relevant. In 1996, the hotel, as a function of the operating
lease agreement generated no income or expense to the Trust. In 1995, hotel
operating expenses decreased $763,000 from 1994, attributable to the leasing of
the property to a third-party hotel management company in mid-year.

Interest expense was $547,000 in 1996, down 33% from $815,000 in 1995, which was
down 22% from $1,044,000 in 1994. The decrease in 1996 reflected the disposition
of the hotel property. The decrease in interest expense in 1995 over that of
1994 reflected the sale of the Imperial Canyon Shopping Center and the payoff of
the note on the Fulton Square Shopping Center.

The 1996 non-cash depreciation charge was $64,000, a decrease of 90% from
$662,000 in 1995. Depreciation charges increased 11% in 1995 compared to the
depreciation charge of $595,000 in 1994. The decrease in 1996 reflected the sale
of Redfield Commerce Center, the Bekins Storage Facility and the disposition of
the hotel property. In addition, the Trust's two remaining properties were not
depreciated in 1996 because they were being held for sale. The slight increase
in 1995 over that of 1994 resulted from amortization of certain property
specific expenses.

General and administrative expenses were $1,503,000 in 1996, up significantly
from $933,000 in 1995. General and administrative expenses in 1995 were up 15%
from the $813,000 reported in 1994. While the Trust was able to lower a number
of office expenses, a net increase in general and administrative costs occurred
in 1996 due primarily to an accelerated investigation of potential merger or
acquisition candidates plus due diligence costs related to the expansion
transaction which had not been incurred in the prior year. Throughout 1996,
CalREIT continued to be negatively impacted by its small size with respect to
general and administrative expenses. As a result of certain fixed costs required
to operate a public company, a disproportionate amount of funds was spent on
overhead expenses and administration of the Trust. A potential benefit to an
expansion of the Trust is expected to be a reduction in the percentage of
revenues required to support overhead and administrative activities. The
increase in general and administrative costs in 1995 over those of 1994 was
primarily due to legal and accounting costs which had not been incurred in the
prior year, plus expansion transaction development costs.

Net Loss

The net loss for the Trust in 1996 was $414,000, a substantial decrease over the
net loss of $2,778,000 reported in 1995. This improvement was primarily the
result of sales proceeds received by the Trust from property and mortgage note
dispositions offset by valuation losses discussed further below. Net loss in
1995 was up significantly from a net loss of $36,000 reported in 1994. The
increase in net loss in 1995 compared to 1994

604320.3
                                        4

<PAGE>



was due primarily to a substantial difference in valuation losses charged in
1995 as compared to those charged in 1994.

Operating income was $260,000 in 1996, down 41% from $437,000 in 1995. In 1995
operating income was up 45% from $301,000 in 1994. The $177,000 decline in
operating income in 1996 was primarily the result of an increase in Trust
operating expenses during the year offset by a reduction in depreciation
charges. Operating income in 1995 was $136,000 greater than that reported in
1994, primarily because of lower interest expense and reduced hotel operating
expenses.

Net Gain or Loss on Foreclosure or Sale of Investments

Income before valuation losses to the Trust was $1,329,000 in 1996 as compared
to $503,000 in 1995 and $83,000 in 1994. The net gain recognized from the sale
of the Redfield Commerce Center in the first quarter of 1996 was $299,000. There
was no gain or loss upon the foreclosure of the Casa Grande Motor Inn in the
first quarter of 1996 as the net book value of the property was equal to its
debt.

During the second quarter of 1996, the Trust incurred a net loss of $164,000
from the sale of the Bekins Storage Facility. Also during the second quarter of
1996, the Trust sold two of its seven mortgage notes. A gain of $430,000 was
recognized upon the sale of the Trust's mortgage note which was collateralized
by a first deed of trust on an office/commercial building in Phoenix, Arizona;
and a gain of $30,000 was recognized upon the sale of the Trust's mortgage note
which was collateralized by a second deed of trust on a commercial building in
Pacheco, California. During the third quarter of 1996, the Trust sold two more
mortgage notes. A gain of $115,000 was recognized upon the sale of the Trust's
mortgage note which was collateralized by a first deed of trust on an office
building in Scottsdale, Arizona; and a gain of $357,000 was recognized upon the
sale of the Trust's mortgage note which was collateralized by a second deed of
trust on an office/industrial building in Sunnyvale, California.

In 1995, the Trust recognized a deferred gain from the partial principal payment
received on one of its mortgage notes. During the first five months of 1994, the
Trust's hotel property experienced an average operating loss after debt service
of $107,000 per month. With the execution of a lease with CapStar in 1994, the
hotel management company, this amount was reduced to approximately $8,600 per
month, the difference between the monthly lease payment of $20,000 and the
property's monthly debt service requirement of $28,600. The lease with CapStar
was renegotiated in June 1995, reducing the monthly lease payments from $20,000
to approximately $9,000; therefore, increasing the loss recorded by the Trust.
In 1994 the Trust experienced a gain of $114,000 on the sale of one property and
the recognition of a deferred gain from the partial principal payment on one of
its mortgage notes. This was offset by a $344,000 loss from the release of and
default on two of the Trust's mortgage notes held at that time.

Valuation Losses

For the year ended December 31, 1996, the Trust reported total valuation losses
of $1,743,000. By year end, the Trust had reduced the book value of the Fulton
Square Shopping Center to $1,215,000 and the book value of Totem Square to
$7,370,000. Since these properties were no longer being held for investment, but
rather for sale, their book value was reduced to more accurately reflect the
then current market value of the assets. The decline in Fulton Square Shopping
Center's value was the result of the Trust's relatively short lease term on the
land underlying the center, the physical condition of the property and changed
market conditions in the Sacramento area. Disposition efforts on behalf of Totem
Square also indicated the need to reduce this property's book value as it was no
longer being held for investment purposes but actively marketed for sale. Both
properties were sold in the first quarter of 1997.

In 1995, valuation losses of $3,281,000 resulted from the write down in value of
two commercial properties and five mortgage notes. In 1994, valuation losses of
$119,000 resulted from the write down of value on two commercial properties. In
1996, 1995 and 1994 there were no extraordinary items.

Significant Changes in the Economic Environment

Changing interest rates are not expected to have a significant effect on the
Trust's operations in 1997 as most of the Trust's assets had been monetized by
year end. Should the Trust desire to undertake debt obligations or to raise
equity capital in the future, an increase in interest rates would make either
debt or equity capital more costly.

604320.3
                                        5

<PAGE>





Item 8.   Financial Statements and Supplementary Data


Index                                                                      Page


Consolidated Financial Statements

         Report of Independent Accountants                                    7

         Consolidated Balance Sheets                                          8

         Consolidated Statements of Operations                                9

         Consolidated Statements of Changes in Shareholders' Equity          10

         Consolidated Statements of Cash Flows                               11

         Notes to Consolidated Financial Statements                       12-24







604320.3
                                        6

<PAGE>




Coopers                                                 Coopers & Lybrand L.L.P.
& Lybrand                                           a professional services firm




                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Trustees of California
Real Estate Investment Trust:

We have audited the accompanying consolidated balance sheets of California Real
Estate Investment Trust and Subsidiary (the "Trust") as of December 31, 1996 and
1995, and the related consolidated statements of operations, cash flows, and
changes in shareholders' equity for each of the three years in the period ended
December 31, 1996. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedules as listed in
the accompanying index. These financial statements and financial statement
schedules are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of California Real
Estate Investment Trust and Subsidiary as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statements schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.



San Francisco, California                               Coopers & Lybrand L.L.P.
February 14, 1997



















Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International, a Swiss
limited liability association.

604320.3
                                        7

<PAGE>


<TABLE>
<CAPTION>

                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1996 and 1995
                                   ----------
                                                                                      1996                  1995
                                                                                      ----                  ----
                  ASSETS
<S>                                                                                  <C>                    <C>
Investments, Generally Held for Sale:
     Rental properties, less accumulated depreciation of $0 and $2,777,000 in
       1996 and 1995, respectively, and valuation allowances of $0 and
       $6,898,000 in 1996 and 1995,
       respectively                                                            $ 8,585,000          $ 17,215,000
     Notes receivable, net of valuation allowances and
       deferred gains of $6,127,000 and $9,151,000 in
       1996 and 1995, respectively                                               1,576,000            10,502,000
     Marketable securities available-for-sale                                   14,115,000                   -
                                                                                ----------          ----------
                                                                                24,276,000            27,717,000

Cash                                                                             4,698,000             4,778,000
Receivables, net of allowance of $1,001,000 and $700,000
  in 1996 and 1995, respectively                                                   707,000               680,000
Other assets, net of valuation allowance of $0 and
  $310,000 in 1996 and 1995 respectively                                           355,000               357,000
                                                                               -----------          ------------

          Total Assets                                                       $  30,036,000          $ 33,532,000
                                                                             =============            ==========

                  LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
     Long-term notes payable, collateralized by deeds of trust
       on rental properties                                                   $  5,169,000          $  8,335,000
     Accounts payable and accrued expenses                                         326,000               209,000
     Other liabilities                                                              70,000                81,000
                                                                             -------------         -------------

          Total Liabilities                                                      5,565,000             8,625,000
                                                                               -----------           -----------

Commitments (Note 10)

Shareholders' Equity:
     Shares of beneficial interest, par value $1 a share; unlimited
       authorization, 9,137,000 and 9,137,000 shares
       outstanding in 1996 and 1995, respectively                                9,137,000             9,137,000
     Additional paid-in capital                                                 55,118,000            55,118,000
     Unrealized holding loss on marketable securities                              (22,000)                  -
     Accumulated deficit                                                       (39,762,000)          (39,348,000)
                                                                               ------------           ----------

          Total Shareholders' Equity                                            24,471,000            24,907,000
                                                                                ----------            ----------

                       Total Liabilities and Shareholders' Equity            $  30,036,000          $ 33,532,000
                                                                             =============            ==========
                  See accompanying notes to consolidated financial statements.
</TABLE>


604320.3
                                                         8

<PAGE>


<TABLE>
<CAPTION>

                                      CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                                  AND SUBSIDIARY
                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                   Years Ended December 31, 1996, 1995 and 1994
                                                    ----------

                                                                       1996                1995                1994
                                                                       ----                ----                ----
<S>                                                           <C>                <C>                 <C>
Revenues:
     Rent                                                     $   2,019,000      $    2,093,000      $    2,593,000
     Interest                                                     1,136,000           1,396,000           1,675,000
     Hotel                                                               --              46,000             519,000
                                                        -------------------     ---------------      --------------
                                                                  3,155,000           3,535,000           4,787,000
                                                              -------------       -------------       -------------

Expenses:
     Operating expenses                                             685,000             584,000           1,011,000
     Hotel operating expenses                                            --               8,000             771,000
     Property management                                             96,000              96,000             252,000
     Depreciation and amortization                                   64,000             662,000             595,000
     Interest                                                       547,000             815,000           1,044,000
     General and administrative                                   1,503,000             933,000             813,000
                                                              -------------      --------------      --------------
                                                                  2,895,000           3,098,000           4,486,000
                                                              -------------       -------------       -------------

         Income before gain (loss) on
              foreclosure or sale of investments and
              valuation losses                                      260,000             437,000             301,000

Net gain (loss) on foreclosure or sale of
  investments                                                     1,069,000              66,000           (218,000)
                                                              -------------       -------------      -------------

              Income before valuation losses                      1,329,000             503,000              83,000

Valuation losses                                                  1,743,000           3,281,000             119,000
                                                              -------------        ------------      --------------

              Net Loss                                            (414,000)         (2,778,000)            (36,000)
                                                            ===============         ===========            ========

Net loss per share of beneficial interest               $             (.05) $            (0.30) $            (0.00)
                                                         ==================   =================    ================
</TABLE>


               See accompanying notes to consolidated financial statements.


604320.3
                                                         9

<PAGE>


<TABLE>
<CAPTION>

                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CHANGES IN
                    SHAREHOLDERS' EQUITY Years Ended December
                             31, 1996, 1995 and 1994
                                   ----------


                                                                                                     Unrealized
                                        Shares of               Additional                          Holding Loss          Total
                                    Beneficial Interest        Paid-in Capital    Accumulated       on Marketable    Shareholders'
                                 Number            Amount         Capital           Deficit          Securities         Equity

<S>                                <C>            <C>              <C>              <C>                <C>          <C>

Balance at January 1, 1994         9,125,000      $9,125,000       $55,106,000      $(35,620,000)      $       -    $28,611,000
Net loss                                   -              -                 -            (36,000)                       (36,000)
Proceeds from shares issued           12,000          12,000            12,000                  -                        24,000
Distributions                              -              -                 -           (914,000)                      (914,000)
                                   ---------       ---------        ----------       ------------     -----------    ----------
Balance at December 31, 1994       9,137,000       9,137,000        55,118,000       (36,570,000)                    27,685,000
                                   ---------       ---------        ----------        -----------                    ----------

Net loss                                   -              -                 -        (2,778,000)                     (2,778,000)
                                   ----------                       ----------       -----------                     -----------

Balance at December 31, 1995       9,137,000       9,137,000        55,118,000       (39,348,000)                    24,907,000
                                   ---------       ---------        ----------        ----------                     ----------

Unrealized holding loss on
marketable securities                     -              -                 -                  -          (22,000)    (22,000)
Net loss                                  -              -                 -          (414,000)                 -    (414,000)
                                                                                     -----------    ---------------    --------

Balance at December 31, 1996      9,137,000      $9,137,000        $55,118,000      $(39,762,000)       $ (22,000)   $24,471,000
                                  =========      ==========        ===========      =============       ==========    ===========
</TABLE>



          See accompanying notes to consolidated financial statements.


604320.3
                                       10

<PAGE>


<TABLE>
<CAPTION>

                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years ended December 31, 1996, 1995 and 1994
                                   ----------

                                                                       1996                1995                1994
                                                                       ----                ----                ----
<S>                                                             <C>                <C>                <C>
Cash flows from operating activities:
     Net (loss)                                                 $  (414,000)       $ (2,778,000)         $  (36,000)
                                                                 -----------        ------------          ----------
Adjustments to reconcile net (loss) to net
  cash provided by operating activities:
  Depreciation and amortization                                      64,000             662,000             595,000
  (Gain) loss on foreclosure or sale of
    investments                                                  (1,069,000)            (66,000)            218,000
  Valuation losses                                                1,743,000           3,281,000             119,000
  Changes in assets and liabilities:
         (Increase) decrease in receivables                         (38,000)            294,000             107,000
         (Increase) decrease in other assets                        (61,000)           (282,000)             82,000
         Increase (decrease) in accounts payable
           and accrued expenses                                     226,000             166,000             (45,000)
         Increase (decrease) in other liabilities                    (2,000)             11,000            (106,000)
                                                                  ---------          ----------           ----------
           Total adjustments to net (loss)                          863,000           4,066,000             970,000
                                                                  ---------          ----------           ----------
         Net cash provided by operating activities                  449,000           1,288,000             934,000
                                                                  ---------          ----------           ----------
Cash flows from investing activities:
     Payments related to sales of rental properties                      --                  --            (100,000)
     Proceeds from sale of assets                                13,796,000                  --                  --
     Improvements to rental properties                             (146,000)           (321,000)           (106,000)
     Collections on notes receivable                                 35,000             850,000             346,000
     Purchase of marketable securities                          (15,849,000)                 --                  --
     Principal collection of marketable securities                1,712,000                  --                  --
     Increase in notes receivable                                        --                  --            (175,000)
                                                                 -----------         ----------           ----------
         Net cash (used in) provided by investing activities     (452,000)            529,000              (35,000)
                                                                 -----------         ----------           ----------
Cash flows from financing activities:
     Principal payments on long-term notes payable                  (77,000)           (405,000)            (94,000)
     Distributions paid                                                  --                 --            (890,000)
                                                                 ----------         ----------           ----------
         Net cash used in financing activities                    (77,000)           (405,000)           (984,000)
                                                                 ----------         ----------           -----------
         Net (decrease) increase in cash                          (80,000)          1,412,000             (85,000)
Cash, beginning of year                                           4,778,000           3,366,000           3,451,000
                                                                  ---------          ----------          ----------
Cash, end of year                                              $  4,698,000         $ 4,778,000        $  3,366,000
                                                                ===========          ==========         ===========
</TABLE>







             See accompanying notes to consolidated financial statements.

                                       11
604320.3

<PAGE>



                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

1.       Organization and Summary of Significant Accounting Policies:

                                  Organization

         California Real Estate Investment Trust (the "Trust" or "CalREIT") was
         organized under the laws of the State of California pursuant to a
         Declaration of Trust dated September 15, 1966.

          The Trust became a partner of Totem Square, L. P. ("Totem"), a
          Washington Limited Partnership in which the Trust owns a 59% interest,
          on November 30, 1990. The Trust also formed CalREIT Totem Square, Inc.
          ("Cal-CORP") to act as general partner of Totem. Cal-CORP has a 1%
          interest in Totem, and Totem Square Associates, an unrelated party,
          has the remaining 40%.

         In 1994, the Trust operated as a subsidiary of The Peregrine Real
         Estate Trust ("Peregrine"), which then held 76% of the Trust's
         outstanding Shares of Beneficial Interest. In April 1994, Peregrine
         replaced the CalREIT Board of Trustees with a slate of its own
         Trustees. In 1995, the Board was expanded from three to five Trustees,
         two of whom were independent. In 1996, the Board of Trustees was
         comprised of two independent Trustees, one Trustee who concurrently
         served on the Board of Trustees of Peregrine, a former officer of the
         Trust, and the then Chief Executive Officer of the Trust.

         On January 3, 1997, Peregrine sold its entire 76%-ownership interest in
         the Trust to CalREIT Investors Limited Partnership, an entity
         controlled by Samuel Zell. Simultaneous with the closing of this
         Transaction, the Board of Trustees was expanded to seven members; one
         Trustee, who also served on the Peregrine Board of Trustees, resigned;
         and three additional Trustees, nominated by CRIL, were appointed to the
         Board.

         At the end of 1996, the Trust owned two commercial properties, Fulton
         Square Shopping Center and Totem Square located in Sacramento,
         California and Kirkland, Washington, respectively. The Trust also owned
         a mortgage note portfolio of three notes encompassing approximately
         $7.7 million in loans, with an aggregate book value of approximately
         $1.6 million. These loans bear interest at an overall effective rate of
         approximately 8%. They are collateralized by mortgages on real
         property. Most of the investments in the three loans were originated by
         the Trust in connection with the disposition of Trust properties prior
         to 1996. Additionally, at December 31, 1996, the Trust had
         approximately $14 million invested in liquid mortgage-backed
         securities.



604320.3
                                       12

<PAGE>



                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

1.       Organization and Summary of Significant Accounting Policies, continued:

                           Principles of Consolidation

         For 1996, 1995 and 1994, the consolidated financial statements include
         the accounts of the Trust, Cal-CORP and Totem.

                                Rental Properties

         At December 31, 1996 and 1995, rental properties are carried at cost,
         net of accumulated depreciation and less a valuation allowance for
         possible investment losses. The Trust's valuation allowance for
         possible investment losses represents the excess of the carrying value
         of individual properties over their appraised or estimated fair value
         less estimated selling costs. At December 31, 1996 all rental
         properties are classified as held for sale and valued at net estimated
         sales price.

         The additions to the valuation allowance for possible investment losses
         are recorded after consideration of various external factors,
         particularly overbuilding in real estate markets which has a negative
         impact on achievable rental rates. A gain or loss will be recorded to
         the extent that the amounts ultimately realized from property sales
         differ from those currently estimated. In the event economic conditions
         for real estate continue to decline, additional valuation losses may be
         recognized in the near term.

         When applicable, the allowance for depreciation and amortization has
         been calculated under the straight-line method, based upon the
         estimated useful lives of the properties which lives range from 30 to
         40 years. Expenditures for maintenance, repairs and improvements which
         do not materially prolong the normal useful life of an asset are
         charged to operations as incurred.

         Real estate acquired by cancellation of indebtedness or foreclosure is
         recorded at fair market value at the date of acquisition but not in
         excess of the unpaid balance of the related loan plus costs of securing
         title to and possession of the property.

                                  Other Assets

         The Trust amortizes leasing commissions on a straight-line basis over
         the lives of the leases to which they relate. Financing costs are
         amortized over the lives of the loans or other financial instruments to
         which they relate.





604320.3
                                       13

<PAGE>



                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

1.       Organization and Summary of Significant Accounting Policies, continued:

                                  Income Taxes

         The Trust has elected to be taxed as a real estate investment trust and
         as such, is not taxed on that portion of its taxable income which is
         distributed to shareholders, provided that at least 95% of its real
         estate trust taxable income is distributed and that the Trust meets
         certain other REIT requirements. Due to federal and California tax net
         operating loss carryforwards ("NOLs"), the Trust does not have taxable
         income for the year ended December 31, 1996. The Trust has federal and
         California NOLs as of December 31, 1996 of approximately $17,631,000
         and $5,194,000, respectively. Such NOLs expire through 2011 for federal
         and 2001 for California. The Trust also has a federal and California
         capital loss carryover of approximately $1,567,000 that can be used to
         offset future capital gain.

         Due to the transaction and the prior year ownership change related to
         the Peregrine bankruptcy, NOLs are limited for both federal and
         California to approximately $1,500,000 annually. Any unused portion of
         such annual limitation can be carried forward to future periods.

                                      Cash

         The Trust invests its cash in demand deposits with banks with strong
         credit ratings. Bank balances in excess of federally insured amounts
         totaled $4,301,000 and $4,577,000 as of December 31, 1996 and 1995,
         respectively. The Trust has not experienced any losses on these
         deposits.

                              Sales of Real Estate

         The Trust complies with the provisions of Statement of Financial
         Accounting Standards No. 66, "Accounting for Sales of Real Estate."
         Accordingly, the recognition of gains on certain transactions are
         deferred until such transactions have complied with the criteria for
         full profit recognition under the Statement. The Trust had deferred
         gains of $239,000 and $1,103,000 at December 31, 1996 and 1995,
         respectively.

                           Interest Income Recognition

         The Trust recognizes interest income on notes receivable when it is
         estimated that the fair value of the collateral related to the note is
         adequate.



604320.3
                                       14

<PAGE>



                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

1.       Organization and Summary of Significant Accounting Policies, continued:

                             Risks and Uncertainties

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

                              Impairment of a Loan

          Effective January 1, 1995 CalREIT adopted Statement of Financial
          Accounting Standards No. 114, "Accounting by Creditors of Impairment
          of a Loan," as amended ("SFAS 114"). In accordance with SFAS 114,
          CalREIT considers loans where it is probable they will be unable to
          collect all amounts contractually due, as being impaired. Where an
          impairment is indicated, a valuation writedown is measured based upon
          the excess of the loan amount over the fair value of the collateral of
          the loan less costs to sell. Interest income from impaired loans is
          recognized to the extent cash is received.

                         Impairment of Long-Lived Assets

                  In 1995, Statement of Financial Accounting Standards No. 121
         ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and
         for Long-Lived Assets to Be Disposed Of" was issued. This statement
         requires that companies review long-lived assets and certain
         identifiable intangibles for impairment whenever events or changes in
         circumstances indicate that the carrying amount of an asset may not be
         recoverable. If the carrying amount of the asset exceeds its estimated
         undiscounted net cash flow before interest, the company must recognize
         an impairment loss equal to the difference between its carrying amount
         and its current value. After an impairment is recognized, the reduced
         carrying amount of the asset shall be accounted for as its new cost.
         For a depreciable asset, the new cost shall be depreciated over the
         asset's remaining useful life. Long-lived assets to be disposed of
         shall be reported at the lower of carrying amount or fair value less
         cost to sell. In 1996, the Trust adopted the provisions of SFAS 121.
         Generally, fair values are estimated using undiscounted cash flow,
         direct capitalization and market comparison analyses.

                               Net Loss Per Share

          Net loss per share of beneficial interest is based upon the
          weighted-average number of shares of beneficial interest outstanding.
          Shares of beneficial interest equivalents were anti-dilutive for the
          three years ended December 31, 1996. The weighted average number of
          shares of beneficial interest and earnings per share of beneficial
          interest are as follows:

                                                 1996         1995      1994
                                                 ----         ----      ----
           Weighted average shares of
               beneficial interest             9,137,335    9,137,335  9,130,961
                                               =========    =========  =========


         Loss per share of beneficial          $   (.05)    $  (0.30)  $  (0.00)
          interest
604320.3
                                       15

<PAGE>



                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

1.       Organization and Summary of Significant Accounting Policies, continued:

                                Reclassifications

         Certain reclassifications have been made in the presentation of the
         1995 and 1994 financial statements to conform to the 1996 presentation.

2.       Related-Party Transactions:

         Until April 14, 1994, administrative services were provided to the
         Trust by B & B Property Investment, Development and Management Company,
         Inc. ("B & B"). B & B's compensation consisted of an advisory fee based
         on the real estate investments and real estate commissions in
         connection with purchases, sales and leasing of Trust properties as
         well as a reimbursement of certain expenses incurred in performing
         services for the Trust. Until April 14, 1994, property management
         responsibilities of the Trust were assigned to B & B Property
         Investment, Inc. ("B & B Property"). The compensation for property
         management services was computed at 5% of the gross receipts of each
         property managed and each note receivable serviced. Compensation to B &
         B and B & B Property was $156,000 during 1994. Certain disputes between
         the Trust, B & B and B & B Property arising from the Trust's
         termination of B & B's and B & B Property's advisory and management
         agreements were settled in May 1994 for $60,000. Prior to 1994, the
         Trust entered into a management agreement with North Main Street
         Company ("North Main"), a company owned by the President and Chairman
         of the Board of the Trust's former advisor, B & B, to manage the
         Trust's hotel. Pursuant to that agreement, the Trust incurred
         management fees of $16,000 in 1994. The Trust also terminated that
         agreement with North Main in 1994 and leased the hotel property to an
         unrelated third party, a professional hotel management company which
         operated lodging facilities nationwide. No payments were made to B & B
         or B & B Property in 1995 or 1996.

         The Trust is self-administered. However, during 1996 and 1995 it shared
         certain personnel and other costs with Peregrine, its majority interest
         shareholder. The Trust reimbursed Peregrine pursuant to a cost
         allocation agreement based on each Trust's respective asset values
         (real property and notes receivable) that was subject to annual
         negotiation. During 1996 and 1995, reimbursable costs charged to the
         Trust by Peregrine approximated $258,000 and $435,000, respectively.
         The 1995 amount was partially offset against $202,000 (net of valuation
         allowances of $141,000) which was recorded as due from Peregrine at
         December 31, 1994.


604320.3
                                       16

<PAGE>



                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

2.       Related-Party Transactions, continued:

         At December 31, 1996 and 1995, the Trust had $31,000 and $45,000,
         respectively, due to Peregrine pursuant to the cost allocation
         agreement. The cost allocation agreement between the Trust and
         Peregrine was terminated on January 7, 1997.

3.       Rental Properties:

                  At December 31, 1996 and 1995, the Trust's rental property
         portfolio at cost included a retail and mixed-use retail property
         carried at $8,585,000 and $13,018,000 respectively; industrial
         buildings, carried at $0 and $7,395,000 respectively; and a hotel
         property carried at $0 and $6,477,000, respectively.

         The Trust's hotel property, with a carrying value of $3,182,000 at
         December 31, 1995, was returned to the lender through foreclosure
         proceedings in February 1996. No gain or loss was recorded on the
         foreclosure of the Casa Grande Motor Inn.

4.       Investment in Marketable Securities:

         At December 31, 1996 and 1995, the Trust had $14,115,000 and $0,
         respectively, invested in mortgage-backed securities classified as
         "available-for-sale."

         Statement of Financial Accounting Standards No. 115, "Accounting for
         Certain Investments in Debt and Equity Securities," ("SFAS 115") issued
         in May 1993 requires that at the date of acquisition and at each
         reporting date, debt and equity securities be classified as
         "held-to-maturity," "trading" or "available for sale." Investments in
         debt securities in which the Trust has the positive intent and ability
         to hold to maturity are required to be classified as
         "held-to-maturity." "Held-to-maturity" securities are required to be
         stated at cost and adjusted for amortization of premiums and discounts
         to maturity in the statement of financial position. Investments in debt
         and equity securities that are not classified as "held-to-maturity" and
         equity securities that have readily determinable fair values are to be
         classified as "trading" or "available-for-sale" and are measured at
         fair value in the statement of financial position. Securities that are
         bought and held principally for the purpose of selling them in the near
         term are classified as "trading." Unrealized holding gains and losses
         for "trading" securities are included in earnings.



604320.3
                                       17

<PAGE>



                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

4.       Investment in Marketable Securities, continued:

         Investments that are not classified as "held-to-maturity" or "trading"
         securities are classified as "available- for-sale." Unrealized holding
         gains and losses for "available-for-sale" securities are excluded from
         earnings and reported as a separate component of shareholders' equity
         until realized.

         In accordance with SFAS 115, the Trust determines the appropriate
         classification at the time of purchase and re-evaluates such
         designation at each balance sheet date.

         At December 31, 1996, the Trust's "available-for-sale" securities
consisted of the following:
<TABLE>
<CAPTION>

                                                                     Unrealized              Estimated
                                                           Cost         Gains      Losses    Fair Value

         <S>                                             <C>                       <C>          <C>
         Federal National Mortgage
            Association, adjustable rate interest
            currently at 7.783%, due April 1, 2024       $2,879                    ($34)        $2,845

         Federal Home Loan Mortgage
             Association, adjustable rate interest
             currently at  7.625%, due June 1, 2024        $967                    ($10)          $957

         Federal National Mortgage
             Association, adjustable rate interest
             currently at 7.292%, due April 1, 2025        $732                     ($4)          $728

         Federal National Mortgage
              Association, adjustable rate interest
              currently at  6.144%, due May 1, 2026      $3,260                     ($5)        $3,255

         Federal National Mortgage
              Association, adjustable rate interest
              currently at 6.116%,  due June 1, 2026     $6,299          $31          -         $6,330
                                                         -------    ---------       ---------   ------

                                                         $14,137          $31           ($53)   $14,115
                                                         =======    =========       =========   =======
</TABLE>

         The maturity dates above are not necessarily indicative of expected
         maturities as principal is often prepaid on such instruments.



604320.3
                                       18

<PAGE>



                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

5.       Notes Receivable:

         In order to facilitate sales of real estate, the Trust has accepted
         partial payment in the form of notes receivable collateralized by deeds
         of trust. As of December 31, 1996 and 1995, the Trust had long-term
         notes receivable, collateralized by deeds of trust (before valuation
         allowances and deferred gains) of $7,703,000 and $19,653,000,
         respectively. The notes are collateralized by real estate properties in
         California and Arizona.

         The notes bear interest at rates ranging from 7.63% to 9.5% as of
         December 31, 1996. For the year ended December 31, 1996, the overall
         effective rate was approximately 8%.

6.       Valuation Allowances:

         Based on a review of its investments, the Trust has provided for
         valuation allowances as set forth below. Adverse economic factors,
         particularly overbuilt real estate markets which caused a decline in
         lease renewal rates, were the primary causes of these valuation losses.
         If such adverse economic factors continue, additional valuation loss
         provisions may be required in the near term.

         As of December 31, 1996, the Trust was in the process of monetizing its
         assets and accordingly, wrote down such assets to current market value,
         less estimated selling costs, the accounting treatment required when
         investments are held for sale.

         Analysis of changes in the allowance for possible losses on real estate
         investments, notes receivable, and rents and interest receivable for
         1996, 1995 and 1994 follow:


604320.3
                                       19

<PAGE>



                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

6.       Valuation Allowances, continued:
<TABLE>
<CAPTION>

                                                                   1996               1995             1994
                                                                   ----               ----             ----
           Rental Properties

           <S>                                                   <C>              <C>               <C>
           Allowance for valuation losses
           on rental property investments:
                Beginning balance                                $6,898,000       $ 5,863,000       $ 8,674,000
                Provision for valuation losses                    1,743,000         1,035,000            69,000
                Amounts charged against allowance
                 for valuation losses                           ($8,641,000)               --       ($2,880,000)
                                                                ------------      -----------        -----------

                 Ending balance                                 $                 $ 6,898,000       $ 5,863,000
                                                                ============      ===========       ===========

           Notes Receivable

           Allowance for valuation losses and deferred
              gains on notes receivable:
               Beginning balance                                 $9,151,000       $ 7,182,000       $ 7,442,000
               Provision for valuation losses                          -            2,246,000              --
               Deferred gains on notes and other, net                  -              (66,000)          (12,000)
               Amounts charged against allowance
                 for valuation losses                            (3,024,000)         (211,000)         (248,000)
                                                                 -----------      -----------         ---------

                 Ending balance                                  $6,127,000       $ 9,151,000       $ 7,182,000
                                                                 ==========       ===========         =========

           Rents and Interest Receivable

           Allowance for bad debt losses on rents
               and interest receivable:
               Beginning balance                                $  700,000        $   323,000       $   233,000
               Provision for losses                                501,000            873,000           183,000
               Amounts charged against allowance
                 for losses                                        (200,000)         (496,000)          (93,000)
                                                                ------------      ------------       -----------

                 Ending balance                                  $1,001,000       $   700,000     $     323,000
                                                                 ==========       ============      ============
</TABLE>

         In addition, the Trust had established an allowance for valuation
         losses on other assets in the amount of $ 0 and $310,000 at December
         31, 1996 and 1995, respectively.


604320.3
                                       20

<PAGE>




                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

7.       Long-Term Notes Payable:

         As of December 31, 1996 and 1995, the Trust had long-term notes payable
         (Notes) of $5,169,000 and $8,335,000 respectively, most of which were
         collateralized by deeds of trust on rental properties with an aggregate
         net book value of $8,585,000 and $11,181,000 at December 31, 1996 and
         1995, respectively. These Notes are due in installments extending to
         the year 2014 with interest rates ranging from 8% to 10.75%. At
         December 31, 1996 none of the Notes were delinquent. At December 31,
         1995, $3,089,000 of such Notes, bearing interest at a default rate of
         18% and secured by the Casa Grande Motor Inn (which was foreclosed upon
         in February 1996) were delinquent. As of December 31, 1996,
         contractually scheduled principal payments during each of the next five
         years were $4,291,000, $39,000, $43,000, $38,000 and $41,000,
         respectively, and $718,000 thereafter. The Note on the Totem Square
         Shopping Center of $4,256,000 is due May 1, 1997.

8.       Distributions:

         There were no distributions paid in 1996 or 1995. Cash distributions
         were made per share of beneficial interest in 1994 and were classified
         for Federal income tax purposes as follows:

                                                 1996       1995       1994
                                                 ----       ----       ----
              Ordinary income                     - %        - %        - %
              Capital gains income                - %        - %        - %
              Return of capital                   - %        - %       100%
                                                -----     ------        ---
                                                  - %        - %       100%
                                                =====     ======        ===

           Total distributions per share       $ 0.00     $ 0.00     $ 0.10
                                                 ====       ====       ====


9.       Stock Option Plans:

         In November of 1995, the Board of Trustees approved two stock option
         plans (the "Plans"). The Plans provided that if they were not approved
         by the holders of a majority of the outstanding shares of the Trust
         within one year after their adoption, they would automatically
         terminate. The Plans were not approved by the holders of a majority of
         the outstanding shares of the Trust within one year after their
         adoption and automatically terminated in November 1996. At December 31,
         1996 there were no stock options outstanding.



604320.3
                                       21

<PAGE>



                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

10.      Statements of Cash Flows Supplemental Information:

         In connection with the sale of property, the Trust entered into various
non-cash transactions as follows:
<TABLE>
<CAPTION>

                                                        1996         1995          1994
                                                        ----         ----          ----

          <S>                                     <C>                         <C>    <C>
          Sales price                             $  13,853,000  $            --     $ 4,423,000
          Notes receivable                                --                  --           --
          Notes payable assumed by buyer and
            other liabilities applied to sales
            price                                       (57,000)              --      (4,523,000)
                                                 ---------------    ------------      ----------

          Cash received (paid)                    $  13,796,000$              --    $   (100,000)
                                                    ===========     ============      ==========

          Cost of property sold                   $  19,321,000$              --    $  8,084,000
                                                   ===========      ============       =========
</TABLE>


         In 1996, with respect to its hotel property, the Trust allowed
         foreclosure on a note payable secured by a deed of trust. The amount of
         $3,089,000 represents the value of the note payable relieved in
         connection with this foreclosure and is aggregated in the 1996 sales
         price category above.

         Distributions were made as follows:
<TABLE>
              <S>                                 <C>                <C>             <C>

                                                        1996            1995           1994
                                                        ----            ----           ----

              Total distributions                 $      --         $     --        $ 914,000
              Distributions reinvested                   --               --          (24,000)
                                                   ---------        --------           -------
              Distributions paid in cash         $       --         $     --        $ 890,000
                                                   =========        ========          ========
</TABLE>



Interest paid on the Trust's outstanding debt for 1996, 1995, and 1994 was
$550,000, $730,000 and $1,121,000, respectively.


604320.3
                                       22

<PAGE>



                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

11.      Commitments:

         During 1995, the Trust entered into a three year, non-cancelable
         operating lease for office facilities in San Francisco, California.
         Rent expense under the operating lease was $40,000 in 1996. At December
         31, 1996 future minimum lease payments under the lease are $50,000,
         with $40,000 due in 1997 and $10,000 in 1998.

12.      Fair Value of Financial Instruments:

         Statement of Financial Accounting Standards No. 107 ("SFAS 107")
         requires disclosure of fair value information about financial
         instruments, whether or not recognized in the balance sheet, for which
         it is practicable to estimate that value. In cases where quoted market
         prices are not available, fair values are based on estimates using
         present value or other valuation techniques. Those techniques are
         significantly affected by the assumptions used, including the discount
         rate and estimates of future cash flows. In that regard, the derived
         fair value estimates cannot be substantiated by comparison to
         independent markets and, in many cases, could not be realized in
         immediate settlement of the instrument. SFAS 107 excludes certain
         financial instruments and all nonfinancial instruments from its
         disclosure requirements. Accordingly, the aggregate fair value amounts
         presented do not represent the underlying value of the Trust.

         The estimated fair value of the Trust's marketable securities is set
         forth in Note 4. The estimated fair value of the Trust's financial
         instruments, other than marketable securities, including cash, notes
         receivable, rents and other receivables and long-term notes payable, at
         December 31, 1996 and 1995, is approximately the same as their carrying
         amounts.

13.      Minority Interest:

         The Trust has a 60% ownership interest in Totem, its subsidiary.
         Totem's net losses have exhausted the minority shareholder's equity
         interest. On the consolidated statement of operations, no minority
         interest in the subsidiary's net loss is recorded for 1996, 1995 or
         1994. In the event that future income is generated from the subsidiary,
         the Trust will have first rights to the income to the extent of the
         minority shareholder's accumulated deficit in the subsidiary.

         Furthermore, the Trust has a note receivable from Totem, which note is
         eliminated in consolidation, in the amount of $3,336,000. Pursuant to
         the terms of that note, it is likely that CalREIT will be entitled to
         all future income from Totem.


604320.3
                                       23

<PAGE>


<TABLE>
<CAPTION>

                     CALIFORNIA REAL ESTATE INVESTMENT TRUST
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   ----------

14.      Selected Quarterly Financial Data (Unaudited):

                                                                           Quarter Ended
                                                  March 31        June 30          September 30         December 31
                                                  --------        -------          ------------         -----------
1996

          <S>                                  <C>            <C>                   <C>               <C>          
          Revenues                             $   871,000    $   780,000           $   771,000       $     733,000

          Gain on fore-
            closure or sale of
            investments, net                   $   299,000    $   297,000           $   517,000       $     (44,000)

          Net income (loss)                    $   440,000    $  (213,000)          $  (514,000)      $    (127,000)

          Net income (loss) per share          $      0.05    $     (0.02)          $     (0.06)      $       (0.02)


1995

          Revenues                             $   879,000    $   836,000           $   942,000       $     878,000

          Gain on fore-
            closure or sale of
            investments, net                   $    66,000   $       -              $       -         $          -

          Net income (loss)                    $   242,000   $    44,000            $  100,000        $   (3,164,000)

          Net income (loss) per share          $      0.03   $      0.00            $     0.01        $        (0.34)

1994

       Revenues                                $ 1,131,000   $   780,000            $1,353,000        $     1,523,000

       Gain (loss) on fore-
         closure or sale of
         investments, net                     $       -      $   114,000            $ (344,000)       $        12,000

       Net income (loss)                      $    (1,000)   $  (328,000)           $   341,000       $      ( 48,000)

       Net income (loss) per share            $     (0.00)   $     (0.04)           $      0.04       $         (0.00)
</TABLE>


604320.3
                                       24

<PAGE>






                                    PART III



Item 10. Trustees and Executive Officers


Trustees and Executive Officers

As of March 10, 1997, the Board of Trustees consisted of the seven persons
listed below. Messrs. Morrow, Brown, Steinberg and Ms. Bancroft served as
Trustees throughout 1996, as did Mr. John McMahan who resigned in January 1997.
Messrs. Edelman, Garrabrant and Klopp were added to the Board during the first
two months of 1997 following CRIL's acquisition of the 6,959,593 Common Shares
from Peregrine. See "Item 1 - Recent Developments."

              Name                 Age       Office

         Frank A. Morrow           57        Trustee and Chairman of the Board
         Gary R. Garrabrant        39        Trustee and Vice Chairman
         John R. Klopp             43        Trustee and Chief Executive Officer
         Juliana Bancroft          48        Trustee and Treasurer
         Elliot G. Steinberg       59        Trustee and Secretary
         Arnold E. Brown           49        Trustee
         Martin L. Edelman         55        Trustee

The principal occupations and affiliations of the current Trustees are as
follows:

     Frank A. Morrow, Chairman. Frank A. Morrow has been a trustee of the Trust
since 1994. Mr. Morrow has been active in the real estate industry for over 25
years. As an independent advisor and business consultant, he has worked for
several real estate companies as a turnaround specialist and workout expert.
Other assignments have included due diligence investigations, stepping in as
senior management in times of crisis, and multi-site real estate portfolio
management. Mr. Morrow has had considerable experience in the acquisition,
financing, leasing, management and sale of single as well as multiple assets.
For a number of years, he served as the Managing Director of Real Estate for
Stanford University and as Senior Vice President for the Boise Cascade Urban
Development Corporation. Prior to his business career, Mr. Morrow served nine
years in the U.S. Navy as an aviator and test pilot. He graduated from the U.S.
Naval Academy and in 1971 received an MBA degree from Stanford University.

Juliana Bancroft, Independent Trustee. Juliana Bancroft has been a trustee
of the Trust since 1995. Ms. Bancroft is an independent consultant to the
hospitality industry. Prior to this she served as a vice president and a
regional director with Kimpton Hotel and Restaurant Group headquartered in San
Francisco. The Kimpton Group is the largest developer and operator of
independent hotels and restaurants on the West Coast. During this period, among
other responsibilities, Ms. Bancroft worked as a project manager on seven
construction and redevelopment projects. She also has owned and operated her own
firm in which she acquired, financed, rehabilitated and sold residential
properties in Southern California. She has also been a principal in the
investment banking firm of Bancroft, Garcia & Lavell, Inc. which secured more
than $2 billion in real estate financing through the tax-exempt bond markets.
Ms. Bancroft graduated from the University of Wisconsin with a B.S. degree in
1971 and from the University of Oregon with an M.S. degree in 1975.

Arnold E. Brown, Trustee. Arnold E. Brown has been a trustee of the Trust
since 1994. Mr. Brown has over 20 years experience in real estate finance and
investment. He is a Certified Public Accountant and previously served as a
partner of the international accounting and consulting firm of Grant Thornton,
where he was one of eight members of that firm's U. S. Real Estate Task Force.
Since 1983, Mr. Brown has been in the private real estate investment and
advisory service. Through his company, Brown Partners Ltd., he has acted as a
principal or intermediary in numerous real estate transactions and has advised
real estate investment companies on financial restructuring and real estate
securities valuation matters. Mr. Brown served

604320.3
                                       25

<PAGE>



as the Chief Financial Officer of CalREIT from April 1994 through 1995. He
graduated from the Wharton School of the University of Pennsylvania in 1969 and
received an MBA degree from Stanford University in 1971.

Elliot G. Steinberg, Independent Trustee. Elliot G. Steinberg has been a trustee
of the Trust since 1995. Mr. Steinberg has been a managing partner since 1994 of
Sunrise Creek, a company engaged in real estate development, and a managing
partner of W.S. Ventures, a private investment partnership in emerging growth
companies for more than the past five years. Mr. Steinberg has also served as
corporate vice president and general counsel to Itel Corporation and was a
founder and senior partner of the San Francisco law firm of Flynn & Steinberg
specializing in real estate, banking, taxation and business planning. He was an
editor of the Journal of Taxation of Investments and is the co-author of several
books. Mr. Steinberg received his undergraduate degree at the University of
California Berkeley in 1961, attended the London School of Economics through
1961, and in 1964 received his JD degree from the Boalt Hall School of Law at
the University of California at Berkeley. Mr. Steinberg serves on the Boards of
Directors of BioFactors, Inc., Ganson Ltd. and Cege Co. Ltd. He was formerly a
director of Kimco Hotel Management Company.

Martin L. Edelman, Trustee. Martin L. Edelman has been a trustee of the Company
since February 4, 1997. Mr. Edelman has been a director of Chartwell Leisure
Inc., a publicly traded owner and operator of hotel properties ("Chartwell"),
since November 1994 and has been president of Chartwell since January 1997. He
has also been a director of HFS Incorporated and a member of that corporation's
executive committee since November 1993. Mr. Edelman has been of counsel to
Battle Fowler LLP, a New York City law firm, since January 1994 and was a
partner with that firm from 1972 through 1993. Mr. Edelman also serves as a
director of Presidio Capital Corp. and G. Soros Realty, Inc.

Gary R. Garrabrant, Trustee. Gary R. Garrabrant has been a trustee of the Trust
since January 2, 1997 and vice chairman of the Trust since February 1997.
After the Acquisition, Mr. Garrabrant will resign as vice chairman of the
Trust. Mr. Garrabrant has been a senior vice president of EGI, an owner,
manager and financier of real estate and corporations since January 1996 and
managing partner of EGI Capital Markets, L.L.C. since September 1996. Prior to
joining EGI, he was a director of Sentinel Securities Corporation where he
established a real estate securities investment management operation. In 1994,
Mr. Garrabrant co-founded Genesis Realty Capital Management, a money management
firm exclusively focused on the equity and debt securities of public real estate
companies. From 1989 to 1994, he was responsible for equity private placements
and asset sales in the real estate investment banking division of The Bankers
Trust Company. From 1981 to 1989 he was associated with Chemical Bank. He is a
director of Meritage Hospitality Group Inc.

John R. Klopp, Trustee. John R. Klopp has been a trustee of the Trust since
January 2, 1997 and chief executive officer of the Trust since February 1997.
After the Acquisition, Mr. Klopp will also serve as vice chairman of the
Trust. Mr. Klopp is a founder and has been a Managing Partner of Victor
Capital since 1989. Mr. Klopp was a managing director and co-head of Chemical
Realty Corporation from 1982 until 1989. From 1978 to 1982, Mr. Klopp held
various positions with Chemical Bank's Real Estate Division where he was
responsible for originating, underwriting and monitoring a portfolio of
construction and permanent loans. He is a director of Metropolis Realty Trust,
Inc., a Manhattan office REIT.

Section 16(a) Beneficial Ownership Reporting Compliance

Based solely on its review of Forms 3 and 4 and amendments thereto furnished to
the Trust during 1996 and written representation from certain of the trustees
and from the Former Parent that no Form is required to be filed, the Trust
believes that no trustee, officer or beneficial owner of more than 10% of its
Common Shares failed to file on a timely basis reports required pursuant to
Section 16(a) of the Exchange Act with respect to 1996 or any prior fiscal year.
However, John McMahan, a former trustee of the Trust, filed a Form 4 report for
January 1997 on or about March 12, 1997 (30 days after the due date). The late
Form 4 report related to four transactions. Mr. McMahan paid the profit from the
transactions to the Trust on February 9, 1997.



604320.3
                                       26

<PAGE>




Item 12. Security Ownership of Certain Beneficial Owners and Management



Listed below are those shareholders known to the Trust as of March 20, 1997 to
be the beneficial owner or the member of a group which is the beneficial owner
of more than five percent of the Trust's shares of beneficial interest
(9,137,335 total). As of March 20, 1997, no Trustee owned Shares of Beneficial
Interest.
<TABLE>
<S>                        <C>                                         <C>
                           Name and Address                            Amount and Nature                    Percent
Title of Class             of Beneficial Owner                         of Beneficial Ownership             of Class

Shares of                  CalREIT Investors Limited Partnership (1)
   Beneficial Interest     c/o Equity Group Investments, Inc.
                           Two North Riverside Plaza                             6,959,593                 76.2%
                           Chicago, Illinois  60606
</TABLE>


                           (1) The sole general partner of CalREIT Investors
                  Limited Partnership is Zell General Partnership, Inc., the
                  sole director and stockholder of which is, respectively,
                  Samuel Zell and the Samuel Zell Revocable Trust (for which Mr.
                  Zell serves as trustee).


604320.3
                                       27

<PAGE>


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

                                   SIGNATURES


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


May 30, 1997                                              /s/ Frank A. Morrow
------------                                              ---------------------
Date                                                      Frank A. Morrow
                                                          Chairman of the Board



604320.3
                                       28

<PAGE>